How to Structure a Seller Financing Offer

Today, I’m going to share with you How to Structure a Seller Financing Offer to a Seller.

Today i’m going to share with you how to structure an offer with one of the most profitable real estate strategies and that is seller financing i’m going to cut through the fluff so you can quickly learn how to structure these offers and make it a win-win solution for everyone hey my name is chris goff and welcome this channel is all about helping you grow your

Knowledge base increase your confidence so you can put more money in your pocket as a real estate investor and it doesn’t matter if you’re just getting started i always say if the seller picks the price you pick the terms if the seller picks the terms you pick the price if the seller picks the terms and the price they’re not motivated follow up with them in 30 days

Because people’s circumstances change in time so as you can see seller financing is what we call a term strategy meaning how much down how much a month and how long can we do it for this is the opposite of a wholesale deal where you need to pay the seller in one lump sum just think about it almost every major purchase made by most people use terms because they don’t

Have enough cash in their bank account to buy houses cars boats rvs cell phones and so much more all right let’s review what makes up a seller finance offer the very first thing is what we call the sales or purchase price what are we going to be buying the property for next is a down payment next is an interest rate that is going to determine the monthly payment

Taxes and insurance because keep in mind you’re going to be owning the property length of loan meaning how many years are we going to amortize this loan out for now most loans are generally either 10 15 20 or 30 year loans now the loan term is what we talk about with the seller now if we amortize the payment the loan out for 30 years a lot of sellers aren’t going to

Want to wait 30 years to get their money so we’ll do what’s called a loan term things to also consider repairs holding cost you know attorney costs for even drafting up the contract and closing costs any hoa dues what is your exit strategy now this is just for example purposes but now we’re going to fill in each one so you can see exactly what the offer looks like

And remember this would be an example offer to the seller so we set a sales price here at 350 a down payment of 10 grand interest rates set at 4 percent which gives us a monthly payment of 16 23 21 taxes and insurance per month would be 195.83 the length of the loan we’re going to amortize this over 30 years but the term with the seller is what we call a five year

Balloon so you could go three years five years seven years you can change this number up depending on how long the seller is willing to do this for but what this means is we’re going to make payments based on an amortization schedule of 30 years but we must pay the seller off within this five-year term so whatever the balance owed you can also buy it prior to the

Five years you would need to cash them out that gives us a total monthly payment of 18 1904 which would be your monthly payment which would be your principal interest payment plus taxes and insurance every single month now we need to determine the sales price now this may be one of the most important steps because you need to understand what is this property even

Worth so the best way to do that is to run comparable sales now running comparable sales we can determine the after repaired value also known as arv this would be the maximum value of the property in tip top shape there’s a couple of ways that you can do this the first way is to contact a local real estate agent they’re going to have access to what we call the mls

And this is the multiple listing service which most homes sold in the u.s are sold through the mls you can also go to rei pro and if you’re an rei pro member you already know this that’s also going to give you access to all sold properties not just on the mls but also any kind of for sale by owner properties as well so it’s going to give you the best of both worlds

When running comparable sales you are finding properties that are similar and that have sold not the homes listed for sale homes that have sold you’re also looking for similar square footage bedrooms bathrooms age condition and location now with rei pro you can access mls comps in all 50 states i have a great training video that walks you through the details of

Determining the arv below in the description you should check it out now let’s determine the down payment now as a rule of thumb when negotiating with sellers negotiate the down payment as low as you can because you know that’s cash out of your pocket that could be used to repair the home so typically the down payment could be anywhere from zero to ten percent of the

See also  Why Financial Independence and Retire Early? (FIRE)

Sales price now you could go higher in certain circumstances really just depends on how the numbers you know play out what kind of purchase price you can get you know if you could get a better purchase price you might you know put more money down if you don’t get a great uh purchase price you might want to consider putting less down so i think you could go back and

Forth like a seesaw here just to balance out what do you need to do from a financial standpoint and what does the seller want or what are they willing to take let me give you just a couple of no money down techniques the first one is what we call a double down payment so since every home will need some type of repairs you could tell the owner that you don’t want

To give them money down and then have to turn around and put money in the home for repairs now the seller you know could agree with you or not agree with you and they could say chris i don’t really care about that i want money down well maybe you move to you know another strategy where maybe you raise the sales price and try to get in with no money down could also

Provide a testimonial you know using testimonials on previous deals is going to show the owner that you’re credible and that you’ve been doing this you know a big part of testimonials is the simple fact that do they trust you and if they trust you they’re more likely to do the deal with you you could also offer three payments up front right so maybe i could get

