How to do seller financing

Question

Where can I learn how to do seller financing? Where can I get contracts for it? Does anyone have book recommendations on the subject?

Derek Dombeck · Answer

@Marcus Auerbach, I respectfully have to call bullshit on your statement. You are making assumptions that only people with bad credit who can't get bank financing would buy on terms or that greedy sellers looking for a sucker would sell on terms. BUT seller financing can be structured in many different ways for many different reasons. I have done 4 terms deals in the last year (arguably the best sellers market we've seen in a decade) because it helped the seller reach their goals.

One example, was a seller who didn't want to be a landlord anymore, but liked the monthly cashflow. He owned it free and clear and was collecting $650 per month rent. He was clearing $275 a month on that house. The house needed about 15k in improvements. I made him a cash offer and 2 terms offers to choose from.

1. 34k cash

2. 55k, zero down and payments at 5% interest with a 5 year balloon

3. 70k, zero down and 0% interest with payments of $325 per month with a 5 year balloon.

He chose number 3 because of one reason. He kept more money in his pocket, after paying Uncle Sam, with this structure. Also notice his monthly income went up without having to be a landlord or maintain the house anymore.

Next, I brought in a financial friends IRA. I gave them an Option for 20% of the Equity when we sell the house in exchange for 10k.

We improved the property with that 10k and Lease Optioned it to a family for $1000 per month with $5000 down, that now has 2 years to buy it from us at a price of 120k.

I use options, lease options, subject to purchases, wrap around mortgages, JV agreements, land contracts, notes, etc strategically to construct a good deal for all parties involved in ANY MARKET.

Derek Dombeck · Answer

@Marcus Auerbach, In that deal, the seller would never accept my cash offer of 34k. So the structure was designed from the beginning with 2 things in mind. #1. Get the seller as much in their pocket as possible, while still hitting my target profit margin. #2 Using as little cash out of my pocket as possible thereby increasing my ROI.

The 2nd offer would have cost me a total of $72,419 over 5 years. I would have been able to take a mortgage interest deduction in this scenario, but my basis would be 15k less and my intentions are to sell within 2 years as I mentioned in my original post.

The 3rd offer which he accepted cost me $70,000 total over 5 years.

I used to use banks for everything and quite honestly, If I never use one again, I would be fine with that. Why???? Because I don't want someone else in control of my business. I can structure win/win deals direct with sellers and close in a timely manner without asking for anyone's permission. And it is not just old landlords. I work these deals with all walks of life. The difference is, I solve peoples real estate problems and if I solve enough problems I make a profit. Most of my competition is only concerned about what is in the deal for them and don't care about the seller. That is my main problem with Realtors. When they go to show a house, they want the seller gone from the property. I can't structure a deal if I don't know what the seller needs. Many more real estate transactions could be done if buyers and sellers would actually sit down at the kitchen table and talk.

People ask me, " how do I find seller finance deals"......... You don't find them, you structure them to solve problems and that all starts with asking questions and having conversations.

The beauty is, whether you use a bank or not, there is many ways to be successful in any market if you get educated!

Todd Pultz · Answer

@Marcus Auerbach good points. You do have to be smart when writing deals and in Ohio, if you are over 20% equity the owner would have to foreclose and I feel good taking my chances if the crazy happened and all lenders shut down lending. You do work extensions into your contracts and remember that owner financing is a form of partnership(or at least we look at like that). Both sides put trust in one another!

Now let me address your point about what if???? What if we can’t get lending???

Well, let’s use your strategy and leverage the property, but something happens where the market collapses and property values sink. Then because we’re leveraged, we are upside down, and the bank calls payments due to reverse that??? Wait, I think that happened a few years back right? If that happens and you have 100 properties that banks are calling on, that will sink you and it did to many and to my friends.

Not being rude, just taking a little Stab! But as you see both sides can flop depending on the unthinkable happening.

I only gave one scenario really, but my third property was 31 doors, no money down, 15 year amortization and payoff. All owner finance! Purchase price was $525,000.  We used only rents to pay that off and update it. Paid owner financing off way early and that property is free and clear. Now appraised at 1.2million! That was a savvy investor and not an old guy that grew up in far years of light travel as you described! We have countless owner finance deals to share that are all different.

