How To Buy Real Estate With NO BANK in 2025! Alternative Financing

We're diving into alternative financing. So subject to seller carry, cross collateralization, all of these kinds of things that we use for alternative means of financing, alternative financing. I think that alternative financing is one of those things that, that is attractive because it is a path to buying a property with little or no money out of pocket. Primarily secondarily, it's a way for us to not have to deal with banks. So if we think about a traditional purchase, like a house, we go in, put up all of our documents. You know, they're looking for our bank statements and our tax returns and our fourth grade report card to see how we did in spelling. You know, it's like over the top, just the amount of documentation that they ask for. So the banker that we're dealing with is typically not the person who's making the decision. Typically it's a loan committee or it's an underwriter. And that process can be onerous, it can be long, it can be painful, and it can be difficult. And at the end of the day we can get to that point and they end up saying no to us anyway. Right. And so when we look at alternative means of financing, it's a way for us to bypass that. It's a way for us to bypass the underwriting, for us to bypass, you know, the, the bank process. I've had a deal a couple of times, I've had deals where the banker has been telling us, yes, everything looks good, everything's great, no problem. And then we literally get to the week of closing or even to the closing table, and the, the underwriter, who's somebody that we hadn't talked to at that point says, oh, we're not doing the steal or the interest rates 2 points higher than what we said or whatever the case may be. Because the banker that we've been talking to is just a salesperson, especially with bigger banks. Their goal is to put you in the pipeline and set that up for the actual decision maker, which could be in a different state, could literally be in a different country, you know. And so it, we're putting a lot of trust into these folks, which is one of the reasons why I prefer smaller banks, regional banks, credit unions, these kinds of things. But if I had it on a spectrum and I said, you know, with, with banks, you know, regional banks, credit unions being here, and maybe private lending would be preferred to that. And then number one would be the alternative methods of financing that I'm talking about. So seller carry, subject to debt transfer, leverage, cross collateralization. So we're going to Dive into each of those with seller carry. I think, I think you understand what I mean when I say seller carry. What that means is that we're buying a property from the seller and the seller is carrying back a note for that. Now, why would the seller do that? There's several reasons that it's a benefit to the seller to carry back a note on the property. One is that it defers, it defers their capital gains taxes. That's probably one of the biggest. So let me explain that. If I sell a property, let's say that I bought the property 20 years ago for $1 million, right? And over the course of 20 years, I'm depreciating that property each year. So that's what I call my cost basis, right? So my cost basis goes down each year. Well, after 20 years, my cost basis has gone down substantially. Let's say my cost basis after 20 years, if I paid a million dollars for my cost basis, might be $150,000, maybe $200,000. If I sell it to you for 5 million, then I'm paying taxes on the difference between my cost basis and what I sold it to you for, not what I paid for it, right? So my, what I paid for it is what the, is where the depreciation started. But then that depreciation reduced that value, that cost basis each year after owning that property for more and more years, people that have had the property for a long time tend to be more attracted to seller carry financing. So if my cost basis was $100,000, $200,000, I sold it to you for 3 million, then I have to pay tax, capital gains taxes, on the difference between those two numbers. In addition to that, I have to do what's called depreciation recapture. So a portion of the depreciation that I've taken over those years, I recapture that, I have to pay taxes on that again. The only way to get out of that is to either do a 1031 or to be morbid, to die. Because if I die in that property, changes hands with my estate, then my estate gets what's called a stepped up cost basis, meaning that the cost basis, remember I said it depreciated down to $100,000 or whatever that cost basis now becomes whatever the market value is at the point of my death. And so my estate gets that stepped up cost basis. This is why, if you can talk to estate attorneys, trust attorneys, whatever, then a lot of times those are going to be fantastic people for you to network with as an investor. Because guess what? Happens when a real estate investor dies and leaves their property to their kids. The kids sell it. One of the very first deals that I did was a turnkey 10% cap rate deal. The property was perfect. It was a commercial deal, 10% cap rate. Out of the gate. I didn't have to touch was the real estate investor who had passed away and left it to his son and his son just wanted to liquidate it. So broker brought it to me after he literally had it for a day and we closed that deal quickly. And so that's a lot of times what we see with it with people who inherit these properties. They don't have anything personally invested in it. They don't care. They just want the cash. They'll sell it quickly. So that's why trust attorneys can be a phenomenal source for, for networking. So to avoid that, what sellers will do is they will sell it to us with a seller carry note, meaning that whatever we give for our down payment is all the money they get. Then they carry back the note, let's say over five years, 10 years, 20 years, whatever the case may be. Now, instead of having to pay capital gains on, on the day of closing, they pay capital gains progressively over time, so it spreads out their capital gain. And if they're doing tax planning like we just experienced yesterday was tax day, they're doing tax planning, then they can, they can use other strategies to offset those tax obligations. They can use other strategies to reduce their liability, spreading it out over time. So that's a big benefit to the seller rather than paying capital gains tax. Could be 20%, 30%, whatever it is, then they're spreading that out over time and it can reduce the amount substantially. Now that's not the only benefit to the seller. The other benefit to the seller is additional income. Additional profit, right, because they're not going to just give