Rookie Reply: Tips on Owner Financing Then Refinancing Out

Ashley:
This is Real Estate Rookie Show, number 56. And we are back with another Saturday episode. I hope everyone is enjoying their weekend. I am your co-host Ashley Kehr. And I am here with Tony Robinson. Hey Tony.

Tony:
Well, what’s up Ash, excited to get into some more questions today and dive into some topics that listeners want to hear about.

Ashley:
Yeah. Yeah. I’m super excited. And we finally have come up with a name for the show. It’s going to be called The Rookie Reply. Super excited for that. Make sure you guys check us out every Saturday and then Wednesday we’ll continue our episode with our awesome guests that we’ll continue to have.

Tony:
All right. So Corey’s question is, does anyone have experience buying in owner financing terms? I have an opportunity, but I could easily also get a mortgage from my lender. My thought is that by doing owner financing, it would buy me some time to get the property rented and cash flowing as well as build some equity before taking it to my bank for conventional financing. Any tips, suggestions, stories on doing this? Thanks in advance. Corey, I’ve never used owner financing before, so I’m going to actually use this as an opportunity to interview Ashley a little bit. So Ashley, what’s been your experience with seller financing?

Ashley:
Oh great. I’m in the hot seat now. I’ve actually done, I think, two seller financing deals. I’ve put in a lot of offers asking for seller financing, especially recently. But my first experience with seller financing was with a guy who had a whole portfolio that he wanted me to purchase. I did not have enough cash to purchase the whole portfolio, and the properties needed a lot of work and weren’t exactly eligible for conventional financing. And so what I did was I put together an offer where I paid cash for some of the properties, and then I asked for seller financing on the bigger property. So my go-to things when asking for someone to hold the mortgage for a seller to do the owner financing, is that you’re going to show them that you are financially stable, that you pay your bills, print out your Credit Karma report, show them you have a good credit score.

Ashley:
If you’re using lenders, bankers already, get a letter of recommendation stating that your loans have been paid, you’re great to work with, you don’t over withdraw on your bank account. Copies of your tax returns and then a personal financial statement. So these are all things you don’t have to give with your offer. You can actually wait until it’s accepted and say, “Hey, this will follow. If you would like to see my financial information, my history, I am more than willing to show that.” So the next thing I look at is, okay, what kind of terms are you going to ask the seller? There is no right or wrong way to actually do seller financing. You can do any interest rate, you can do any amount of time, you can do interest only, you can do a balloon payment, you can do a 30-year term. It’s, whatever’s going to work for you and the seller.

Ashley:
What I recommend is figuring out what works for you. So what kind of down payment do you want to give the seller? There’s definitely very, very lucky people who can buy properties with no down payment and the person will do seller financing. I have not been one of those people yet, but start with your down payment. Run the numbers with what’s your down payment? What kind of interest rate do you think is reasonable? Do you want to pay and we’ll work with your numbers? And then, when are you going to refinance out of this, or do you want to stay in the seller financing forever? And you want to look at what you think the seller is going to want to. Have you talked to the seller at all, or has the realtor mentioned anything that would be like, this person is selling this because in two years they’re building their dream home or something like that?

Ashley:
So, okay, two years. They’re going to need a big lump sum, so let’s schedule this seller financing over two years and then they’ll get a balloon payment. So there’s no right or wrong way and you just got to look at the terms. So the example that I did, I did 30% down and then I did 7% interest only for one year, and then it was a balloon payment of the balance of the loan. So I think it ended up being 122,000 was the actual seller financing after I had paid the down payment. And I paid 7% interest on that over a year, and that kept my monthly payment really low while we raised rents and we renovated one of the units. And when I went to refinance, I used the refinance money and paid off the seller financing loan. So that’s my first experience with it.

Ashley:
My second experience was I actually did the seller financing. I had a friend of mine buy a property that I owned with a partner Free & Clear. We did seller financing for six months for him until he did some changes to the property, increased rents, and he had to wait a little bit before he was eligible to get bank financing because of a change of job and stuff. So we did the six months interest-only with him where he paid me 7% interest and then a balloon payment at the end. So they’re very similar.

Tony:
A couple of questions there. When you were the person who is the buyer and you approached the seller with this proposition to have them carry the note, what does that look like? How do you even bring that up to someone? Did they already know what seller financing was? Did you have to educate them? What was that conversation like?

Ashley:
Well, the guy that I purchased it from, his son was a commercial realtor. So he definitely had some knowledge and was very helpful. And what I did was since this was technically an off-market deal, I drew up a letter of intent. And if you just Google this online, you will find millions of examples. But basically it’s just a letter stating, “I would like to buy this property for this amount. These are the terms.” So I wrote out my 7% interest in a balloon payment, and just like there was no contingencies, no inspections. And then I signed my name and then a spot for them to sign. Then I had my lawyer look over it, obviously. So that was the starting point, but with that letter, I attached an amortization schedule showing what the interest-only payments would be over the course of those 12 months.