In with no money down but i’ll give you the first three months payments up front now eventually whatever exit strategy you do decide obviously you could get that money back so you’re really not spending money out of your pocket you’ll be able to recuperate that money so just a few different ways to get in with no money down i’m here to tell you most sellers are

Going to want something down the extremely motivated seller would accept a no money down deal because of the situation that they’re in you know there are some people that hey please just cover my monthly payment right now that’s all i want that’s their burden so most people probably want something down again keep in mind you need to keep this as low as you can

Now we need to determine the interest rate so once you’ve determined the sales price and the down payment we need to figure this out now there’s two numbers um are going to determine the monthly payment so once we get that purchase price or that sales price and now we’ve established that interest rate we’re going to put that in a mortgage calculator it’s actually

Going to give us our monthly payment now from an interest rate point of view i like to go anywhere between two and eight percent again this will be very dependent on the deal and what the seller’s willing to take and and some other factors too of you know your exit strategy where you know if you’re buying at this price and the interest rate is this if that monthly

Payment may be too high for you or you may have to adjust some of these numbers just to make it work for your exit strategy as maybe you’re renting the house so now we’ll determine the monthly payment what we call p and i so principal and interest so now we have the sales price we have the down payment remember that down payment’s going to be subtracted from that

Sales price now we have an interest rate we’re going to use that mortgage calculator and that’s going to calculate your monthly payment so let’s determine those taxes and insurance now you can simply look up the property on your local tax assessor you can obviously use rei pro we’re going to give you that tax value what what is it cost in taxes for this house now

That number is different across the country all counties have different formulas on how they actually calculate taxes then you can get an insurance quote there are tons of companies out there but let me show you in rei pro here so we’ve pulled the property up here and this is just a quick screenshot our step one through our 10 executable step system and you can see

That tax amount here on this particular property is 748 a great insurance company um that we know the owners of good people and i do believe they do work in all 50 states but you can receive special rates when you become a member of the national ria so they have numerous rias in chapters across the country you might want to check out and see if there’s one near

See also  Reading the Bond Market - Eddie Ghabour on YAHOO!! Finance

You if you do become a member there you can get a discount from the insurance side now we need to determine the length of loan and terms right so the length of loan we typically go out 30 years because we want this monthly payment to be as low as possible now you could go 20 years you could go 15 years but just keep in mind that’s going to increase that monthly

Payment so generally we will go 30 years now loan terms with the sellers what we call balloon payment now like i said before most sellers are not going to wait 30 years to get their money they want their money much sooner we typically go five 10 years and again this could change depending on the seller seller may say hey chris i don’t want to go past three years

I don’t want to go past six months some sellers say hey i’ll go 20 years so it will vary and i think what we need to look at is a good five-year term because i think that five-year term is where you really start to build equity in the property so if you’re a buy and hold person that five year number is really pretty good all right so let’s actually structure this

Offer so one of the most important things we need to figure out what that after repaired value is we did that by running comparable sales on this particular property again this is just an example because i want you to understand it 3.95 we also have repairs so we visited the property and determined that 25 000 would be needed to fix up the home you’re going to

Have some holding costs during this time that you’re remodeling it of course you’re going to have paperwork every seller finance agreement i highly recommend having a real estate attorney draft up the paperwork now this cost could vary depending on where you live in the country there will be closing costs right so we’re going to actually close this deal with the

Seller that’s going to be closing costs on our side again this is going to vary depending on where you live in the country as well also want you to throw in payments for three months in this particular example i’m just guesstimating the time frame it would take to repair the house before i decide what my exit strategy if i’m going to rent it lease option it sell

Or finance it or just sell it so i want to make sure that i throw this in because those are payments that we’re going to have to come out of our pocket paid to the seller each month and then exit strategy cost again i just put zero because there’s so many different directions you could go here like i said you could rent it lease option it sell or finance it back

Out or simply sell it so your price after these expenses and you could always throw in some more expenses here but these are going to be the big ones drops our price really down to 360 thousand so if these expenses were true and i bought it for 360 000 from the owner on a seller finance i pretty much paid full price for the property do people do that yes because

They want to use it for a long-term hold the great thing is they didn’t have to go to the bank because it’s seller financing the property is not going to go on their credit report because it’s seller financing so there are some benefits that may outweigh you know the fact that you’re purchasing it at full price here’s what my offer would be remember that number

