Why Seller Financing is a Game-Changer for First-Time Investors

Your first bank loan is the hardest, so skip that step.

Yeah, exactly.

Today we are talking about why you should buy using seller financing on your first deal.

Hello and welcome back to the channel. I'm Christian, this is Cody, and as Cody just mentioned, we are going to be talking today about why seller financing should be your first deal. Cody, why would you do seller financing before you do a conventional deal? Because you do that even if you had money, right?

Well, I do have a little bit of money now, but that's true. Still buying through seller financing. We just closed on a 23-plex and we're closing on a 15 here in a couple days.

Both seller financed?

Both seller financed and both very low money down. But the reason that you should buy using seller financing as your first deal is it makes you stay intentional. When you go and buy with a conventional loan, you have to hit someone else's boxes. You don't have to know why you have to hit those boxes, but as long as you hit the boxes, you can buy the piece of real estate. You just have to write a check for the down payment. With seller financing, there are no boxes. You have to be intentional with how you structure it and really know why things work the way they do. This causes you to think instead of mindlessly go through the process. And if you do this, you go out, you buy seller financing, and you understand why the little pieces work the way they do, which this will force you to do, you'll become better for it and be able to scale your portfolio faster than those who don't do this.

A lot of the online gurus are telling you things like, Oh, if the bank says you can buy it, it's a good deal. Let their underwriting department carry it. I hear that actually quite a bit online.

They don't own a lot of real estate.

Yeah. Or there's a few, a few of them are bigger players who'd say the same thing, like, well, if the bank says yes, then you're good to go. People have adopted that and it's not true. The bank is worried about their collateral. They're going to write deals that fit their box for how they are comfortable placing the loan and how comfortable they are that if you fail, they're going to be able to take back the asset and profitably unload it. They're underwriting to a different metric than you are. When we're underwriting, we're looking for the deal first, then the debt, then the equity, in search of cash flow and long-term equity growth. So deal comes first no matter what. You have your opportunity. Now, a lot of people in their first deal, especially if you have a couple hundred thousand in the bank, which more people than I realized when I first started this game, absolutely have that. But you start with some money, you go, hey, I'm going to take this money and I want to buy my own property with it through a bank. I'm going to go out and finance it. I don't need to seller finance, so I'm going to play the conventional game. Cody, why do we do this and why should you avoid doing that on your first deal?

Well, I mean, you could use a bank loan that we've used bank loans to refinance stuff. We've never used it to purchase. We would.

Mm-hmm.

But rates are not doing their best right now. But the reason why we avoid using the bank is because while they may hit their boxes of what they're happy with, the underwriter likely doesn't own a lot of real estate. Practical application, the seller can fudge enough numbers to make it look good for the box and you can get the loan done. I've seen that happen more times than I'd like to, where underwriters let things slide that they shouldn't have. When you are the underwriter, it causes you to be intentional, like I mentioned earlier, and really understand what's going on. That's what we share with our mentees all the time. You have to be the final decision maker. You can't let it go to some other player in the space because you don't raise money for other people. It's one of our principles on our channel. And if you're going and doing a deal based on other people's metrics, you are raising money based on other people's metrics, which would violate our rule. You have to be really intentional and really understand why pieces work the way they do. If you don't do that and you just try and get a loan based on someone else's box, you're going to find yourself in a position which is where most investors are right now, where they didn't fix their rate because they went with a bank that said, oh, this is— you just fit the box and you'll get it done and your deal will cash flow. Well, look where they're at now. Those investors didn't truly understand what happens when market cycles change. Why the loan product is so important to negotiate on the front end. And that's where a lot of people fall susceptible to falling into that trap because they say, oh, well, they said it's good, so it must be good, right?

