How does owner financing work for the seller? Is this a good idea to sell your
house on seller financing? Should you be considering it or is this a terrible idea?
Hey there, my name is Mike Fritz, I'm the founder of Titanium Capital Investments in
the multifamily CEO system. My greatest passion is helping real estate investors just like you
create financial freedom with multi-family real estate and in this video, I'm going to walk you
through the five things you need to know about owner financing when you're gonna sell your house.
The very first thing you need to know when you're gonna sell your house owner financing
is what terms are you gonna set up with the buyer and there's a few terms that are very important in
the owner financing discussion. The very first one is your down payment. Are you going to require the
buyer to bring a down payment to the table? Now, I would encourage everybody who's going to sell
their house on seller financing to definitely require a down payment. You want the buyer to
have a little bit of skin in the game so they're treating the property well and so you're making
sure that they're a really qualified buyer. If they don't have a down payment to put down on
the property it doesn't mean that they'd be a bad buyer. But what it does is it qualifies your buyer.
If you have at least a 5,000 or a 10,000 down payment or you can even do up to 15-20 percent
as a down payment just like a bank would. Then it really makes sure the buyer has to go through a
hoop and almost self-qualify. Because if they have the money to put down on the property
and they've put money on the property the chances of them walking away and not making the payments
is extremely low. Because they have some skin in the game and they don't want to lose that
money. The second thing you want to negotiate is the interest rate. What type of interest
rate should you be charging when you do owner financing for your property? Well, let me tell you
the first thing you need to know is what are the banks charging and you should charge at least
one to two percent more than banks. So if banks are charging four percent you should be aiming at six
percent. Five to six percent. would be a good range and some sellers are even charging as much as
seven percent. Because they're charging a premium in the interest rate for not having to go to the
bank. When you go to the bank you have to qualify for the loan. They have to look into your finances
and because you're not doing that and they don't have to do that and they don't
have their credit score checked and all of these things. You can charge a premium in the interest
rate from bringing that service to a buyer. So I would look at one to two percent at least
higher than a bank. Now because interest rates are so low right now they're in the three percent.
I wouldn't go below six percent because again you want to make sure you're getting paid a premium
for offering the service on selling your home seller financing. The third part of setting up the
terms is deciding on a sale price and by the way because you're selling your house seller financing
you can sell it above market value. Even though the market might say your house is worth 200,000
if you're selling seller financing. You can charge a premium in the price as well. You can charge it
for 210,000 or sell it for 220,000. As long as the numbers still work for the buyer you can start
charging a little bit more. In fact, as a side note I teach the people buying houses seller financing
to make sure they know they can actually pay more than a house is worth as long as the numbers work.
So you as a seller can check if the numbers work sell that property for a little bit more and
you can generate more revenue for bringing that service. The fourth part of the terms you want to
negotiate is the amortization. The amortization is simply the length at which the loan would be paid
off if every payment was made. So if you amortize the loan over 25 years you take 25 years worth of
those payments with the interest and if they made that payment every single year for 25 years that
loan is amortized over 25 years. I would encourage you to amortize the loan in the 20 to 30 range.
The higher you amortize the loan meaning, if you amortize it at 30 years the lower those monthly
payments are going to be, the lower the years at 20 years the higher those payments are going to be. So
you can find the payment that feels comfortable to you and amortize the loan for that distance
and the fifth thing you need to discuss inside the terms is if a balloon payment or a balloon option
is in place. Now, what that means is if you amortize the loan over 20 years a balloon payment means
it's done in a certain amount of years. So for example, I've bought properties that had a 30-year
amortization. Meaning, I was making payments as though I was going to pay it off in 30 years.
But it had to be paid off in five years. That's called a balloon payment, a five-year balloon.
Means, I've got to pay the house off in five years no matter how much I've paid off. The idea here
is that the house will increase in value at five years and you can refinance it and by refinancing
it. It's going to increase enough in value. You can refinance it switch it to a traditional
lender and pay off the loan to the seller and the sixth part of the terms you want to negotiate
is what happens if delinquency of payment takes place? What happens if they don't make a payment?
