What Is Seller Financing? | REIal Talk | EP. 71

Foreign.

Welcome back to podcast number 71. My name is Erica. I'm the assistant property manager for Independence Property Management.

This is Mark. I'm the director of investments for Freedom Real Estate Group.

Awesome. And like we talked about in the vlog, we are going to talk about today, what is seller financing?

Absolutely.

Mark has a little tidbits for us on that.

Yeah, seller financing, it's very fun, you know. And so although here at Freedom Real Estate Group, the majority of my time is spent working with investors on finding a property that works for them and whether it's bed and bath count or if they're looking for a certain cash flow or whatever. But every once in a while they let me do some acquisitions. So it's very fun. So being in real estate seller financing is great. We had talked about in the vlog maybe some examples of the different kinds of things that you can run up against. And as an investor, you know, some things to have in your arsenal to help you maybe stretch that dollar on your offer. So in short, and I know we talked about it in the blog, is that in short, it's a way of trying to be able to offer more to that seller for the purchase of their real estate when your numbers are kind of tight. So for example, you know, we had talked about a house that's $80,000 and you're looking at a rehab that let's call it $30,000. Right. And so, so you're all in sellers asking 80, you've got 30, so you're in at 110 and you' I really need to be closer to that hundred, so I can really only offer you 70. But a way of looking at that is by doing creative financing. And so there's in essence four different ways that you can structure creative financing. And we're not going to get into the specifics of that, but there's either short term, you know, I mean like a short term solution or there's a long term solution like that you're going to be working on, you know, maybe paying this out over a long period of time versus obviously short. And then the other option would be do they have a mortgage or is there no mortgage? And so those are the different scenarios. And so if you were to say have a short term solution and you wanted to do this and this person is not have a mortgage. So they're just like, you know what, you sell it whenever you want. Sometimes you can get into things and there's no really like right way to structure these deals or but you want to make sure that everybody's on the same ground. But like, for example, I can say, Erica, you know, I mean, I can't really hit the 70, but I'm going to try to make the 80 work. But you're going to have to wait until I sell it. You know what I mean? So in essence, I'm going to ask you to give me a promissory note or to, you know, we'll figure out a way to write it out so that I'll say that I'll pay you $80,000 on the sale of the house after the rehab's complete. And so that would be like a short term solution in order for me to do it versus saying, you know, in traditional real estate, like, all I can give you is the 70. If you're willing to take it, deal's done, then it's on me to do the rehab. Whether it takes one month, 11 months.

Yeah.

Then, you know, then you're out of it. It doesn't matter. Whereas if we do the creative financing, you know, you got to make sure that your numbers are accurate because you want to make sure that your rehab number is correct and that your after renovation value is correct. Because if those numbers are off again, you're still getting your 80, I mean, because you have, you know, maybe that first position on the house, in essence. So for me, I got to make sure that my numbers are correct or I'm going to be losing money on that.

Yeah. So can be get a little sticky, but.

Yeah, and so that's why I don't want to. Yeah, I don't want to jump into all of the confusing parts of it or mortgage, no mortgage. But, you know, sometimes it is fun, you know, on the acquisition side to, you know, it also makes you feel good to be able to maybe offer a little bit more for that seller. But again, you know, if they want that more, sometimes they have to travel with you a little bit, a little bit further down the journey there. So.

And there's also, like deals that sometimes, like the buyer, if, if there's like someone still in half the property or something, if it's a duplex, like, hey, you get the rent on top of me paying you the additional.

Yeah, no, absolutely. And so again, that's a great point. In fact, I think, you know, we're working on one of those deals now where so for this, this particular duplex, half of the site is rented. And so we wrote up an offer just saying instead of us taking possession of it right away and keeping the rents and pro Rating these things at closing and making it more complicated than it needs to be. Write up a deal where you keep the rent, you know, you keep that cash flow coming in. We're going to rehab the other side. When we sell that to another third party investor, then what we'll do is, you know, we will give you, you know, the money that we talked about that you would get. Any of the difference minus our expenses would be, you know, what the company makes. So, yeah, there's definitely different ways to structure things. A lot of the times you, you have to take a look at, you know, maybe what are some of the current bank rates because again, if you're, if you're going to do a long term deal and somebody does have a mortgage, you got to cover that mortgage for them, you know what I mean? And then maybe giving them a little bit extra on the side. Sometimes it costs maybe a down payment. But yeah, there's so many different ways to do it. You know, if I were to come to you and I say, look, Eric, I can't do the full 80 right now, but how about I give you, let's assume you have a mortgage too, right? How about I give you $10,000 now, now, and I give you the rest of closing, I'll cover your mortgage and I'll throw you, you know, an extra $200 a month or something like that. I mean, so there's, there's so many different ways to look at it. You know, looking at the mortgage rates to make sure you're not overpaying, you know, on things. Because in essence then you're, you're. I would be taking over as the bank for you, you know, I mean, you're holding the note. And that's, that's another term, I guess, that people will, will hear or use is holding the note, you know, or a seller's note or something like that.

And so, yeah, I can get pretty complicated. But it's good, you know, it's good to know it's a good option if it works for both parties, you know, it's definitely something that you could explore.

Yeah, absolutely. And so, you know, again, this is so. I know that typically when you see me, I'm talking more about traditional real estate, talking more about investments or things like that. But I mean, just, you know, it's nice to touch on this in case our investors want to try and play in that, you know, playground as well, to make sure that you're smart and doing your homework. And then number two, to know that, that we also, you Know, here in our acquisitions departments are trying to get good properties. You know, I mean, we're trying to, you know, look for great properties, be able to offer those initial sellers the best that we can offer them on those deals. And so, yeah, so it does come full circle. All the companies here at Freedom.