Mm-hmm. Now, for me, I started my first deal was actually a conventional purchase. I bought a duplex because that's what I could afford. The money that I had available let me buy one duplex with enough set aside to get started on my second deal. Which I funded the renovation for. I actually bought the second deal 101% financed, but through a bank. That limited me to a box that got me about 4 units with the money that I had. Now, when I pulled a little bit of money out, I had some seed money. I probably could have bought a third duplex, but I would have been out at that point. The type of deals that you look at change when you negotiate all the money, the down payment, the loan term, the interest rate, where any balloons are within their interest only or amortized, special clauses. There's all sorts of things that you can put into a loan. Super simple. But if you don't learn these, you're going to limit yourself on what you can actually purchase. That first box in deal debt equity, the deal, you're not even looking at opportunities. Third deal that I did in multifamily was the 38-unit with Cody, and that was his fourth deal. We got together, if we were looking at what we could buy with our own money, we could have probably pooled resources and maybe a 5-unit, 6-unit building. Yeah, we could have taken out conventionally.

We probably would have bought the 4-plex thanks to my 12-year-old Quincy.

That would have been a really logical choice.

Yeah.

Instead of buying 38 units that made us each $1 million over the next 2 years, when you are choosing your own debt, not only are you learning how to play the game, understanding every aspect of both the deal and the financing, you're opening your mind to, okay, I'm going to take what the bank says I can do off the table and I'm going to look at what is my actual goal and what is it that I want to do. All the way from the beginning of your process, you're going to look at a different set of properties, a different set of deals. And when you find that opportunity, someone who's willing to sell to you and seems to be willing to work with you and negotiate. Well, now you can look at your pieces and say, okay, with what I have, the cash I have on hand, the network I have, and what the property yields, what could I put together to hit the seller's goals and maintain my long-term cash flowing fixed rate debt?

Which is a much better question than asking, how do I fit the box of this underwriter? Because that's not a fun game to play. And it's never worth it.

Yeah, the two boxes you avoid are how do I fit the box of the underwriter and how do I fit the box of the money I have on hand. You're not limited by your money when you look at a creative finance deal, which means on average you're going to do a better first deal because you're not just looking for, hey, what's on market and what is the bank like and is it small enough? Can I get into this property comfortably with the money I have? Those questions are now taken off the table.

And when I got started, they didn't want me to buy in Central Washington. Imagine if I didn't do that.

Oh wow, that would have been dumb.

The banks, they're like, oh, there's not a lot of proof, there's not a lot of growth over there. And all these companies came in.

There in fact was a lot of growth coming in, and the populations were all going up and continued to go up over, uh, they haven't stopped at all, haven't slowed down one bit.

But they didn't want to lend to me at all, not even just based off of myself, but I had clients I wanted to buy over there, and they said, oh, we don't want to lend over there.

A last piece to this, and this is a small bonus, this isn't the main— the main big two are don't limit yourself on the deal and don't limit yourself to what the bank tells you you can do. But a small bonus is when you're buying another market, you're building your own portfolio, you've actually acquired some properties, it's much easier to refinance because you have proof of concept. If you're looking for that initial financing, you're going to hit those same hurdles, especially if you're starting with less money, you're starting younger, you're starting in a tertiary market, any of the things that the banks traditionally don't like.

Your first bank loan is the hardest. Hardest by far. So skip that step.

Yeah, exactly. We ended up— our first bank loan together was on the 38-plex for about $2 million.

Yep.

Uh, which, by the way, how much should we buy the 38-plex for?

$2 million. Ta-da! Free real estate. And that sat on the market for 13 years straight.

We would not have— I mean, not even close— we would not have gotten a bank loan for that property. It was in ill repair. The collections were poor. And again, it was in an area that the banks weren't as excited about. Now, as you get a little further, you build more banker relationships, you meet some regional banks that actually want to deploy in that area. There are ways to work it conventionally. However, we bought a deal that a bank would not finance. We got a great set of books on it. We went through the work of getting it done through a bank, which was a lot of work. And once we had proof of concept, banks now love to lend to us in that market.. We have banks in Washington, banks in Texas, all over the place. People enjoy lending money because we can show we bought this portfolio, we hold this portfolio, we've increased rents over time. You can build a better business when you buy on creative terms. You put together the business you want to build, and with proof of concept, you come to the bank. It's going to be way easier to secure financing at a higher level because the properties are performing better.

Yep. So all that to be said, start with creative financing. Start with seller financing, real estate contracts. Use that to get into the game, build your portfolio, and then you can move on to bank loans when it's easier and you have a bigger portfolio to manage.

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