How do you structure a seller financing deal? If you're the buyer you want to make sure certain
things are true in the deal and if you're a seller you want to make sure certain things are in the deal.
But how do you make sure you create a win-win for both the buyer and the seller.
Hey there, my name is Mike Fritz, I'm the founder of Titanium Capital Investments in
the multi-family CEO system. I have a passion to help people just like you create financial freedom
through multi-family real estate investing and in this video, I'm gonna walk you through the four
things you need to know about seller financing. So, the next time you do a seller financing deal.
Whether you're the buyer or the seller. You know exactly what to do to make the deal a success and
stick around to the end so I can share with you my favorite way to structure a seller financing deal.
The very first term that goes in the contract is the sale price. How much are you actually going to
sell the property for to the buyer and when you're selling seller financing. You have to think about
it like a service you're offering to somebody. The reason the bank charges closing costs and
fees is because they're offering a service to buyers. Now, if you're going to take the place of
the bank as the seller you can start charging that kind of fee. Now, you might not charge closing costs
in a deal but what you can make that up in is by raising the price of the property. So, if your
property's worth $200,000 you might be able to sell that 225,000 on a seller financing contract.
Because you're offering a service. So, I tell buyers this all the time. We want to look at
terms not price. Meaning, if the price is a little bit higher but the property still works and the
numbers still work and I'm still making money. I don't really care. I just want to make money on a
project and make sure I can sell it later. So for you, you can raise the price of the house a little bit.
You want to be careful to raise it too much so when the property appreciates the buyer doesn't
get to realize that appreciation. But you can raise it some because again you're offering a service.
As a seller, if you're selling a property seller financing you're offspring a service. As a buyer,
you have to understand the sellers offering you a service. So, they should be compensated for that
service. So in the payment just understand that's how the payment can be structured. Can go a little
bit above the value but that's the first thing you need to decide. What's the price of the property?
The second term you want to decide is the interest rate. What interest rate are you going to charge
for your service of acting as the bank? I always say see what the bank is charging for normal
investment type deals if it's an investment and go one to two percent higher. The bank's charging four
percent aim in that six percent range. Bank's charging five aiming that's seven. I like two
percent, some people only charge one percent above but you definitely want to be above a bank.
Why? Because you're offering a service. Since they don't have to go to a bank and go through
all the process of being underwritten by a bank you're offering a service to them. So make sure
that you have an interest rate that reflects the service you're offering. So, increase that interest
rate a little bit above what the bank is charging so you can experience that interest on your own
bottom line and here's the powerful thing about an interest rate. Because taxes are
spread throughout a seller financing deal. Meaning, you're only paying taxes in a year on how much
money you're making off the property you're not paying on the sale of the whole property.
The interest can often offset those taxes. So, you're actually getting your property sold
tax-free. The third part of the terms is the down payment. How much down payment are you going to
charge to get the deal done? I suggest in the 10 to 20 percent range. You want to really stay in that
10 to 20 percent to make sure that the buyer has to put some skin in the game to get this deal done.
If you do a zero down seller financing deal you're going to get a lot of buyers you probably don't
want to deal with. You want to make sure you have a down payment also to make sure the buyer not
only has skin in the game but is more qualified. Having a down payment qualifies your buyer. So you
can make sure they're going to be able to make the payments. If your down payments only five thousand
dollars and they can't come up with five thousand dollars and your payments 900 I'd be really...
of selling a property to them believing that they could actually come up with the payment month
after month after month. Because again, if they become delinquent on their payments and don't pay
you then what do you have to do? You actually have to take the house back and go through an eviction
process to get them out. So in the contract make sure they have to bring a down payment to make
sure they have some skin in the game and that also really cuts down on your delinquency. Because when
people have skin in the game they're a lot less likely to just walk away from a deal and not make
the payments. So make sure you have a down payment in your contract and in your terms. The fourth part
of the terms is to think through the amortization. The amortization is simply if every payment was
made how long would it take to pay off the loan? So if you've ever gone to a bank you might hear of
something called a 25-year loan or a 30-year loan. That means it's amortized over 30 years. Meaning,
you're gonna make payments as if every payment was made it would take you 30 years to pay off a loan.
