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Creating Your Own Bank for Seller Financing

by Kevin Kaczmarek on April 5, 2012 · 11 comments

  
seller financing bank

For many investors offering the option of seller financing is attractive if you want to get a property sold, but there could be one tiny hiccup! You may not have immediate returns on your cash to do your next investment deal especially  if you’re an active investor looking to wholesale properties or do fix and flips.

Here is a fairly simple and very real solution in today’s market that most investors overlook. Think about the returns of some of your family and friends (oh great the family and friends pitch!! …Stay with me this is exciting!! ), many of whom are getting 1-2% returns or less in the market or in their bank accounts. Wouldn’t it be great to create a win-win-win scenario for you, a prospective homeowner, and someone such as a friend or family member who would really like a better return? If you implement this simple strategy, you will be on your way to creating your personal bank.

You and Your “Bank”: I use the term bank to describe the person whom is interested in a higher rate of return that is secured by a tangible asset. By working with a “bank” you can create a note at anywhere between 55-75% of the total seller financed mortgage balance on your property and offer terms at 100% to a prospective homeowner. Here is an example:

You offer a property with seller financing at $100,000 sales price with comparable conventional sales in the last 90 days at $110,000 or above. You purchased the property for $55,000 cash. You set your terms at 15% down payment, 30 year fixed rate of 7.5%, no balloon. When you find a prospective buyer with the $15,000 down payment, your “bank” gives you $55,000 and you keep the $15,000 down payment. Let’s look at what you have done.

For Your “Bank”: Provided an $85,000 note at 7.5% on an asset that is worth $110,000 for $55,000. Not a bad return (12.67%) on a $55,000 investment that has collateral worth double the investment

For the Homeowner: You’ve given them financing and the opportunity for someone to own a home who might not traditionally qualify for conventional lending because  self-employment, recent divorce, or another life event not related to just being a poor payer.

For You: Immediate access to $70,000 cash for your next investment. Not a bad return for providing a win-win scenario for an investor and homeowner.

This is a very real strategy that is used every day by savvy seller financing investors. You may have to adjust the numbers to make this strategy work, but this is a truly win-win-win investment scenario. If your ‘bank’ is  a relative and their IRA funds, be sure they are not a disqualified person of your family tree.  If they are, you will need to find another “bank” or work with other sources for funds.

Photo Courtesy: Muffet

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{ 11 comments… read them below or add one }

Giovanni Isaksen April 5, 2012 at 10:43 am

Great post, I can see that a niche opportunity exists for facilitating those type of transactions.
One question, how is the Franklin stove related to the story?

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Kevin Kaczmarek April 5, 2012 at 12:07 pm

Thanks Giovanni. The stove is supposed to represent the old fashioned way of making things happen.

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Jeff Brown April 5, 2012 at 6:09 pm

Hey Kevin — Remind me of this post when we next talk. Can see SO many variations, as I’m sure you do too. :)

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Dennis April 5, 2012 at 11:09 pm

Who get the profit above 70k? If its not the seller then why not sell property for 70k? Also do you need a license to offer seller financing?

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Steve Rabago April 8, 2012 at 12:11 pm

Hey Kevin, very nice explanation of how “creating a bank” works. The next step is often forgotten – the billing, accounting and reporting of the loan interest, my business has automated the process. Would your clients find automated loan tracking tools helpful?

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Nicholas Morris April 8, 2012 at 9:23 pm

Am I seeing this right? You are selling the 85k note for 55k? And you only make 15k profit on the deal?

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Eric Fete April 8, 2012 at 9:49 pm

Great article! I enjoy the way you explained this as it benefits the “bank”; I can definitely use this example for my associates and friends.

Eric

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Nicholas Morris April 8, 2012 at 10:09 pm

This is extremely interesting because there are a lot of people out there with “banks” in their 401k. Is this within the acceptability of using your 401k on? If so, say you sell a guy a 85k note for 55k and the note is amortized at 30 but due in 5 years. You make 7.5% on 85k note but then you make your 30k at the 5 year mark. Meaning you would 30k after 5 years on your 55k initial which is an on average 10.9% interest. So you would get 12.67+10.9=23+% average over the 5 years. Am I seeing this right? It wouldnt be 23% compounded but it would be solid esp for a 401k.

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Jason S April 9, 2012 at 9:35 pm

Making the most out of financial instruments, as you mentioned, really does pay off. Using positive cash flow, and keeping it liquid as much as possible, is always the final goal. Great post to simply get the “wheels turning” again about many business techniques. Thanks for the great post! This is my first read here, but I’ll definitely be back. It a hot time to buy in Austin, Texas, and every little insight helps.

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Bill Dunger April 26, 2012 at 10:54 am

Well put… there ar so many varations to creating and selling notes but I particularly like the way you explained it. I sent this article out to a few of my investors.

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Bard Luippold April 26, 2012 at 11:25 am

Thanks for this post. This concept in general is definitely valid. You are essentially seller financing the $100,000 sale price, collecting the $15,000 downpayment and then selling the resulting $85,000 promissory note for a $50,000 lump sum to a note investor (your friend).

I do think that the discount mentioned – $50,000 on an $85,000 note – is a little steep for a relatively low LTV, performing note. The 36mo payment on the note would be $594.33. If you pop that into Excel (=rate()) with 360 periods and then annualize the result by multiplying the monthly yield by 12, you have basically sold your 7.5% note for 14% yield to the investor. That is a great deal for the investor, but you could probably get a higher lump sum by shopping around to different firms that purchase real estate notes.

Also, you did not discuss the issue of servicing and risk. Your friend/family member will need a way to collect the payment each month and will also need to be able to manage the loss mitigation process if the borrower defaults.

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