You make some good points though

Todd Pultz · Answer

@Derek Dombeck @Marcus Auerbach I’m going to jump in with Derek and agree that your statement was a little off! I use creative financing options like owner financing all the time. I’ve closed 3 deals this year buying properties with owner financing. Sure when interest rates were higher it may have been more widely used, but interest rates are not the only factor.

Like Derek I had just recently found a property owner that was done landlording and he wanted to retire with his wife. A triplex and a quad that were off market. When I called, his plan was to sell 1 property a year for the next 6 years and he had 5 left. Reason was because he did not want to get hit all in same year for 5 profitable sales. We structured an owner finance deal where one of those properties had a balloon in year 2 and the other in year 3. We also structured so his monthly payment was close to his normal NOI. Win win

And by the way, I can buy whatever through financing and have over an 800 credit score with plenty of reserves, but why would I fill out the paperwork, go through appraisals and deal with a bank when the owner is willing to finance?

Some property owners may not have great financials which will kill lending in some situations, so the owner finance for 6-12 months may be enough to season some solid rent rolls.

Also on the realtor side of my business, I certainly try to work these type of deals for my clients as well.

Rest assured that owner financing is alive and well, but you have to be creative and willing to work at it!

Derek Dombeck · Answer

Cashflowdepot.com is the best resource for  creative deal structures that I've ever found.

Marcus Auerbach · Answer

Todd, that sounds like win-win! You are right, this is the scenario that works - the advantage to the seller is not in the interest rates, but in the timing and staying in a lower tax bracket. As mentioned before old landlords are open to this, because they came up during the hey days of seller financing when bank loans were 15%. Explaining seller financing to a non investor single family seller is mission impossible, but yes, it does work with old landlords.

The trade off is that you are only getting 24 months; so now you have to make sure you will have either equity or down payment next year to be able to finance out of the balloon. So in reality you have not avoided bank financing, you have just deferred it by two years.

An you assumed risks. What will you do if you can't get bank financing at that point, if the appraisal comes in short, if your downpayment had to be spent on an emergency? You will probably be alright and it looks like rates will stay as low as they are right now at least for another year, but over all you are assuming a whole bundle of risks just to delay your bank loan by 24 months.

Long term low fixed rate debt is one of the key factors; the longer the better. Ideally you'd get seller financing for 30 years at a fixed rate of under 4%, or at least on par with a commercial loan 5/25 or 10/20. This was very possible and very common back in the 1980s - a 10% loan over 5 years was beneficial to both the buyer and the seller.

I believe you will be just fine with your deals and get them financed on a great rate in a couple years, but my point was, this is not the holey grail it used to be.

Nicole Heasley Beitenman · Answer

The Book on Investing in Real Estate With No (Or Low) Money Down by Brandon Turner. It's in the BP book store.

James Allen · Answer

Derek literally had no money out of his own pocket and set himself up to receive positive cash flow from day one. This, plus a nice pay day within two years, if his tenants decide to take his option. Also, he immediately has access to the $34,000 in option 1 for another deal. The analysis is missing the key exponential effect of his deal. If he decides to use $34,000 at 25% on another deal of $136,000, he is now covering the losses mentioned earlier, plus receiving the additional funds.

Marcus Auerbach · Answer

Derek, I agree, old landlords who own property free and clear are the one scenario that can work. Mostly because they have come up at a time when seller financing made a lot of sense. They understand it and they like the idea of passive income.

However, your first example deal kind of prooves my point.

- Your seller finance offer is 100% higher than your conventional offer, you had to pay him literally twice the money!!

- After paying $19,500 over 5 years you still owe him 50,500

- If you would have financed the deal with a commercial note your interest expenses would have been about $6,500 (tax deductable) and your principal would be down to 30k (not 50.5k)

So yes, the old guy was smart to take your option number 3!

It did however cost you about $30,000 to avoid a bank loan.

The other issue is that houses under 50k (for Milwaukee I would say under 100k) are usually money pits, because in most cases capex will exceed cash flow with time. The nasty reality is that most investors don't realize this until they are a few years into and repeirs can no longer be deferred. The longer they limp along, the more the condition worsens, tenants stop paying rent - it turns into a downward spiral.

Now, you are in a different market and I don't know what ARV you are looking at - if you have tons of equity in the deal it might be a home run; however it would have been even better if you bought it cash or even if you would have financed it (not all lenders will do loans under 50k).

How to do seller financing

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