Many people that I meet seem to think that completing a seller-financed transaction is simply not possible, in fact, those that do believe it is possible do not believe that a zero interest arrangement is possible. I have students and friends across this country who are continually doing deals with seller financing terms were no institutional or private loans are involved in any part of the transaction.
While most sellers believe they want cash for their property at first, the reality is that they really want the cash will do for them. That is what conventional thinking says every seller wants. Here is the problem as I see it; interest is one of the biggest money stealers that investors are experiencing without realizing that money is bleeding from their transactions.
In the early 1980’s interest rates had escalated to 18% to 22% for institutional loans. I can tell you from personal experience that it is extremely challenging to make profitable deals work when 18% to 22% interest comprises a considerable part of the loan you must pay that will steal most of your profit. It was at this point that I decided to help sellers by teaching them the benefit of accepting payments for their equity.
Let me show you an example of what I mean:
If you were to offer a seller $100,000 at 4% interest with a monthly payment of $477.42 for 30 years how much would you eventually pay the seller? The cumulative totals after 30 years are $171,871.20 total payback of which $71,867.97 is interest and the original loan amount of $100,000.00
What if you were to offer a seller $100,000 at 6% interest with a monthly payment of $599.55 for 30 years how much would you eventually pay the seller? The cumulative totals after 30 years are $215,838.00 total payback of which $115,838.44 is interest and the original loan amount of $100,000.00
Now let’s see what it would cost you if you borrowed $100,000 at 18% for 30 years like investors had to pay in the early 1980’s. How much would you eventually pay the seller? You would have a monthly payment of $1,507.09. The cumulative totals after 30 years is $544,059.49 total payback of which $442,485.89 is interest and the original loan amount of $100,000.00
As you can see paying interest costs, the investor large sums of money needlessly spent when there are other alternatives, namely, zero percent interest. Let’s look at the total cost of unnecessary interest in my examples;
4% for 30 years = $71,867.97 more paid for interest than the original $100,000 loan (3/4 times more)
6% for 30 years = $115,838.44 more paid for interest than the original $100,000 loan(1 ¼ times more)
18% for 30 years = $442,485.89 more paid for interest than the original $100,000 loan(4 ½ times more)
Are you now starting to see why interest is a huge profit stealer? Let’s assume that you were planning to keep the property you are thinking about buying as a long-term income property; could you offer to pay the seller $30,000 more for the seller’s property if you could get 0% interest with a monthly payment of $500.00? If you were to pay the seller $130,000 for a property currently worth $100,000 and you were able to negotiate a monthly payment of $500 at 0% interest, do you think this would be a good deal for you? Let’s look at the numbers.
Because you would be paying no interest, the entire monthly payment would all apply to the principal pay down of the loan every month. With this in mind you would have the whole mortgage paid off in 260 months, ($130,000 ÷ $500 monthly payment = 260 months – just over 21 years saving nine years of payments). Example: what if you paid a seller $30,000 more than their property was worth? If you plan to keep the property for many years as an income property that the tenants pay for, can you see that by paying more for a property to get 0% interest can save you a boatload of money that can be used to buy more property rather than waste the money paying interest? This strategy only works if you plan to keep the property for many years without selling it.
The reason high-interest rates will quickly stall your real estate business is that the people you will be selling your houses to will also find it much too costly to afford the loans they are forced to make. If that were to happen, you would find it extremely difficult to sell the properties you buy and fix up.
If you don’t believe it is possible to get zero percent interest deals, let me show you a note I received recently from two of my beginning students from Glencoe Missouri:
Larry, we want to thank you for sharing your knowledge, and teaching us creative seller financing. It really works! My husband and I just started as new investors. By just asking for seller financing terms, we were able to buy properties with seller financing terms getting 0% interest. Because of your teaching we were able to implement on these deals what we would not have been able to do if we had to rely on cash transactions. We can’t wait to go to your boot camp and learn more about creative seller financing, and how to do more deals like this. We really appreciate your sincere desire to see your students be successful in real estate investing.
Thank You again for sharing your knowledge.
James and Grace Lee
I do need to make a point here and tell you that paying more than any property is worth can be risky if you don’t know what you are doing. For instance, zero interest only works if the property you are buying is free and clear with no existing loan or debt associated with the property. I want to make an important point to make because if the property has an existing mortgage on that property the best price, you will get what the current loan balance is and more importantly, the existing loan already contains interest so getting 0% interest will be impossible. Also, the current payment you will have to continue to make unless you refinance the property and pay off the existing loan. The problem is, if you get a new loan you will again have to pay interest in almost all cases.
The only way paying more for a property than it is currently is worth and paying zero interest will be if you can negotiate seller financing terms with the seller who has a property that has been ultimately paid off. Make sure you never pay more for any property you plan to fix and resell in a relatively short period. Paying zero interest and also paying more for any property than it is currently worth, can only be successful if the property you are buying and negotiating, is a deal like what we have been talking about is a property you will be keeping long-term. This is important if you plan to keep the property as an income property, and your tenants will be paying for the property from the rent they pay you every month.
This is why I believe on most deals it will always be better to deal directly with the seller, get 0% interest deals, and save a significant amount of money you would be forced to pay if you don’t at least try to negotiate to get 0% interest deals.
If you would like to learn more about how to structure zero interest transactions, you will find more about this subject in my “Never Step Into a Bank creative seller financing course. If you want to learn more about this please visit LarryHarbolt.com/NoBanks
Until Next Time Happy Investing,
Larry
