What Is Seller Financing And How Does It Work? | Part 1

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

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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

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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

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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