Basics of Owner Financing and Notes (pt 1)

[For part 2, visit Part 1 – Easy to understand explanation of how owner financing compares to traditional financing, and how it creates the discounted note business.

Hi this is dawne one of the first things that i want to cover is a couple of terms that sometimes throw people in a tizzy and they think they’re all mysterious and hard to understand one of them is owner financing or seller financing oh my god what is that even a lot of people who let’s say have been a real estate agent for a long time have a hard time understanding

Really what seller financing is it sounds so you know scary and woowoo and so out there and i want to show you that it’s really not i want to bring the note business and owner financing together on the same plate for you and show you that dance between property and paper though i see lots of people teaching owner financing and seller financing techniques as a way

Of buying and selling property and i see people teaching about the note business and what the note business is you people bring these together once once you understand these steps the steps of this dance i’m caught talking about the dance between property and paper real estate and real estate notes then you have so much flexibility you will see so many options that

You didn’t even think of it’s just amazing so ok so let’s take the a really simple example and i apologize for those of you this is going to be extreme review for some of you you might want to fast forward or whatever but what i want to do is take someone who it knows absolutely nothing and show them really how simple all of this is ok so we’re gonna start super

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Basic with a little single-family house and we’re going to say that this property is worth $100,000 or it’s being listed for $100,000 by the seller okay and for the purposes of this example we’re going to pretend that the seller owns this property free and clear meaning they don’t have any mortgage against it they don’t owe anything they either paid cash for it

Inherited it or they paid off the loan a long time ago okay so they have a hundred percent equity at this point they’ve got a hundred thousand dollars of equity in this property okay now along comes a buyer who goes i want that i want to buy that house to live in for my family and i’ve been saving and i have hopefully they have saved up at least 10% of the jeppe

That’s a really good solid acceptable number in most underwriting circles remember when the bank’s used to f4 asked for 20% though okay so the buyer says i’ve been saving my money and i’ve saved up ten percent what’s ten percent of a hundred thousand ten thousand so this mister seller i’d be willing to give you my down payment of $10,000 that i’ve been saving but

I don’t have i don’t have a hundred but i’ve got ten but tell you what i’m gonna run over to the bank this really let’s pretend like it’s a really solid and fancy structure that we can all trust and count on it all right okay okay so they say can i get a loan i need $90,000 more the bank you know within a couple of days maybe a week at the outside say yeah no

Problem or where’s it a year or two i can’t remember but eventually if the buyer has good enough credit and the property does appraise and they say yes it’s it’s more than hundred thousand dollars or more and i pick in our opinion we think you’re a good risk so yes we are going to lend you the money they make a loan of money and this is ninety thousand dollars so

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That the buyer can then turn around take this money and give it to the seller he then has their 90,000 from the bank and they have their $10,000 from the downpayment from the buyer and they’re good they got their hundred thousand dollars and sellers happy but how do we make the bank happy they’ve just lent the buyer ninety thousand dollars what are they going to

Want in return well they’re gonna ask the buyer to sign a note they’re gonna want two things a note a promissory note and a security instrument which will either be a mortgage or a deed of trust a trust deed depending on what state that you’re living in so here’s what the the bank says i gave you this what are you gonna do for me okay and the buyer then gives the

Bank how can we do this they give them a note and they give them a security instrument the house is the security for the loan the collateral the bank gets a deed of trust or a mortgage okay so the note what does the note say the note says okay bank you loaned me 90 thousand you you gave me an interest rate of 6% then you set the term at 30 years so you’re giving

Me 360 months to pay off this loan and that gives me a monthly payment the 539 60 fire says i promise to you promissory note i promise to pay you five hundred and thirty-nine dollars and sixty cents for the next three hundred and sixty months in the next 30 years i promise to pay you back the money that you lent me and the bank says that’s nice it’s less than you

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Promised but if you break your promise and you don’t pay us money we want a way to get our money back we want security for our investment okay so if you don’t pay us according to the terms of the promissory note we are going to take your property that you’ve pledged as collateral for this note so we all know what that looks like right foreclosure they just say you

Didn’t pay we’re taking the property so we can sell it and get as much of our $90,000 back as we can out of it okay so that is i’m gonna break this right down the middle that’s mostly what we know and are comfortable with in in terms of real estate transactions so what’s over here owner financing how does owner financing work i mean think about it we we say that

The bank is in the lending business they loan money which is true but couldn’t we also say that they’re in the note business what did they ask for him what are they holding they’re holding a note they’re receiving payments on the terms of a promissory note so really just think of the bank as being in the note business yeah they lent money but what they’re holding

Is a note and a deed of trust okay just think about that banks are in the note business okay over here the buyer says in this scenario

Transcribed from video
Basics of Owner Financing and Notes (pt 1) By Dawn Rickabaugh