Creative seller finance

20 Replies

Hello everyone, 

I hope everyone's investments are going according to their desired plans. I am having a tough time understanding this seller finance strategy someone shared with me. To summarize, I'm looking to acquire rental properties, mostly turnkey. In the past I would save funds for down payment and structure a deal with the seller with seller favorable terms/conditions. An investor shared with me how she creates seller finance deals. She said she will have the seller create a note/mortgage then take that note to a lender then refi (the note) then use the cash the lender gives to payoff the seller. First question I asked, is the asset free and clear? She replied yes. At this point I am not sure what additional questions to ask to get a better understanding of this strategy or even in theory if this works. Could someone help me understand this better or if someone has done something similar to this please share. I look forward to hearing from you all. Enjoy your day. 

Regards, 

The above does not add up. Maybe a flawed explanation or you did not remember the conversation correctly.

The key is there is a need for cash in the deal beyond your downpayment. Therefore there will be debt secured by this property or some other property.

@John Corey

Thank you for the prompt feedback. The conversation I had with my investor associate was brief. Those points I made above are what I remember. I am meeting with her this coming Tuesday to get a better understanding. I was hoping to get more insight from this discussion topic thus I could ask her accordingly. When you say, "the key is there is a need for cash in the deal beyond your down payment, there there will be debt service by this property or some other property", what do you mean? I look forward to hearing from you soon.

Regards, 

The house is not free and clear. The bank that refis the house will have the loan. The person who gets the loan will be responsible for the loan payments. You can take the payments over subject to the existing financing and do a wrap around mortgage. 

If the person owns the house free and clear then you can create a mortgage and pay the seller like you would do a bank.

@Shiloh Lundahl

Thank you for the prompt feedback. I would like to make clear that the asset would start free n clear but once its taken to a lender then the lender will put a mortgage on it thus not making it free n clear then. I could, of course create a mortgage with the seller and make payments like a bank n borrower but the seller then would want a decent down payment. I do not mind a 10-20% down of the agreed price however, I could only do 1 or 2 deals per year vs if I do not have to put much down then I could do 5-6 per yr. I am looking to take 20k-30k cash towards buying rental properties in an effort to have a combined 100 units in 3-5 yrs. At your earliest please give me your thoughts.

Regards,

I believe what you’re looking to happen is that you buy the home using seller financing but at a price under market value. Then after you hold it for a couple of months you can go to a conventional lender and do a cash out refi. They will likely lend to 80% of appraised value so it’s possible, if you bought it right, to get your down payment back. 

So if house is worth $150k, you get seller to finance it at $120, putting 10% or even 20% down. 

Conventional lender comes into play and has an appraisal done. If it actually appraised at $150 and they’re willing to refi at 80% you pay off the seller and get your down payment back. Minus closing costs and whatever interest you paid seller for the first few payments. 

Sounds great in theory but finding that deal won’t be easy. 

@Derek Tellier  

Thank you for the feedback. You scenario makes sense. I agree with you, finding a deal to work out the best for me does not come around that often. I have been getting preliminary quotes from "big box lenders", do you believe that local credit unions to the subject property would have better rates/numbers? At your earliest please give me your thoughts. 

Regards, 

@Duriel Taylor

My experience shows that often the smaller credit unions won't necessarily have better rates but you might have a better chance of getting to the closing table. 

There are a lot of things that can go wrong and sometimes dealing with a local lender that comes with a good reputation of making sure you get to close is worth paying a little more for, especially if this is your first or second deal. 

@Derek Tellier

Thank you for the feedback. I will keep those notes in mind once I compare credit union and the big box guys. Which big box guys have you used that are easier than most? At your earliest please give me your thoughts. I look forward to hearing from you soon. 

Regards, 

Normally if a person seller finances a house to you , you won’t have a clear note to do anything with usually The seller has the note still and there’s wording the contract you can’t do much of anything with the property till it’s paid off . I don’t know how you could sell a note you don’t possess .

@Dennis M.

Thank you for the feedback. I understand better now. All the best with you  and your investment business. 

Regards,

I use a mortgage Broker if I'm just going to look for conventional lending. You can try the discount online brokers and get better rates (not really better but possibly at lower up front costs) 

Every state is a little different and not all mortgage brokers or lenders are made the same. Find someone local in your area, go to a meetup or REIA meeting. I'll bet if you talk and ask around at those types of meetings you'll find someone that will be able to give you more detailed help that is specific to your area.


Good luck 

@Derek Tellier

Thank you for the feedback. I will find brokers and or lenders that will help with the structure of the lending. I would like to state that my area is South Florida, which most if not all assets are overvalued thus I am seeking assets in markets that have double digit cap rates. Those assets fit my scope, I prefer cash flow than appreciation. 

Regards, 

Originally posted by @Duriel Taylor :

@John Corey, 

Thank you for the prompt feedback. The conversation I had with my investor associate was brief. Those points I made above are what I remember. I am meeting with her this coming Tuesday to get a better understanding. I was hoping to get more insight from this discussion topic thus I could ask her accordingly. When you say, "the key is there is a need for cash in the deal beyond your down payment, there there will be debt service by this property or some other property", what do you mean? I look forward to hearing from you soon.

Regards, 

Something I learned a long time ago from the Nothing Down book is to draw stick figures representing the building and the debt vs equity. One image of the building at each stage. In this case, you might end up with three or four. What the property is worth now, the debt level and how much equity there should be. Then, after a note is created or a loan is taken out, what the property value would be, the debt and the equity. 

So you can see what you have or what you are dealing with at each milestone. You can then figure out the tasks necessary to move from the before to the after state. 

It is easier to see than what I just wrote makes it sound. LOL

@Duriel Taylor Did she say her strategy was substitution for collateral? I have never Used this strategy but had a few people tell me about it. Still trying to understand it as well.

@John Corey

Thank you for the feedback. That strategy seems simple enough for me to try out.  I will also look for this book and read it. I also welcome an additional information, books, and strategies to make educated decisions easier. All the best with you and your real estate business. Enjoy your week. 

Regards, 

@tbwilliams, 

Thank you for the feedback. No, she did not mention that, however she did not give much details. I am meeting with her tuesday (may 21). I will post more detail after the meeting. All the best with you and your real estate business. Enjoy your week. 

Regards, 

@Duriel Taylor

Please follow up to this post after your meeting, im curious.

If you buy right and the seller leaves enough equity in the property, I could how you could refi out to pay seller and get your seed money back. Essentially a value add without any value add or your wholesaling to yourself. The seller would have to agree to sell at a deep discount.

@Will C.

Thank you for the feedback. I have confirmed the meeting for today at 3pm est. I will surely give details on how this colleague describes this strategy. Enjoy your day.

Regards, 

Good morning all, 

I hope all is going well with you and your businesses. Just an update, I called the colleague I mentioned in the prior post (yesterday) in an effort to confirm our scheduled meeting and she did not answer thus, I did not have the meeting with this person. If and when this contact reaches out and or replies to my call, I will update this post as I said I will. Enjoy your day everyone. 

Regards, 

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