Rookie Reply: Tips on Owner Financing Then Refinancing Out | Rookie Podcast 56

This week’s question comes from Cory on the Real Estate Rookie Facebook Group. Cory is asking: Owner financing would buy me some time to get the property rented and cash flowing as well as build some equity before taking it to my bank for conventional financing. Any tips, suggestions, stories on doing this? 

This is real estate rookie show number 56. and we are back with another saturday episode i hope everyone is enjoying their weekend i am your co-host ashley care and i am here with tony robinson hey tony what’s up ash excited to get into some more questions today and then uh dive into some topics the listeners want to hear about yeah yeah i’m super excited and

Um we finally have come up with a name for this show so it’s going to be called the rookie reply uh super excited for that um make sure you guys check us out every saturday and then wednesday we’ll continue our episode with our awesome guest uh that will continue to have all right so corey’s question is does anyone have experience buying and owner financing terms

I have an opportunity but i could easily also get a mortgage from my lender my thought is that by doing owner financing it would buy me some time to get the property rented and cash flowing as well as build some equity before taking it to my bank for conventional financing any tips suggestions stories on doing this thanks in advance so corey i’ve never used owner

Financing before so i’m going to actually use this as an opportunity to interview ashley a little bit so ash i guess what’s been your experience with uh seller financing oh great i’m in the hot seat now so i’ve actually done i think two seller financing deals i’ve put in a lot of offers asking for seller financing especially recently but my first experience

With seller financing was with a guy who had a whole portfolio that he wanted me to purchase so i did not have enough cash to purchase the whole portfolio and the properties uh needed a lot of work and weren’t exactly eligible for conventional financing and so what i did was i put together an offer where i paid cash for some of the properties and then i asked

For seller financing on the bigger property so my go-to things when asking for someone to hold the mortgage for a seller to do the owner financing is that you’re going to show them that you are financially stable that you pay your bills you know print out your credit karma report show them you have a good credit score if you’re using lenders bankers already get

A letter of recommendation saying that you know your loans have been paid you’re great to work with um you know you don’t overwithdraw on your bank account as much you know copies of your tax returns and then a personal financial statement so these are all things you don’t have to give with your offer you can actually wait until it’s accepted and say hey you know

This this will follow if you would like to see my financial information my history i’m more than willing to show that so the next thing i look at is okay what kind of terms are you going to ask the seller there is no right or wrong way to actually do seller financing so you can do any interest rate you can do any amount of time you can do interest only you can

Do a balloon payment you can do a 30-year term so it’s whatever is going to work for you and the seller so what i recommend is figuring out what works for you so what kind of down payment do you want to give the seller there’s definitely very very lucky people who can buy properties with no down payment and the person will do seller financing i have not been

One of those people yet but so start with your down payment what run the numbers with what’s your down payment what kind of interest rate do do you think is reasonable do you want to pay and we’ll work with your numbers and then what kind when are you going to refinance out of this or do you want to you know stay in the seller financing forever and you want to

Look at what you think the seller is going to want to you know have you talked to the seller at all or has the realtor mentioned anything that would be like this person is selling this because in two years they’re building their their dream home or something like that so okay two years they’re gonna need a big lump sump so let’s schedule this seller financing

Over two years and then they’ll get a balloon payment so there’s no right or wrong way and you just gotta you know look at the terms so the example that i did i did um thirty percent down and then i did seven percent interest only for one year and then it was a balloon payment of the balance of the loan so i think it ended up being 122 000 was the actual seller

Financing after i had paid the down payment and i paid 7 percent interest on that over a year and that kept my monthly payment really low while we raised rents and we renovated one of the units then when i went to refinance um i used the refinance money and paid off the seller financing loan so that’s like my first experience with it my second experience was i

Actually did the seller financing so i had a friend of mine buy a property that i owned with a partner free and clear and so we did seller financing for six months for him until he did some changes to the property increased rents and he had to wait a little bit before he was eligible to get bank financing because of a change of job and stuff so we did um the six

Months interest only with him where he paid me seven percent interest and then a balloon payment at the end so they were very similar so a couple questions there so when you were the person who was the the buyer um and you approached the seller with this proposition to have them carry the note what does that look like like how do you even bring that up to someone

Like did they already know what seller financing was did you have to educate them what was that conversation like well the the guy that i purchased it from his son was a commercial realtor so he definitely had some knowledge and was very helpful and what i did was i since this was technically an off-market deal i drew up a letter of intent and if you just google

This online you will find millions of examples but basically it’s just a letter stating i would like to buy this property for this amount these are the terms so i wrote out my seven percent interest in a balloon payment and just like there was no contingencies no inspections and then i signed my name and then a spot for them to sign then i had my lawyer look over

It obviously but uh so that was like the starting point but with that letter i should attached an amortization schedule showing what the interest only payments would be over the course of those 12 months so i do this with every offer that i submit i attach the amortization schedule say like okay i’m offering you a hundred thousand dollars cash or hundred thousand