In the terms, you want to make sure that's clearly articulated in your contract. If they don't make a
payment is there some sort of late fee and if they don't make so many payments at what point do you
get the house back and you have to really set that up ahead of time to make sure you're protected
against somebody who just decides not to pay or may lose a job and can't make the payments. The
second way owner financing works for the seller is simply they're making monthly payments to you
instead of paying the bank. So, every month you're going to get a mortgage and interest payment just
like the bank. So instead of them writing that mortgage payment to the bank they're writing
it to you. So you're gonna get paid not only on your principal on the property but you're also
gonna get paid interest at that six maybe seven percent interest rate. You're going to get paid
interest every single month on your property. As a side note here I would have a contract attorney or
real estate attorney draw this up for you and make sure all those terms are in place and make sure
you also lay out the payment structure in place. How much is the monthly payment? What's included in
that payment and how is it going to happen? What's the payment schedule? Have an attorney draw that up
so everybody's on the same page and you're covered with the investment. Number three, you have to
decide when you get the house back. You have to put a clause in the contract that protects you if the
seller can't make the payment and a clause inside that contract can make sure that you get the house
back after a certain time if it's not paid. The way I would set it up is there's a stiff late fee if
the payment isn't made and I would also say after 90 days if no payments have been made the house is
transferred back into the owner and then you have a renter. So now, if you do have to get your house
back then you often have to go through an eviction process to get them out. This is why a down payment
is really important. Because people that have a down payment and skin in the game they're gonna
find a way to come up with that payment. So you're not put in this situation. Before we go to the next
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Now, let's get back to the video. The fourth way it works for the owner is the seller pays the taxes.
But here's what you have to be careful with in letting them pay the taxes. What if they don't
pay the taxes and all of a sudden your credit gets hit and you get a fine for non-payment of taxes. So
what a lot of sellers do and I would encourage you to do this is just like a bank escrow the taxes
in to the mortgage payment. So when they pay each month you actually write the tax bill until the
property is paid off and you transfer the title to them. So what I would do is increase the amount of
payment the monthly payment they're making. So, you write one tax bill a year or a winter and
a summer however it's set up and where you own the property. But make sure that the taxes are escrowed
in with the payment. That way, you're not having to ask for proof of taxes paid and you're just taking
care of that piece of the deal and you make sure that those taxes get paid and the fifth thing you
need to know about owner financing is they pay the insurance. But insurance is really important
two things need to happen. Number one, you need to be on the insurance and the insurance company will
actually require you to be on in most cases. So what I would do in the same way we're going to
escrow the taxes in, I would escrow the insurance in and have one payment that included the mortgage
and interest the taxes and the insurance just like a bank does. For the same reason a bank
wants to pay that insurance you should want to pay that insurance. A bank wants to pay insurance
because they are loaning 70 to 80 percent of the project. They have way more skin in the game than
the buyer does. So if that place burns down and it's not insured the bank's on the hook for a lot
more money. The same is true of you. If you own that home and you're selling it and it's not insured
you have a lot more to lose than they do. They lose their down payment, you lose all your equity.
So, escrow the taxes and insurance in and make sure that insurance is paid so that you can make sure
the whole property is insured and covered and you don't have anything to worry about.
Now, the power of selling owner financing is you get monthly cash flow. They take care of
a hundred percent maintenance. You don't ever get a call again and you get to earn on the interest
instead of the bank and get this you also get a major tax benefit. Because if you sold that house
you'd have to pay taxes on that right away. But on seller financing, it stretches those taxes out
and by you charging interest for selling it on owner financing. The interest will often cover
the taxes. So you often sell your house tax-free if you stretch it out long enough and this is the
one of the powers of selling and owner financing. So I would encourage you to do this if you can
make it happen financially. I have a training I've created called seller financing secrets.
It basically teaches all the ins and outs of seller financing. If you go in the description
and you go to sellerfinancingsecrets.com you're going to see a page that explains this product and
how it really can help you navigate this whole process. So, I hope to see you in the training.