In this 40th episode of the Storage 100 series, Joe Downs explains how seller financing can be used as a powerful tool for acquiring self‑storage assets. He begins with a story of a seller who rejected a large cash offer to avoid a massive immediate tax bill, opting instead for a seller‑financed deal that spreads the tax liability over years. Downs defines seller financing as the seller acting as the bank, bypassing traditional lenders, and outlines why sellers agree: monthly “mailbox” income, tax deferral via the IRS installment sale rule, and the ability to accept a higher purchase price. He introduces three negotiation levers—price, down‑payment, and interest rate—and stresses the need to balance them so the buyer gets favorable terms while the seller receives their desired price. A detailed tax example shows how a $1 million gain can be taxed incrementally rather than all at once. The mechanism that protects the buyer is the balloon payment, which forces a lump‑sum payoff after a minimum 5‑ to 7‑year term, giving the buyer time to stabilize the asset and refinance. Downs provides a pitch framework, recommending a soft opener, a direct ask, and always presenting at least two offers (cash vs. high‑terms) to make the seller‑financed option appear advantageous. He then describes his “perfect” seller‑financing structure: ~10% down, ~4% interest, 30‑year amortization, and a 7‑year balloon. The episode concludes with a teaser for the next day’s topic on rapid deal analysis.
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Well, here we are, day 40 of the Storage 100. I am Joe Downs with the Storage Moguls Mastermind, and today I am excited to talk about the ultimate cheat code in real estate investing, one of my favorites, seller financing. But before we jump in, let me tell you a short story about how a seller refused a multimillion-dollar cash offer, full cash offer from a major institutional player. I mean, like, One we really couldn't compete with. He knew he was going to have a massive capital gain and knew a cash sale would trigger a huge tax bill. So instead, he took my seller-financed offer, which allowed him to spread his tax liability over 10 years. He literally turned down a faster, bigger cash payout because the tax savings were more valuable to him. That is one of the powers of the strategy. So if you master this concept, you're going to be able to buy more deals, faster with less of your own money and likely better terms. It's the difference between playing the game on hard mode and unlocking the secret level. All right, let's dive in and show you what this actually means. So what exactly is seller finance? Well, it's simple. The seller becomes the bank. Instead of going through the traditional bank route, you bypass all that bureaucracy. The traditional way is through a lender. It's slow, it's expensive, invasive with credit checks and guarantees and personal guarantees and endless paperwork and expensive appraisals and a 60 to 90-day close. The cheat code, seller finance, can be a— can be, I don't know if I recommend this, but it can be as simple as a 2-page note. You don't need an appraisal and you can close in 14 days. It's relationship-based, not bureaucracy-based. You're dealing directly with the person who owns the asset, which makes everything faster and simpler. But why would a seller ever agree to this? You might be wondering. Well, sellers do this for 3 main reasons, and you need to understand all of them to make your offer compelling. First, they get mailbox money. They're going to get a check every single month without having to chase tenants or manage managers. It's retirement without the work, and that's a huge psychological win for them. Second, they get massive tax benefits. The IRS has something called the installment sale rule, which allows them to spread their capital gains taxes over 10 years— I'm sorry, over years— instead of paying it all in one lump sum. And finally, you can offer them a higher price. Because you're paying over time, you can often afford to give them their dream price. This is the crucial trade-off, price versus terms. And this is going to bring us to the 3 layers you have in any negotiation, or levers, excuse me, you have in any negotiation. I usually say dials or levers in any negotiation. But before I do, I want to make sure I land a point home here. You can pay more doesn't mean you should pay more. So don't just use this as a tool to get deals and pay sellers whatever they want. The deal still needs to work. Just want to make sure we put that caveat in there. All right. So the key to seller financing negotiation is, is this phrase: I will give you your price if you give me my terms. And this is the core of the deal. So you've got these 3 levers or dials. In this case, they're levers, I guess. And you could pull any of them, all of them to make the deal work for both you and the seller. You can get them that higher purchase price if that's what they want. That's the first lever that might satisfy their ego and their desire for that dream number. And in exchange, they might have to take a lower down payment and get a lower interest rate. That's just one example. These 2 levers are what make the deal work for you as the buyer. We've done many deals, by the way, where they take a lower price because they want more cash flow. So they want a higher interest rate and higher cash flow. So we'll structure the deal for that. Sometimes they want more of a down payment, which might mean we have a low interest rate and a lower purchase price. It all depends. You get— that's the— this honestly, the most, the most fun we have is