Same in seller financing. You want to decide how long are we going to stretch this loan out so we
know where to set the payment. I would suggest in the 20 to 30 year range. So, if you want the payment
to be higher go closer to 20. If you don't mind if the payment is a little lower go closer to 30. But
I would stay inside that range. So, the amortization allows you to kind of dictate how high that
payment is so you can experience your money either faster or a little bit slower. But you might be
saying, "Mike, I don't know if I want to wait 20 to 30 years to realize my money from this deal."
You don't have to, because you can amortize the deal out as long as you want and you can have
what we call a balloon option and this is the next part of our terms. A balloon option means you can
set a date when the entire balance is due. So, you can amortize the loan over 30 years and have them
make payments but have a balloon option at year five. Meaning, it needs to be paid off at year five
and the idea there is they can go to the bank and refinance it because it's increased in value
and they can get a loan and a fresh loan on this project pay you off and everybody moves on. I've
actually done loans as small as two-year balloons. I actually bought a three-unit property years ago
they amortized it at 30 years but I had to pay it off in 24 months and what I did was I ended
up refinancing. I increased the rents, increased the value, I refinanced it, paid off the seller
and we all went on our merry way. So you can set the balloon as short period as you want. You want
to do a one-year seller financing deal sell it in one year. I actually did a seller financing deal
one time that was for 30 days. I bought a property for 30 days because I needed an extra 30 days to
get the bank contracts around and get the bank done. I bought it for 30 days then refinanced it
and got the whole deal done 30 days later. So, I did a 30-day land contract. So, you can do
seller financing for as much time as you want and set that balloon payment of when it's due,
and then the last part of the terms is you have to decide what's going to happen if
there's a delinquency. Nobody likes to go into a marriage planning for divorce and nobody likes
to go into a seller financing deal planning on it going south and figuring out that you've got
to figure some other way to get this person out because they're not making their payments. But
we have to make sure it's in the contract. So we both know how to proceed if this takes place. So,
what you want to set up is number one a stiff fee on late fees. So, if they're late there's a fee just
like if there's a late fee on rent. So number one, there's a fee if they're late. Number two, I would
set up a duration if you don't pay in this amount of time we actually repossess the house and you're
exited from the property. So, I like to set that in the 60 to 90 day range if I get no payments
I'll actually take the house back and I will have to evict them and that's the other process.
Once you take the house back you're going to have to evict them and go through the eviction process
that's dependent on the area in which you live in usually the county in which you live in will have
different types of eviction procedures you need to go through. After you repossess the house then you
can actually go through the process of victim get your house back and then you can go forward with
whatever your plans are for that property. Now, the second thing you need to understand about seller
financing is not just all the terms but you need to have an attorney draw all this up. Because after
you've gotten all these terms now you have to have an attorney draw it up. So everybody's clear
on what's actually going on. So, after you figure out all these terms a real estate attorney is
going to come in put all these terms into a contract so everybody can sign on the agreed upon
terms and move forward with the project. Anytime you buy a project through a real estate agent
you notice when you buy a house you have to sign a lot of documents. That's because the bank and
the title companies and the real estate agents all have a set of documents that transfer title
and take care of all of the sale of a property. Well when you're selling on seller financing you
don't have that. So, how do you make it happen? So you can pay an attorney to draw up a contract.
