Hope you’re well, Awesomely friend, Cam Dunlap here…
So, in one of my mentoring sessions, I was recently asked a question that I won’t detail for you here, because the specific question isn’t relevant. But! In part of my answer, I explained a really interesting opportunity that I think most real estate investors aren’t even noticing that’s emerging right now — because of the high interest rate environment.
Let me explain…
A Realtor took a house off the market he was selling for his client because interest rates were keeping it from selling.
Now, that’s not unusual. Right now across the United States, there are a lot of sellers who are giving up because interest rates are so high and buyers are getting priced out of the market.
And what some are doing is resorting to seller financing. That’s interesting to me!
Over the years, the past few times I’ve seen seller financing become a real, widespread thing is when interest rates were unusually high and buyers got priced out of the market and sellers were left with a house they didn’t want, didn’t need, couldn’t afford, whatever their scenario was.
But what that does is open a huge door for investors to come in and utilize this seller or creative financing.
But it also creates an interesting opportunity for retail buyers to engage in seller financing — not just investors.
And there’s another interesting opportunity: to buy the seller carryback loans at a discount and then resell or hold them. That’s the paper side of the business where we buy, sell, hold paper.
Here’s a very interesting little factoid that I’ll share with you that you might not know…
My Private Lender Data Feed has a filter for seller carryback mortgages.
See, whether the buyer moves in the house or they’re an investor who leases it, when a seller carries back a mortgage, they are, by default and definition, a private lender.
Now, they might have done that under duress. They might have sold the house on those terms because they had to or felt they had to, and they’re not thrilled about it and would much rather have the money.
Or, they might have sold it on terms for tax purposes because they depreciated it to zero and they didn’t want a giant tax bill through recapture depreciation and capital gains.
So, they sold it on an installment sale through seller financing. Therefore, they are a private lender. And did so very deliberately and would have little compulsion to sell the loan because that would create a tax problem for them.
Ok, going back to our Realtor at the beginning of this blog post — he took it off the market since it wasn’t selling because of the rates. And he could sell it on terms, take (say) $50k down, collect some interest and then get the balance of the sale price when the property is resold or refinanced.
There’s your seller carryback.
Let’s look at this idea with some numbers…
There’s a property for sale for $950,000. I agree to pay $950k and put $50,000 down. The seller carries back a $900,000 loan, but isn’t thrilled because he’d really prefer to have the $900,000.
You come along and offer him $800,000. Cash.
The seller might say, “Well, I could take the $800K now, or I could wait 5 years for $900k – assuming there is a 5 year balloon payment required in the note.
If the seller puts the $800K in the bank in a money market account, with 5% interest on it, that’s $40,000 a year for 5 years = $200,000. And he’s really not taking a hit at all, so he decides to take your $800K.
Then, you turn around and sell that loan for $825K/$850K, and boom. That’s basically wholesaling a note. Or you could hold the note, collect the interest at the “face” rate and receive a much higher yield than the face rate because you bought the note at a 12% discount.
So, all that to say…
I am certain that there is more opportunity for us, with the seller financing that’s going on right now, than there has been for years.
Now go get some of it!