you that loan for free. They're going to charge interest for the loan. And so the profit comes not just from the sale of the property. If I sell you the property and I, and I cash out today, then that's, that's it, you know, that's all the profit that I get. But if I do a seller carry, I get the down payment and then I get additional profit over time in the form of interest. Most of the time a seller carry financing, there's also a point that's paid right up front, transaction fee, whatever you want to call it. So half a point, 1 percentage point, whatever it is, that's just money they wouldn't have gotten otherwise. And so you know, it allows them to defer taxes, allows them to make additional profit. And for you, the buyer, there are some benefits as well. Sometimes with seller carry, it doesn't have to be the whole deal, right? I don't have to go in and have the seller carry back the whole purchase price. A lot of times they'll carry back a portion of it. Like for example, one of my favorite things to do is I will go in and buy a property and have the seller carry back any improvement costs, any capital improvements, any deferred maintenance, have the seller carry back that portion of it and then have the bank carry back the rest. So when you're looking at a deal, when you're analyzing a deal, just keep an open mind to seller carry and have that sort of be a default for you. Because remember, when you sell it or yeah, when you buy the property, that seller is getting a big chunk of change. And so for a portion of that deal, whether it's equity, whether it's capital improvements, whatever it is, I find that sellers are often open to carrying a portion of that deal for the reasons that we mentioned. So, yeah, thank you for that comment. Because it's not just one thing or nothing. It's not they. They carry the whole thing or nothing. A lot of times sellers haven't even thought about carrying back a portion of it. And it'll be a way to put the deal together. For examp, I had a deal where the appraisal came in low and the appraiser was a bonehead, didn't know what he was doing. He's not like Blaine. Blaine smart. But this appraiser, Blaine's also an appraiser, but this guy, this guy wasn't smart like Blaine. So came in, appraised it low. We still wanted to put the deal together, but now the bank will only finance what it appraised for. So I had the seller carry back the difference between appraisal and the loan amount. And that allowed us to proceed with the deal and pull and put the deal together. So that's a great way to keep things moving forward. The benefits to the seller, deferred taxes, additional income. The benefits to you are legion. But when you go into a seller carry deal, what do you think the seller is going to get in terms of underwriting? Remember, you go into a bank, you got tax returns, you got bank statements, you got all these kinds of things. And you're going to have to put all of that, give all of that to the bank for their careful review. And it's A ton of paperwork. If you're doing a seller carry, the paperwork is whatever the two of you agree to. That's really, that's as broad as it is, whatever that you as the buyer and the seller agree to in terms of the documentation, that's what it is. So I've had sellers who, they'll, they'll look at a bank statement. A bank statement and see that the capital is there. That's enough underwriting for them. You know, though, not all sellers pull credit reports. As a matter of fact, in my experience, most don't. Most of the time they're focused on one or two pieces of information, maybe a tax return, something like that, stuff that you would already have from having dealt with a bank. And so it just makes your life a lot easier. Another big one that the, that you can avoid with a seller is the one I was talking about, an appraisal. Most of the time, a seller is not going to require an appraisal. So if they're carrying the whole note, that could be thousands of dollars. Most of the time, your banks are going to require an appraisal, they're going to require a survey, they're going to require special title insurance. All of this underwriting, these kinds of things, you just don't have to deal with that with a seller. It's just whatever the two of you will agree to. So what that means is if you want to, and I'm not saying that you always should, but if you want to, you can close very quickly with a seller carry structure because you don't have to have all of these things that take so much time. Appraisals and underwriting and documentation, you know, a survey, an environmentalist study. All these things that banks often will ask for just goes out the window. So I've done seller carry deals where we closed in 10 days, which is just about as fast as most title companies will allow. But it's just because that's all we're waiting on is the title insurance. And so I think we don't realize sometimes how long it takes banks to go through their whole process. And we don't have to go through that when it's seller carry financing. So really it's whatever the two of you will agree to. And then practically, how do you do this, who does the paperwork, where does the contract come from, all of that kind of stuff. So typically, in my experience, what I like to do is I'll have the, the title company write up a simple deed of trust. I'll say this is the interest rate. This is what I'm paying. And I would encourage you, when you're doing seller carry financing, to do interest only, to just pay interest only on seller carry financing. Why is that? Well, first of all, it's way simpler. It can be a little bit burdensome on the seller. If they're doing traditional structured financing, if you pay $100 extra on one payment now they've got to re amortize that whole loan. And that can be a little bit burdensome for a seller. Whereas if you're doing interest only, then the payment amount is the same every month. It allows you to pay less every month because you're not paying principal. And the reality, guys, is even if you get traditional financing, I don't know if you've ever gotten a mortgage and you look at how much goes to principal in the first month after you've got, after you got a mortgage, how much is it? It's. It's nothing, right? It's like 99% of it's all going to interest anyway. And so it's not like you're missing out on paying down a whole bunch of, a whole bunch of principal. So interest only is simpler and more desirable for both parties. And then the idea is, in most cases, three to five years, you stabilize the property, the property is healthy, standing on its own two feet. You refinance out of that seller carry financing and go on your merry way. Pay off your investors, if you're syndicating, etc.