This usually costs in the 500 to a thousand dollar range to get a contract drawn up which as a
seller by the way I would encourage you to pay for. So that the contract is drawn up correctly because
you have more to lose than the buyer does. So again, you want to make sure attorney draws this contract
up and you both can sign it. I encourage you to get a third party attorney that doesn't have
any bias towards the buyer or seller they haven't worked with them before. So that the attorney can
just drop the contract make sure everybody's in agreement and everybody can move forward. So, after
you set the terms you want to have a real estate attorney draw it all up so we're all on the same
page. Before I go into the last two tips make sure you subscribe to the channel and turn on that bell
notification so you get notified every time we do a video. We love adding to our family so we can
continue to help people achieve financial freedom and the third thing you need to know about seller
financing is how the taxes and insurance work. Does the seller take care of taxes and insurance. Does
the buyer take care of taxes and insurance? Is it a mixture of both? How does this actually work? Well, I
like to keep it very clean and structure it much like we're doing it through a traditional lender.
So, what I would suggest is have the seller escrow the taxes and insurance into the payment
and the seller still make the tax payments to the county and still make the payments to the
insurance company and here's why. The seller still has more to lose in this project. Because often
they'll have a 10 to 20 down payment then the rest of the 80% of the project they stand to lose if
something goes wrong. So for example, if the project is uninsured and it burns to the ground and the
buyer was simply saying, "Yeah, I have insurance", but they didn't want to spend money on insurance all
of a sudden we have a real problem on our hands. The property burned to the ground and there's
no insurance to put it back up. So, the seller loses big time on that. So as a seller the way
I protect myself against delinquency and taxes and a non-insured building is I act just like the bank.
I have the principal and interest payment and I add on the taxes and insurance and I just have
the seller make one payment to me per month and I just pay out the taxes and insurance myself
as the seller. That's how I would encourage you to do it as well. Another thing to consider in seller
financing is there a payoff extension. For example I talk back in the terms about putting a
balloon option into your terms and let's say they have to pay it off in five years. But let's say
five years comes around and they can't. Maybe if the economy has gone down and they can't refinance
they can't get a loan anywhere else and they can't end up paying it off. What are you going to do in
that scenario? So you can decide for yourself what would feel good to you and maybe you can give a
12 month extension and may have them continue to make the payments. But seek to do something in 12
months but that extension comes at a cost. They can buy another 12 months for maybe $2,500 and they can
buy another three years for $7,500 or whatever you decide. But make sure you have something in
the contract that protects you against a balloon payment that can't be made. Because if they can't
get a refinance they've had their credit take a hit a business went bankrupt, who knows? It makes
sense for you to have a insurance policy around you on that contract that says you can take the
property back if the balloon payment isn't made. Now, if you don't want to do that you'd rather do
the extension model, that's fine. Do the extension model just make sure we put it in the contract.
Now, my favorite favorite favorite way to do seller financing is the lease to own option
and here's why. A lot of people have mortgages on their properties and they're in trouble and
distress and my job I want to come in and help them not go into bankruptcy not lose their home
lose their credit. What I want to help them do is make sure they can exit that property go someplace
else where they can afford it and not have a massive hit to their credit. So, it's a win-win
and a lot of people want to just get out of properties because it's so stressful that they
can't make the payments and they want to just get out. But for a lease option the powerful thing here
is you can do this often with no money down. You can move into an assumable mortgage or a subject
to we call it take over the mortgage and there's no down payment. However, I do want to prep you
sometimes the sellers will ask for some things. For example, I one time had a seller ask me, "Listen, I'm
interested in doing the subject to model but I need $10,000 to move down to Vegas
where my kids are", she was an elderly lady. So, for us we gave her ten thousand dollars so she can
move down to where her kids were and we got the property for essentially ten thousand dollars down.
Now, the idea here is that we're buying it at a decreased rate so it made sense to give the ten
thousand dollars and I would tell you subject to is a great way to start buying real estate with
none of your own money. I also want to invite you to join a group of our students that are learning
seller financing and starting to do deals. Seller financing secrets is a course I put together to
help people just like you start knocking down and negotiating these seller financing deals
like a pro. If you go into the description you go to sellerfinancingsecrets.com and you
can become the next addition to our community and start knocking down seller financing deals.