One of the most well-known strategies in real estate is seller financing! But what is seller financing and how does it work? In this video series, I’ll teach you everything you need to know about seller financing and how this benefits both buyers and sellers!
On seller financing, i’m gonna break this i’m gonna explain why this is one of the hey there, my name is mike fritz. i’m the founder of titanium capital investments in the multi-family 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. 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 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 often they will escrow in the taxes and insurance 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 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 you’ll have a land contract agreement or a seller 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 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 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. dollars down. i would encourage you to go more 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 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 anyway. so, i would stay in the 10 to 20% range because this will give you a down payment and give 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 i would charge 1 to 2% higher than a percent
Range, you should be in that 5 to 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 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 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 do you want to be paid off in 2 years? if not, you want to make sure it’s written into the contract 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 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 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 and make sure you tune in to part 2 of how
Do seller financing work when i walk through financing so you know which one is right for you.
Transcribed from video
What Is Seller Financing And How Does It Work? | Part 1 By Mike Fritz