But that's great. Have you had many of these deals that you worked with or is it just like kind of one off situations?

Yeah, I mean, I guess, you know, so for me personally, not as many because I don't do as many of the acquisitions for the company. But I would just say, you know, even if you talk to wholesalers or guys that get out there and do this a lot, I would have to say it's a small percentage.

Okay.

Because most people want to just be done.

Yeah.

You know, I mean, like if you're really in a pinch or you're really not in any hurry to sell and you, and you're willing to hang around to get the top dollar, it is what it is. Right. But if you're like, you know what? I'd rather take $70,000 now be done with you, good luck.

Yeah.

You know what I mean? Like, so I would say the majority, probably 90% or more, probably would be willing to just take a cash offer. But again, this is just thinking of it. Say this is what you did and you were a wholesaler and you don't have thousands of dollars to be buying homes in cash. Then you better work on your ways to do creative financing so that you can still structure deals for people with minimizing your amount of money and cash out. And then, you know, if you also work with sets of investors or something like that, that kind of always buy from you or, you know, trust you, I mean, they, they want to know that you're doing the right math and that you're doing the right deal. Because ultimately if you're in one of those long term deals, you know, once you as the wholesaler out and you've made your money, I mean, that long term deal might still continue with the other investor to the original seller. And so, yeah, it's, you know, you got to make sure that that person that you've sold that property to as a third party, that you trust them. Because if not, I mean, it could come back on you.

Yeah, there's like a legal document that is signed too between the party and the buyer and the seller.

There is, yeah. So yeah, you want to make sure that you document everything that you do. But yeah, there's always that risk that you might have missed something and that you want to make sure that you've done your homework.

Yeah, I gotta be thorough.

Yeah, not for novices. Right.

Seasoned. Seasoned investors. That's great. Well, awesome. Well, that's all the.

Yeah, I was gonna say, have you, have you heard of this or done any of this yourself?

No, I haven't really dabbled too much in the investment world, but I love learning about it and learn, learning the different avenues for people. I work with a lot of different owners and investors, so it's cool. Like if I ever have a situation, sometimes they tell me about this stuff. So I'll definitely, you know, tell them to listen to this podcast.

Yeah, I was gonna say again, I know enough to be dangerous, but there are definitely professionals out there that do this all day, every day. Very savvy at it. But again, if I had to give any words of wisdom, it would definitely be to be careful, make sure that you run your numbers, document everything that you do and you know, ask questions.

That's great. That's perfect. Well, been fun chatting about seller financing, getting to learn a little bit about it, I guess. One thing I don't know if we went over was how to structure a seller financing deal. Is there a specific way to structure it?

Well, we just kind of touched on it. There's no, there's. Yeah, there's no like specific like document that you pull out and say, like, here's what we're going to do. I mean I, I have personally done deals with people over handshakes, which is not smart, but.

Okay.

Yeah, so don't do that. But I mean, it's, I mean as long as everybody knows what the plan is, then there's a way to kind of put it into it. It's, it's whether you want ownership of the property right away or whether somebody's holding on to a note or a mortgage or first position of the house. So again, there's different ways to structure how it looks. Any interest payments that are due, any monthly payments that might be due, if you're doing a little bit longer, you know, settlement or something like that. So yeah, no, no, no equation for it. But again, just making sure that in order to get to where you want, what are the steps that need to be covered in order to do it? Put it in writing.

One question I did have was the, like the long term deal that they might set up, what's like the longest that you think it would be like smart to go as maybe a seller, like wanting to make this deal with A buyer, Would it be like, yeah, usually like a year is tops, or does it just depend on. Yeah, I guess what you guys discuss again?

Yeah, I guess it depends on whatever like is your, you know, your, your comfort zone. I would say that like a couple years would probably be the most because again, you want that third party seller to, to make you whole, cash you out. The reason that most people are trying to sell their property is because they don't want to manage it anymore. They don' want to be a part of it. So the longer that you make that deal, but maybe less appeasing or, you know, good that looks to them because it's like, I don't want to be in this for three years, you know, with this cash out then. But again, you never know. I mean, there could be people that have, you know, a lot of properties and they're into all kinds of creative solutions and they still have monthly, you know, cash flow coming in off of this with the possibility of a bigger payout at the end. But yeah, I would say a general rule of thumb is probably try to keep it under a couple years.

Yeah, that makes sense, I guess, because I work in property management. I'm curious who would be like the one that would be responsible for if like a maintenance issue came up? If there was a tenant in half the building, would it be the buyer? Is that just something again, that you just have to discuss?

Yeah, that would definitely be on the buyer.

Okay.

Yeah. Because in essence, the other person is just holding a note, you know, like whether it's a promissory note or holding a mortgage, you as the buyer, I would assume would be responsible for any of those damages because you're the owner.

All right, well, that's good to know. That's kind of helpful for the seller not having to deal with a headache. They just get to hold it and make some money if they have rent coming in.

Right. Well, yeah, again. And then I guess the problem or trouble with that is if that third party that you're selling to, like defaults or stops making the payments or something like that. In essence, it goes back to. Yeah, I mean, so that's where you got to make sure that you have all your paperwork documented.

Yeah. Make sure it's right and tight there. That's great. Well, cool. This has been really fun. I really enjoyed.

No, absolutely. Sorry. Yeah, it's a short conversation topic, but it's fun and it's interesting.

But yeah, definitely a good thing. Well, we like to end these with invest smart and live happy.

Thanks. So much.

Thank you.

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