360 that’s going to be that price after expenses i want to start my offer obviously less than that and it could even go lower now i would recommend just don’t even it out like in this example 350 000 you might want to do 350 470 dollars you want to make it look strange like you must have calculated this number you put a lot of thought into it okay you just don’t

Want to throw out an even number in this example i think ten thousand dollars down keep in mind i still gonna need some cash to fix up the home actually purchase the home and so on so ten thousand dollars i would offer to the seller now if they came to me and said hey i’ll take you know five thousand down then i wouldn’t offer the ten right but what happens if

The seller comes back and says no i need fifty thousand down i’m still going to offer the 10 because financially it may not work for me and again i would need to run those numbers with a different down payment set the interest rate at four percent i want to go as low as i can i think if you go too low doesn’t make sense we go too high it may not make sense for

You right because that’s going to change your monthly payment which could affect your exit strategy monthly payment comes out to 16 23 21 taxes and insurance now this was just a tax you know on this particular property plus an estimated insurance amount i just combined the two together comes out to 195.83 a month again be sure to calculate that for your property

See also  FIN533 GROUP PRESENTATION: MANAGING PERSONAL FINANCIAL STATEMENTS AND BUDGETING & ESTATE PLANNING

We’re going to amortize this over 30 years but we’re going to do a five-year balloon on this so i’m gonna keep making payments on this property for up to five years now keep in mind i still own it the deeds and my name i just have the owners the lien holders like they’re the bank so i could cash them out tomorrow but i have up to five years to do that total monthly

Payment which is principal interest taxes and insurance is going to be 18 1904. now let’s look at five years later because we’re gonna have a balance that’s owed to the seller now if you can see here at month 60 we’re going to owe all the way to the right hand side 307 000 now there’s two ways to pay the seller off you can either sell the home or you can refinance

The home because that is the end of our term with the seller let’s look at a five-year breakdown for the seller like why would they do this deal well number one our balance is that 307 total monthly payments keep that in mind it’s at 16 23. now if i multiplied that by the entire 60 months five years they would receive 97 000 in just monthly payments so total pay to

The seller in this example is 414. almost 415 thousand dollars keep in mind we bought it for 350. but after five years because of interest they have earned on the property they’re actually making more money so that difference is about 65 000 i want you to remember they don’t have the tenants the turnover the repairs remember they don’t own it anymore they’re just

The bank we take on all that responsibility so their profit margin is is going to be at its highest here because they won’t have any additional expenses in the property and it’s a great way to look at from a seller point of view that this is an investment and they’re making money on their investment they’re just getting a check from me every single month until i

Cash them out they don’t have to worry about anything else because now remember i own the home you always want to make this a win-win right so there are thousands of ways to structure these deals so you need to determine where the motivation is with the seller and and you’ll find out is it the sales price do they want a higher sales price or is it more about i want

More money down so i think you’re going to figure out where that motivation is just by simply talking to them you could create numerous types of offers i might increase the interest rate i might decrease the term there’s a lot of different ways that you can structure this and i think it’s really coming down is it a win-win does it make sense for both parties so

Your goal as a real estate investor is to structure the numbers to make it a win-win for all parties involved let me give you some key takeaways number one if the seller has an existing mortgage you’re going to need to do a wrap-around agreement so that’s subject to existing financing because there’s already financing in place now that won’t change the way that

We structured the offer but it is something to note obviously you’re going to need a mortgage calculator because you’re going to need to figure out your payments you’re going to need to amortize this you may have to adjust the sales price in the interest rate to arrive at the best monthly payment that works with your exit strategy just think about it if you’re

Going to rent the property out and our total payment is 18 1900 to the seller and the property only rents for 1500 well that’s not going to work because that would be negative cash flow so you may have to adjust some of these numbers to get that monthly payment where it meets your exit strategy now be sure to receive this irs form 1098 from the seller because

It’s going to report the interest on the property now this deduction provides up to a hundred percent of the interest you pay on your mortgage is deductible from your gross income along with other deductions which may be eligible for a tax liability is calculated so be sure to speak with your cpa on this i put together a video that’s going to teach you how to get

Tax-free cash to purchase more properties you can see that video right here and be sure to subscribe right now so you can receive the latest training videos and learn how to invest in real estate the correct way and i’ll see you on the next video where you’ll learn how to use subordination to get tax-free cash to purchase more deals

Transcribed from video
How to Structure a Seller Financing Offer By Chris Goff