The Asset Advantage

What is Seller Financing?

Seller financing occurs when the property owner acts as the lender, allowing the buyer to make payments directly to them instead of securing a traditional mortgage from a bank. In this arrangement, the seller essentially "carries the note" and sets the loan terms, including the interest rate, repayment schedule, and down payment.

Key Benefits 

For Buyers:

• Faster Closing Process: Financing. a purchase through a bank takes time, effort and money. Typically, a 45+ day underwriting period is required in which the bank will ask for all sorts of documentation from the purchaser. Included in that documentation is often an appraisal and inspection which can cost $4,000+ each depending on the size and location of the property. With seller financing, it is possible to skip some of those strenuous steps and allow for a quicker closing. (Not that we necessarily recommend this route)

• Flexible Terms: When it comes to seller financing, the options are nearly limitless. You can offer anything from 12% interest, 20 year term (we would likely never do this, but you get the point) to a 0% interest, 50 year term. This creativity enables both sides to find a win-win situation.

• Access to Hard-to-Finance Properties: Unique or distressed properties are often more attainable without the need to qualify for a bank loan. An example of this may be a property that has great up side but has not been taken care of by the seller, has a high vacancy rate, etc.

For Sellers:

• Potential Tax Benefits: Spreading income out over time can help sellers avoid costly capital gains taxes. Currently, long-term capital gains can be as much as 20%. The typical owners who are willing to finance their properties to buyers have owned them for decades, meaning the property value (and therefore taxable gain) has likely increased drastically.

• Pricing Premium: Often times a buyer is willing to pay a premium price for a seller financing opportunity. Sellers might negotiate a premium price due to the favorable financing terms offered. Money that would typically go towards securing bank debt can now be added to the purchase price.

What to Look Out For

For Buyers:

• Dishonest Seller: In certain cases, a seller may be open to seller financing because the property has something to hide. Without the requirement for an inspection, an issue may be overlooked in a standard walk through. For this reason, we always highly recommend that a professional inspect the property and the due diligence remains thorough. (Stay tuned for more on our due diligence process in the coming editions!)

• Unclear Property Title: Ensure the property title is clear and free of liens or disputes, as these can complicate the transaction.

• Due-On-Sale Clauses: If the property has an existing mortgage, the original lender might invoke a due-on-sale clause, requiring immediate repayment of the loan.

For Sellers:

• Default Risk: Buyers may fail to make payments, requiring legal action to reclaim the property. Foreclosure can be time-consuming and costly.

• Complexity of Agreements: Poorly drafted contracts can lead to misunderstandings or disputes. Professional legal and financial advice is crucial. When working with a seller, we always advise them to have their own attorney review any documents to ensure that both parties are properly aligned and on the same page.

When Seller Financing Makes the Most Sense

Seller financing is particularly advantageous in high-interest environments, tight credit markets, and when there is a business plan involving value-add strategies.

• High-Interest Environments: It can offer more competitive rates than traditional lenders when interest rates are exceedingly high.

• Tight Credit Markets: Buyers who struggle to secure financing can still close deals.

• Value-Add Opportunities: Investors can leverage seller financing to acquire and improve underperforming properties. They can utilize a potentially lower interest rate and/or down payment to allocate those funds towards renovations and improving the property.

Success Story

Our 16-unit property in a Cleburne, TX is a wonderful example of seller financing. The property was underperforming due to deferred maintenance, under market rents, and the seller was eager to offload it quickly. However, having owned it for 30+ years, he did not want to pay a large tax bill. Instead of relying on a conventional lender, we negotiated seller financing with 20% down, a 5.5% interest rate, and a 30-year term.

This structure allows us to:

• Preserve cash for immediate renovations.

• Increase property value and rental income.

• Refinance after forcing appreciation to return investor’s money.

By the end of the term, the improved property’s value will have increased significantly, thanks to a higher NOI resulting from enhanced management and renovated units.

Final Thoughts

Seller financing can be an incredible opportunity to think outside the box and make deals happen. It’s not just a financing strategy—it’s a way to create win-win scenarios for both buyers and sellers. Whether you’re trying to secure a unique property, navigate challenging markets, or simply explore more flexible options, seller financing might be the solution you’ve been looking for. We certainly always keep it in the back of our minds when negotiating with sellers, listening to see if it is a strategy that may serve their unique situation and needs.

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Disclaimer: Nothing in this communication shall be construed as an offer for investment in CHLW Partners, LLC (the “Company”). Solicitations for investments by the Company will only be made through a Published Investment Opportunity in the Company's investor portal provided by the Company to potential investors for such purpose.