trying to structure and negotiate seller finance deals. So what you're doing is you're trading, in this scenario, you're trading a higher price for better terms, which means less cash out of your pocket today and a lower monthly payment. This is how you can structure a win-win deal, especially when you factor in the tax benefits for the seller. All right? But just remember, you got 3 levers there and they don't, this isn't the cookie cutter deal, probably more common this way, but it doesn't have to be done this way. All right, let's take a look, a closer look at that tax benefit here. So the tax hack is the secret sauce that makes the whole thing palatable to the seller. Obviously. So let's look at a scenario where the seller has $1 million in profit. Let's say if they do a cash sale, they pay taxes on the entire amount immediately. So that could be, you know, figure 20% capital gains tax plus recaptured depreciation. Let's say in this example, that might mean they're paying $238,000 tax bill in year 1. That's a huge hit. But if they use the installment sale method, They're only going to pay taxes on the principal they receive each year. So if, let's say the down payment was $100,000, if they received $100,000 that first year, their tax bills only in this case would only be $23,800 if the math held through. They're literally deferring hundreds of thousands of dollars in taxes, and that's a massive incentive. And this is why you need to lead with the tax benefit when you're talking to the seller about potentially doing a seller-financed deal. So obviously the tax act makes sense, makes seller financing a no-brainer for the seller. But now we need to talk about the mechanism that makes it work for us, the buyer. And that mechanism is the balloon payment. This is the ticking clock that forces a lump sum payment of the remaining balance at the end of the term. So if you look at this example, you pay, you're paying $4,000 a month for 5 years, and then at the end, you know, you owe $900,000 all at once. And this is why the golden rule in this case is never accept less than 5 to 7 years on that balloon. So when you're proposing your terms, you need a minimum of 5 years. We do a lot of deals, by the way, this is talking about amortized deals. We do a lot of deals interest only, still minimum 5 years, and we usually get the 5-year extension. You need those 5 years. And if you're going to do something amortized, I agree with going 7. You need that time to stabilize the asset, increase the value, and then go to a traditional lender to refi out the seller, right? So maybe in year 5, 6, 7, you're going to get a traditional bank loan on your new value, and there should be plenty of money to pay off the seller the debt that they're owed. The seller gets their money, you get locked, you're locked in a great deal for years. So how do you pitch this to the seller who's used to getting all their cash at closing? Or thinks they are, or expects to, or didn't know there was another way. You need to give them options that make the seller financing look like the better choice. So you start with a soft opener. Hey, Mr. Seller, do you need all your cash upfront for another project, or would you just prefer some monthly income and a down payment? This frames the conversation around their needs, not yours. Then you can hit them with a direct ask. Tell them you could pay their full asking price of $1 million, but only if they agree to be the bank. If you have to use a traditional bank, you're probably only going to be able to be approved for financing for up to $750,000 purchase price. I'm making up these numbers in this example, but it's probably pretty true. This is fairly common in how we do it. The pro tip here is to always give them 2 offers at least. One cash offer and one high terms offer. This makes the terms of the offer look like a huge win for them, even though it's actually a huge win for you. This strategy is going to help you structure what we call the perfect deal. So now we know about the tax hack, the balloon payment, and how to pitch it. So let's put all those pieces together and define what that perfect seller finance deal looks like. So, and this might be a little bit of a unicorn here, But this is what you're hunting for. You want a low down payment, maybe 10%, because that keeps cash in your pocket for repairs and improvements. You want a low interest rate, maybe 4%, because that's going to maximize your monthly cash flow. And you want a long amortization. 30 years would be ideal because that spreads the payments out and lowers your monthly obligation. And finally, you need the 7-year balloon. And 7 years gives you the time to stabilize the property, increase the rents, and then refinance out of the seller's note. When you hit all 4 of these points, you've structured the ultimate win-win. This is how you, this is how you use seller financing as the ultimate cheat code in storage. And it's the power of seller financing. It's the ultimate cheat code, as I said, in real estate, especially self-storage, and allows you to control the asset without having to deal with the banks, which is a huge advantage in this market. All right. Tomorrow we are moving on to day 41. Where we will talk about deal analysis in 15 minutes or less, I promise. And you don't want to miss it, so make sure you subscribe. And if you like, hit like if you liked it. See what I did there? Cut me some slack here, folks. I'm 40 days in. I got to have some fun with this. All right. Lastly, and of course, share this with a friend who says interest rates are too high to make these deals work. They will thank you later.
