The Two Types of Seller Financing: Learn How it Can Help You!!

More creative is not always better. In fact, the more creative, the less repeatable. One of our rules of real estate.

Today we're talking about real estate contracts and seller financing. They're very similar and they're ways to buy things on installment payments or payments over time. Let's talk about it.

Excited to share this seller finance content with you. I'm Christian Osgood. This is Cody Osgood, and welcome back to Multifamily Strategy.

Today we're talking about real estate contracts and seller financing, which are really just the couple types of seller financing. We'll also talk a little bit about lease options because it's kind of similar. But let's start out with traditional seller financing. When you do a promissory note and a deed of trust, title conveys over. I go on title, the seller gets off title, and it transfers through a warranty deed. That's my favorite type. Super simple. But there are more ways to play the game. What do you do differently with a real estate contract?

So a real estate contract is basically just a sales contract. Easy comparison is like when you buy a car, you write a— you go, okay, I'm going to buy this vehicle. I have a promise to pay and it lives on a sales contract. And when that contract is executed, you get title to the vehicle. Well, it works just like that with a piece of real estate. You have a contract that says this is what is going to be done and the terms of my payments. When payments are made, I get title. It looks a little different. Seller finance, you're the one on title.

On contract for deed, you're both on title.

Crazy. There's a difference. There's equitable title and then there's legal title.

Now, I bought two sixplexes side by side. I bought one on a similar street and then another just a couple of blocks away. One of them was seller financed. I'm on title, seller's off title, but they hold a lien as a private lender against the property.

It means a loan, by the way.

Yep. Means a loan. However, the one I bought on Pheasant Street, just a couple of blocks away, I bought on a real estate contract and we're both on title. We have both of the ownership policies on title. I have equitable title, meaning I have the equitable interest to do what I want with the property as long as I fulfill my contract. But instead of a warranty deed that takes them off of title, It's a contract of sale. And the contract of sale is what a lot of people do. There's a subject-to clause where people can not pay off the existing loan. That is the way people get around that because it doesn't take the old owner completely off of title. There's different types of collateral. One with seller financing is a lien. And I'm just talking in Washington State. I don't know what every state is like. I just know what it's like in a, in a state that we're in. So there's a lien against title and I'm the owner. On a real estate contract, they don't have a lien against title. There's no recorded debt. There's just a contract of sale. Their collateral is they still have legal title, similar to the car example.

Now, on contract for deed, there's some advantages to the seller. It's much, much easier to reclaim the property in the event that you default on contract for deed. You get to avoid the judicial foreclosure.

That's nice. You know, that which is really nice for them.

And it's something that a lot of people like to do. When people who taught us seller financing, they prefer contract for deed for how they write their contract for that reason. They're like, look, it's simple, it's easier paperwork, it's functionally just about the same. And if things go wrong, it's a simpler process for us. So we're going to do everything contract for deed. If you're the buyer, you have to realize this. Do not— well, in general, don't miss your payments ever. But if there's anything you're not going to miss your payments on, do not violate your contract for deed because a violation of that contract can void the whole thing instantly and the property goes back to them. So be very, very careful. This is where something like a great note servicing company really comes in handy.

Automatic payments is a big thing. And also having a great attorney that will draft up a solid contract that doesn't just protect the seller but protects the buyer because there are some trash contracts out there where you make one mistake and it'll get conveyed back. And you don't want to do that. You don't want to put yourself in a bad position. So you need excellent legal counsel if you're going to do anything in the real estate space.

Now, let's talk a little bit, a little bit about lease options. Now, this is not seller financing because on a lease option, you have an option to own the property, but you don't own it. Exactly.

It's really important to understand that there is a difference. However, you can take over control of something on payments. If an asset, the NOI is $5,000 a month, maybe you set the lease payment at $3,000 a month. You may have a little option fee of maybe $5,000, $10,000. However, $2,000 a month cash flow is pretty good, and a portion of your lease payment can be applicable towards your purchase price at some point in the future. And the nice thing about an option is it's not an obligation. If you want to really build a stable business, you need to be able to manage your options with your obligations. Every time you sign for an obligation, you have to hit it or you lose it. An option, if you don't hit it, oh well, maybe the market goes down, maybe the debt products are really hard to get, maybe you're just in a terrible financial position. Let it go. You ride it out, get your cash flow and move on. We're not a huge proponent for just doing a whole bunch of lease options. The whole rental arbitrage thing is— we're not a huge fan of. However, it is a way to lock down real estate and put a pin in the map so that you can come back to it when you are financially capable in the future.

So in summary, the simplest and cleanest way to do this is conventional seller financing. It's a note, it's a deed of trust. You own the property, you've purchased it, and they're just acting as the bank. Very, very simple. That is our preferred method. If that's not the right thing for your deal, then you're gonna look at contract for deed. You own it, you both show up on title. It's a little easier to foreclose on you. It's also a little easier to put together the paperwork and the agreement. Looks different on title. So you have some different debt options. You can get more creative, which has its own pros and cons. More creative is not always better. In fact, the more creative, the less repeatable. One of our rules of real estate.

Yep. You have to keep it super simple. That's why everything we do is simple so that you can repeat it. Because if it's not repeatable, it's not worth anything. Yeah.

The complicated deals we've done, we can't use that same structure again. Can't scale.

And if you can't do either of those, you can do a lease option. Maybe they have $100,000 of debt and they need to do a lease option for 5 years before they can sell or finance it. You start paying down their mortgage payment just with your lease payments, and all of a sudden they can seller finance it and you just put a pin in the map until they have no debt.

That's the right way to think about it. You're just putting a pin in the map of I'm going to acquire it. You're asking the two questions that we always ask on this channel. How do I buy it? How do I never lose it? The lease option is a potential answer to the how do I buy it piece. If you cannot figure out a way to seller finance or contract for deed, Then how do I buy it? I may need to change some conditions so that we can do this in the future. You just mentioned a great one. Maybe the debt structure needs to change and they need more time to adjust that. More debt needs to be paid off. Okay, we need more time. How do we get that? Lease option. Another thing, maybe the property is not operating the way that it needs to to execute the agreement to a point where you are comfortable that you're never going to lose it. What the lease option can allow you to do is take control of the property and fix the problems. Where I see this used the most is you have an owner who is tired of the property. They've run it for a long time. They do not want to do the effort to fix it up. They want to offload it. The problem is they haven't fixed it up. It's not performing well enough. No one's buying it. The current owner is stuck and you cannot get the terms you need to make it cash flow. To own it. This is something where you come in, take control of the property, raise rents, coordinate repairs, and buy it. Just know if you're doing this, you don't own it yet. So if you're going to dump a bunch of money into it, you're carrying more risk because if that contract does not go through, it does not get executed, you've just paid to repair someone else's property, which is why it's not a preferred method for us. But those are the two reasons you would use a vehicle like the lease option.

Now we prefer to keep things simple, which is why we do seller financing the way we do it. And we like to keep it simple for you. So make sure if you want to keep watching all of our content and you want to simplify your universe when buying real estate, number one, you hit the subscribe button, hit the like so you can see more of our content, and then click the link down below for a free PDF to simplify your universe. Thanks for following.