Dollars seller financing but over the course of the next year you’re going to make another ten thousand dollars in interest payments so i tried to break it down and make it as easy to understand and i even put um i didn’t do this then but i do this now where i will put in the offer like this this is the monthly payment and it will be direct deposited into your

Account every month on the first like just every reassurance i can give them i i try to add that in there can we talk a little bit about like the actual legal structure of the seller financing like what are the what are the documents you have to sign to make this like actual like like what’s stopping the seller from you know two months after you guys agree to or

Just you know pull the property back from you yeah so my attorney so what we do is like we do the purchase contract and at closing the property goes into my name so i own the property and then the seller actually becomes the mortgage holder so there is an actual mortgage drawn up and a lien place against the property so if i do not make those payments they can

You know start the foreclosure process on me and then get the loan back so in new york state like the foreclosure process is pretty long i know like texas it’s actually pretty quick to get a property back so that all depends on your the state you live in how the for closure process would actually work um i actually was talking to someone last night who was asking

Me about seller financing and they were they wanted to do it on a flip and so we talked about how you know this guy does construction you know does a lot of remodeling so we’re in the person he wanted to ask to do seller financing has seen a lot of his work and how great it is and i said use that as a tool like say hey worst case scenario i don’t this doesn’t

Sell i don’t pay you you have a beautiful house because you’ve you’ve seen my craftsmanship yeah so it works out that’s awesome i feel like i just got a crash course on how to sell or finance so at least now i know who to go to when one of those deals comes my way yeah i love talking about seller financing because that was like my biggest deal and i definitely

Couldn’t have been made possible without seller financing so you guys just remembered that there’s no right or wrong and you know figure out what will work for you first and then present it as easily as possible as you can to the seller i guess one other question what are the potential downsides to going this route as opposed to traditional like you know what

What are the pitfalls that they should be looking out for when they set something like this up yeah i mean i guess it could be uh i mean i had a great process both times uh the only issues i ran into was like i closed on my refinance the day that the it was due the balloon payment was due and that was just like cutting it close my lender just like dragged his

Feet on some things and you know my fault too for not like staying on top of them and but we did close in time so it worked out but um actually when we the bank actually uh overnighted his check to him and he never like he called he’s like i didn’t get it i didn’t get it and i go to the post office they’re like we delivered it the bank had given me like the

Receipt and everything and it ended up they delivered it to his um like he lived in a community of development where he has like mailboxes by the end of the road and they delivered it in there and he was expecting it to come directly to his door so it ended up being his fault but oh my gosh i was a nervous wreck for like four hours and like i even called the

Post office that delivered it and they sent someone out there to his house and that’s how they figured out that it was and i thought that was so nice of them to do and then when i did the seller financing the person that was doing the refinance to pay me off he did not make the payment and time and what we’ve we figured out and i would recommend doing this in

Advance um luckily he was a friend of mine and it worked out fine was we did um 25 a day so that like kept him motivated to get the refinance done and pay me back and also you know was a little benefit to me because i was making a little extra money off the deal so putting something in there like um you know 25 dollars per day you’ll i’ll pay that to you or

Whatever that amount is if i for some reason go over um yeah so make sure you’re covering all your bases and also look in a prepayment penalty i would not bring this up i would try to avoid it at all possible so if the seller wants like oh well you know i’m only going to make that 10 grand if you keep that open for one year make me those payments but what if

You finish your rehab early you refinanced and you got a way better rate with the bank and you’re ready to pay that off but then you have a you know two percent fee that you have to pay them so try to avoid any kind of prepayment penalty in the the seller financing contract okay one last question i know i keep saying that but so you structured it you structured

It in a way to where you put down i think you said 30 percent um so that was cash out of pocket for you and then to actually uh finance the rehab was that just additional cash reserves you had or did you have some other kind of like you know line of credit or something you did to to finance to rehab yeah we had a line of credit um we use the uh cash reserves we

Didn’t actually need that much money to put into rehab i think like total 10 grand and um but yeah we have a line of credit that we use for rehabs and then we also use our our cash too that we have in our properties got it okay that was my last one i’m done now i feel like i learned enough about seller financing this is actually nice and relaxing like being the

Guest instead of the host so thanks today you’re welcome awesome well i’m glad we got that question corey i hope we answered every everything you were looking for brother and and for all of you that are listening uh we want to get more questions like this on the show so if you’re in the facebook group uh just look us up real estate rookie um you can always call

Us on the request line at 8885 ricky as well maybe we’ll pull some questions from there but looking forward to getting more answers and questions just like this one yeah thank you guys for listening and yeah definitely like tony said give us your questions we’ll be more than happy to answer them if you guys could go to wherever you’re listening to this podcast

And leave us a review we would greatly appreciate that uh so i am ashley care at wealth from rentals and he’s tony robinson at tony j robinson make sure you guys enjoy the rest of your weekend

Transcribed from video
Rookie Reply: Tips on Owner Financing Then Refinancing Out | Rookie Podcast 56 By BiggerPockets