Ashley:
So I do this with every offer that I submit. I attach the amortization schedule say like, “Okay, I’m offering you a $100,00 seller financing, but over the course of the next year, you’re going to make another $10,000 in interest payments.” So I try to break it down and make it as easy to understand. And I didn’t do this then, but I do this now, where I will put in the offer, like this is the monthly payment and it will be direct deposited into your account every month on the first, just every reassurance I can give them, I try to add that in there.

Tony:
Can we talk a little bit about the actual legal structure of the seller financing? What are the documents you have to sign to make this actual? What’s stopping the seller from two months after you guys agree to just pulling the property back from you?

Ashley:
Yeah. What we do is we do the purchase contract, and at closing, the property goes into my name. So I own the property. And then the seller actually becomes the mortgage holder. So there’s an actual mortgage drawn up and a lien placed against the property. So if I do not make those payments, they can start the foreclosure process on me and then get the loan back. In New York state, the foreclosure process is pretty long. I know like Texas, it’s actually pretty quick to get a property back. So that all depends on the state you live in, how the foreclosure process would actually work.

Ashley:
I actually was talking to someone last night who was asking me about seller financing and they wanted to do it on a flip. So we talked about how this guy does construction, does a lot of remodeling. So the person he wanted to ask to do seller financing has seen a lot of his work and how great it is. And I said, “Use that as a tool.” Say, “Hey, worst case scenario, this doesn’t sell, I don’t pay you, you have a beautiful house because you’ve seen my craftsmanship.”

Tony:
Yeah, that’s worked out. That’s awesome. I feel like I just got a crash course, Ash, on how to seller finance. So at least now I know who to go to when one of those deals comes my way.

Ashley:
Yeah. I love talking about seller financing because that was like my biggest deal, and I definitely couldn’t have been made possible without seller financing. So you guys just remember that there’s no right or wrong and figure out what will work for you first and then present it as easily as possible as you can to the seller.

Tony:
One other question, what are the potential downsides to go in this route as opposed to traditional? What are the pitfalls that they should be looking out for when they set something like this up?

Ashley:
Yeah. I had a great process both times. The only issues I ran into was I closed on my refinance the day that it was due, the balloon payment was due, and that was just… My lender just dragged his feet on some things and my fault too, for not staying on top of them. But we did close in time so it worked out, but the bank actually over-nighted his check to him and he called, he’s like, “I didn’t get it. I didn’t get it.” And I go to the post office, they’re like, “We delivered it.” The bank had given me like the receipt and everything. And he lived in a community, a development where he has mailboxes by the end of the road and they delivered it in there and he was expecting it to come directly to his door. So it ended up being his fault. But, Oh my gosh, I was a nervous wreck-

Tony:
The drama.

Ashley:
… for like four hours. And like I even called the post office that delivered it. And they sent someone out there to his house and that’s how they figured out that it was. And I thought that was so nice of them to do. And then when I did the seller financing, the person that was doing the refinance to pay me off, he did not make the payment in time and what we figured out, and I would recommend doing this in advance. Luckily he was a friend of mine and it worked out fine was we did $25 a day. So that kept him motivated to get the refinanced on and pay me back. And it also was a little benefit to me cause I was making a little extra money off the deal. So putting something in there like $25 per day, I’ll pay that to you or whatever that amount is, if I for some reason go over.

Ashley:
So make sure you’re covering all your bases and also look in a pre-payment penalty. I would not bring this up. I would try to avoid it at all possible. So if the seller wants to be like, “Oh, well, I’m only going to make that 10 grand if you keep that open for one year and make me those payments.” But what if you finish your rehab early, you’ve refinanced and you got a way better rate with the bank and you’re ready to pay that off, but then you have a 2% fee that you have to pay them? So try to avoid any kind of pre-payment penalty in the seller financing contract.

Tony:
Got it. Okay. One last question. I know, I keep saying that, but you structured it in a way to where you put down, I think you said 30%. So that was cash out of pocket for you. And then to actually finance the rehab, is that just additional cash reserves you had? Or did you have some other kind of line of credit or something you did to finance the rehab?

Ashley:
Yeah, we had a line of credit. We used the cash reserves. We didn’t actually need that much money to put into rehab. I think like total 10 grand. But yeah, we have a line of credit that we use for rehabs. And then we also use our cash too that we have in our properties.

Tony:
Got it. Okay. That was my last one. I’m done now. I feel like I learned enough about seller finance. I’m good to go.

Ashley:
Yeah. This is actually nice and relaxing, being the guest instead of the host. So thanks Tony.

Tony:
You’re welcome. Awesome. Well, I’m glad we got that question, Corey. I hope we answered everything you were looking for, brother, and for all of you that are listening, we want to get more questions like this on the show. So if you’re in the Facebook group, just look us up, Real Estate Rookie. You can always call us on the request line at 888 5 Rookie as well, may well pull some questions from there, but looking forward to getting more answers and questions just like this one.

Ashley:
Yeah. Thank you guys for listening. And yeah, definitely like Tony said, give us your questions, we’ll be more than happy to answer them. If you guys could go to wherever you’re listening to this podcast and leave us a review, we would greatly appreciate that. So I am Ashley Kehr, @wealthfromrentals, and he’s Tony Robinson @tonyjrobinson. Thanks you guys. Enjoy the rest of your weekend.