What is seller financing and how does it work? I've got so much content
on seller financing, I'm gonna break this into 2 parts and in this first part,
I'm gonna explain why this is one of the most powerful ways to invest in real estate.
Hey there, my name is Mike Fritz. I'm the founder of Titanium Capital Investments in the multi-family
CEO system. My greatest passion is helping people just like you create financial freedom
with multi-family real estate investing and in this video, I'm going to walk you through how
seller financing really works, the in's and out's and make sure you understand why you should be
looking for selling financing deals all the time. And stick around to the end because I have a great
invitation for you that I want to make sure that you have so you can start doing seller financing
deals. Before we get into seller financing, we have to understand a definition. What does it actually
mean? Seller financing is simply when the seller or owner of a property offers to sell the property
and act as the bank, meaning you'll make payments to the seller instead of making payments to a bank.
When in the context of residential real estate, it's also called bond for title or owner financing.
There's many different terms that can cover what seller financing really is. A couple of
those terms are bond for title, are land contract, owner financing, seller financing, vendor take-back,
vendor buy buyback, vendor financing. There are so many terms over the years that have been attached
to this process and some of them do have different nuances, however the major thing you need to know
about owner financing is the seller is acting as the bank, you're simply making payments to them.
So, the first thing you have to understand is the seller literally steps in the place of the bank. So,
now you as a buyer are working with the seller on negotiating all of the terms of the property, all
of the terms of the financing and you're working with them directly. Well, this is powerful for you
because let's say you have bad credit, you had an unfavorable event happening to you in your past
and it kind of hit your credit. Well, you can buy a property on seller financing and not necessarily
have your credit come into play. So, this makes real estate available to people that may not
have the ability to get a loan from a traditional lender. And every single month in owner financing
structure, you simply make a payment straight to that seller just like you would a bank and what
goes into that payment is all dictated on the contract. A lot of times your taxes and insurance
will be made with that payment just like with a bank. When you pay a bank your mortgage payment,
often they will escrow in the taxes and insurance so you make 1 payment and it covers your taxes,
insurance and your property. The 2nd thing you need to know about seller financing is you want
to make sure you have a real estate attorney drop the contract between you and the seller. Now, in a
normal real estate transaction, you really don't do that. You're buying it from the bank and the bank
kind of has their own contractual process and so you just sign the bank documents of the loan.
All of those documents cover them if payment isn't made and all of the nuances that can go wrong
inside of a project. When you're doing it directly with seller, you or the seller don't typically
have those contracts. So, you have to have somebody qualified draw those up. So, I would suggest going
to a real estate attorney. A real estate attorney will know the in's and out's of a land contract deal
and be able to draw up a contract that's really favorable to both sides and protects you both
in the transaction. So, instead of a PSA or a purchase and sales agreement that you would
have if you're buying a normal property through a real estate agent or straight through a bank,
you'll have a land contract agreement or a seller financing agreement straight with the seller and I
would have a third party attorney draw that up. And I would encourage you to have an attorney that you
nor the seller have necessarily worked with before so it's a third party attorney that's unbiased in
the transaction. It makes sure everybody's on the same page with understanding what to expect in
the property when certain things happen and how to make sure that we have everything laid out so
everybody is clear about the expectations on both sides of the contract. Before I go on and explain
all the terms that come into seller financing, make sure you subscribe to our channel and hit that
bell notification. We love to teach people just like you about real estate investing and making
sure they're making the best decisions to create financial freedom. When you're setting up terms
for your seller financing agreement that your attorney is going to draw up, there's really 6
things you need to understand inside those terms. There's 6 specific talking points that you and
the seller need to agree on in order to get to a completion of the contract so everybody feels good
about what's taking place. The very first thing is obviously the sale price. How much are you actually
going to sell the property for? And if you're selling your property land contract, you can charge
a little bit more for your house because again you're charging a premium for not having to go to
the bank. Because that seller doesn't have to go to the bank, you deserve to be paid for creating that
service. You selling land contract, you're creating a service. A bank charges closing costs, what do you
get for holding the loan for a buyer? Well, you also should be paid for that service and by offering
that service, charging a little bit more for your property, you can actually create some revenue for
doing that deal. So, I would take your sale price and bump it up a little bit above market value and
if you're buying a property on land contract, I'd be willing to pay a little bit more than market
value for a couple reasons. Number 1, if you don't have to go to a bank and you don't have to pay
those closing costs, you're all of a sudden saving money. Because you're saving money, makes the deal
a little bit more appealing but also we worry more about income if it's a real estate investment then
we do about price. As long as the numbers work, I'll pay a little bit more than the property's worth as
long as the cashflow still works if I'm buying it for cash flow. But again, make sure you don't
get so egotistical here that you're like, "Oh, it's above value. I'm not doing it." Now, sometimes that's
the way to get the deal done and especially if your credit is a little sluggish because we have
some things on there that we don't want on there anymore and we're trying to work our credit out of
a hole, it's a great way to get into property even though my credit might have taken a hit. So, I'd be
willing to pay a little bit above market value to make that deal happen, but the very first thing you
need to negotiate is the sale price. 2nd thing you need to negotiate is a down payment. Is there
going to be a down payment associated with this project? If not, then we move forward at 0 down
and I would encourage every buyer to not just seek only deals that are 0 down, seek deals on seller
financing all over the board and make sure the numbers work with the down payment but again, you
have to understand the kind of service the seller is offering. We want to make sure we pay them for
that service. So, again, you want to negotiate what type of down payment is going to happen.
Some people that do sell or financing a lot, that's how they sell their properties and that's how they
make their money, they have kind of a flat fee. They move people in for 5 to 10,000
dollars down. I would encourage you to go more on the percentage route. Stay in the 10 to 20%
range because this weeds out people that just want free real estate. And here's the thing, they
can move into that property if there's no down payment with 0 money and that is never a good
thing because you can have people in there that really aren't qualified to make that payment. Just
like the bank, make sure they collect documentation that this person can make this payment even if
somebody does have a bad credit score doesn't mean they're a bad person to buy this property,
but we do need to run them through a little bit of a process to make sure they can afford the kind of
payment this house is going to have. And a down payment helps you weed out people that probably
aren't going to be able to make that payment anyway. So, I would stay in the 10 to 20% range
because this will give you a down payment and give you some revenue for the value you're providing.
Another side note on a down payment, if you're selling this through a real estate agent, that
real estate agent is probably going to want a fee. If you don't charge your down payment, you're going
to have to come out of pocket to sell your house. By charging a down payment, you'll actually be able
to cover the fee of that real estate agent. Now, if you're selling it on your own on Craigslist or
Facebook marketplace or some of the online sites on Zillow or Redfin, you don't need to worry about
that. But if you're selling it through an agent, they're going to want a fee and without charging
a down payment, you got to come out of pocket to sell your house, that's not what we want. The
3rd part of the terms is the interest rate. What type of interest rate are you charging your buyer?
I would charge 1 to 2% higher than a bank charges. So, if a bank is in the 4 to 5
percent range, you should be in that 5 to 6 percent range. But right now, I would start at 6
percent and make that your floor. Don't go lower than 6 percent because you can get deals done
at 6 percent right now. So, you need to decide on the interest rate. Now, your buyer may have some
pushback on that and say, "Hey, the banks are at 4 and a half percent or the banks are at 3 and
a half percent," but you can again explain you're charging a service if you're the seller. If you're
the buyer, you have to understand they're charging you a service. They're charging you for not having
to go to the bank. So, paying a little bit higher interest rate may make up for the fact you don't
have to pay closing costs, you don't have to pay a lot of the fees associated with closing on a loan.
The 4th part of the terms is the amortization. Amortization is simply the length of time
if every payment was made that a house will be paid off. A lot of times it's amortized at 20 to
30 years. It's just like a normal house, if you buy a house and they give you a 30-year loan, meaning
you can pay that off over 30 years, 30 years is called the amortization. It means if every payment
was made, you'd pay it off in 30 years. And the amortization of a land contract can be 15 years, 20,
30 years. Again, it's all negotiable. I would aim in that 20 to 30 year range because you want to keep
the payment low enough that it makes it appealing to a buyer, but if you go all the way up to 30
years, it's going to really shrink that payment down. I like in the 20 to 25 year range, lowers the
amount of time that they have to pay the loan off but you'll also get a little bit more on a monthly
payment basis. So, I would amortize it in the 20 to 25 year range but I typically see land contract,
seller financing, owner financing deals in the 20 to 30 range. The 5th part of the terms is will
you have a balloon payment. Now, what is a balloon payment? Well, I just told you amortizing a loan
is how long will it take to pay that loan off. A balloon payment if you shorten that, usually it's
in the 5 to 10 year range, and you say, "At this point, the entire loan needs to be paid off." So, yes
they're making payments as though they're going to pay it off in 30 years and they're making smaller
payments but in 5 years, the entire loan has to be paid off. Now, the thought process behind this is
usually in 5 to 10 years, it'll increase in value enough to refinance it, put a traditional
loan on it and pay off the previous seller. But in the balloon payment, there's a couple things you
want to notice. Number 1 is there a prepayment penalty? Do you want to be paid off before the
balloon payment? Let's say the buyer comes into some money and can pay you off in 2 years,
do you want to be paid off in 2 years? If not, you want to make sure it's written into the contract
that they can't pay you off before a certain period of time. I actually bought a portfolio
of properties last year where there's a 15-year balloon payment but I can't pay it off before
15 years. The contract prohibits me from paying it off so I'm just experiencing cashflow until that
15 years and then I'm going to either refinance or sell off that portfolio. So, you need to decide if
you're going to have a balloon payment and if you do, is there a prepayment penalty? And then
the last thing in the terms that nobody wants to think about, but you have to have a clause in there
that talks about what happens if payment isn't made. If payment isn't made, is there a late fee
or if payment isn't made for a certain number of days, do you get the property
back? I would encourage every seller selling on seller financing that you would set up a late fee
if they don't have the payment in on time and I would make it a steep late fee to encourage
on-time payment and then after 90 days, you get the property back. But just so you know, when you get
the property back, they're living in the property then you need to go through an eviction process
and actually evict them out of the property. It's a very unfriendly process. We really don't want that
to happen. Going back, that's why we want to make sure we encourage a down payment because if we
encourage a down payment, often we have less likelihood that that'll actually take place.
I also put together an online training called Seller Financing Secrets where I walk through
all the secrets of seller financing. ow to find deals, how to fund them even if you don't have
the down payment money, how to structure them, how to negotiate with sellers, to sellers, how to
set up your deals seller financing. If you want more information, make sure you click the link
in the description, Seller Financing Secrets. You're going to go to a page that explains
our entire product of how we help people just like you get seller financing deals.
And make sure you tune in to part 2 of How Do Seller Financing Work when I walk through
the 5 different types of contracts in seller financing so you know which one is right for you.