Why would an Owner Seller Finance?

Out of curiosity, I've actually never asked, were the numbers actually accurate after you closed?

The numbers were accurate.

Oh good. I never actually checked that. Have you ever wondered the benefits of seller financing as a seller? Like when you're actually pitching the seller of a property, why would they actually say yes? Why would they say no? We're going to go into that today on our episode on Multi-Family Strategy.

Welcome back to the channel. If you're not familiar, my name is Cody. This is Christian. And on this channel we talk about buying creatively financed real estate. Why? Because we never had any money and we wanted to still buy real estate. And today we're really going to dive into, number one, what is seller financing? Just as a quick debriefer for those who are new to the channel. And then second, what are the benefits for a seller? Because a lot of people worry, okay, well, why would they do this? Well, number one, seller financing is when you make an offer to buy a property. The seller could take a down payment or no down payment, and then they will take monthly payments over a long period of time, and then you can cash out in the future. This omits banks, it omits private lenders, and you can't get around the idea of putting down a down payment. Because when you're working with a seller on a seller finance note, they are the bank and everything is negotiable.

Now Cody, why would they want to be the bank? Don't most people just want to be cashed out?

Well, some people don't want a bunch of cash. Think about it in their shoes. If you were 80 years old, you've got kids, they've got kids, and you don't want to just give them $10 million, let's say you built a huge portfolio up, $10 million could ruin a lot of people. It's like winning the lottery. However, if you could give them payments every single month when you pass away, maybe they get $8,000 a month, they can't just spoil the whole fortune that you've spent your life building. So instead of giving them a lump of cash, you can get what's called a promissory note that you become the holder on if you were to sell out a whole bunch of real estate. And the maker of that note, the buyer in that case, makes payments to you every single month backed by the real estate. And those payments, when you die, would then go to your kids and then their kids.

And that's absolutely perfect. We've done a couple of deals where that was actually their specific reason for why they were doing it. And they want to hold those notes as long as possible. Most of those notes with the sellers that I'm thinking of, they're on a 5-year balloon and their intention is to sell or refinance every time so they keep that note going on and on and on. They just want a little review period to adjust for inflation.

Yeah, they do not want their kids to get a whole bunch of cash because as we've seen with lotto winners, when people win the lottery, they can typically lose it and that's not what they want to do. They being the property owners and sellers. They don't want to just set their kids up for failure. They want to give them an income so that even if they blow it all, they get it again the very next month on the first.

Now another reason that a seller would like creative financing, be it seller financing or any type of creativity, is they can't work with the bank. It could be deferred maintenance. They could have terrible bookkeeping, which, oh my Lord, we've seen a lot of that.

Yeah, I've gotten properties where I got a picture of a paper plate with writing on it. I didn't even get the paper plate. I got handwritten notes on a plate and I got a picture of it. That's not gonna qualify for traditional financing. Banks don't like that.

Out of curiosity, I've actually never asked, were the numbers actually accurate after you closed?

The numbers were accurate.

Oh, good. I never actually checked that. So they might just not have the bookkeeping. Another reason is they might just want their price and it might be more than the property would actually appraise for at a bank. We're actually sitting in our property. We call this the Hood Lodge. The Robin Hood Resort is next door. This is a 4,000 square foot house next door. We're in the middle of renovating. I'm sure we're gonna have some shorts on that soon.

Yeah, it's got a sauna, hot tub. We bought this with no money out of pocket. Did we overpay for it a little bit?

Yes, absolutely.

How much money did we put down out of our pocket?

I, um, after I did my HELOC, $0.

It cost us $0 to buy this asset. Now, why would we buy it? It was an expansion from the Robin Hood, but we couldn't have bought this conventionally with a bank. We would have had to knock them down on price. They were not willing to come down on price, meaning that we would have had to wait years until this appraised where it was at for the condition it was in. Now, we've gotten it into a far superior condition to to where we bought it, and now it's actually worth more than we paid for it. However, we couldn't have gotten the deal done, zero money down, had we bought it through a bank. So if you look about it from the seller, they got a price that they couldn't have gotten in the condition it was in for the year that it was. Maybe a few years down the road, maybe they could have gotten $900,000, but they wouldn't have gotten that today unless they got creative. Yep.

Another reason is they want to get specific terms. We actually, first time we're announcing it on our channel, I believe, But yesterday we bought a tiny home.

Zero money down, seller financed.

100% seller financed. Actually our first 100% seller financed deal. Their big thing was, well look it, I would like to get cashed out, but I know I'm probably a little bit high on price for that. Can we do a higher interest rate? We can do it interest only. And you don't have to put any money down. I'm like, well for no money down, we can rent that place out for more than the monthly payments. Money never actually leaves our pockets, ever. We own that asset.

And we have a rule. If you can get the real estate to buy the real estate, everything is free. If other people pay for your stuff, everything is free. It's just a function of time. And we got that tiny home seller financed, zero money down. From the seller's perspective, he's getting monthly payments, which he wasn't getting on it at all. He's gonna get his price, which he wanted. He's gonna get monthly interest payments, which he also wanted. And for us, as a buyer, one benefit of that is when we rent it out as part of the resort eventually, we gotta do a little bit of TLC, a little bit of upgrades. All of a sudden we can rent that out and then other people who come and stay as part of the experience will then pay us and we can pay him off.

Now before we pivot to the cons, I want to mention one more thing. This is never the reason you're going to present to a seller on why they should do seller financing.

They already know.

You know what I'm gonna say.

You don't have to pitch them.

But there are tax benefits and there are all sorts of, like, there's interest rates, tax, there's all sorts of other benefits to the seller that people love to present to the seller. Saying, "Hey, you're selling this property, you're gonna get all these tax benefits." Their tax problems are their problems. Their tax picture is for them to know and their CPA to know. You don't need to tell them that. Most people who are open to seller financing already know what the tax picture looks like for them. That being said, it is a legitimate benefit and it is a reason why people might consider it. Just make sure that's not part of your presentation.

Yeah, if you think that's the reason that they would do it, you're wrong. And there's a lot of people online that say that's the reason they would do it. It's not. Typically they want to just help you out. And the final benefit that we'll share here before we go into the cons is they get the feeling of passing on the torch. At the end of the day, there are people that have more money than they have life, and if you realize that, More often than not, they just want to pass it to somebody. If you can let them pass it on to you, it's probably a reason they didn't pass it to their kids. They probably didn't want it. They just want the income. They don't want to worry about the management or the maintenance or the upgrades. So if you let them pass it on to you, they get to finally pass the torch. And I found that is the number one reason people actually sell on seller financing.

So now that we know all the benefits, no one would ever say no to seller financing, right?

Well, some people just want cash. Some people want to do what's called 1031. They want to keep rolling up. If you're not at the end of your buying cycle, you're still scaling up, you probably want all your cash so you can go buy bigger and bigger deals. So if people want to do a 1031, that's a number one deal killer that I've seen for not doing seller financing.

And that's usually where I hear people get really discouraged. We're like, I found someone who owns a lot of real estate and they have a pretty low debt on this and they just weren't open to creative financing. What am I doing wrong? You're probably not doing anything wrong. It's not a perfect fit for everyone who wants to sell real estate. If you are in a build cycle, seller financing will rarely make sense because you want to pull as much capital out as you can to redeploy.

That's the reason that we don't seller finance to any of our mentees. We still are in the scale mode. We're stabilizing right now, but it wouldn't make sense to give up all our equity in the form of a loan because we want to keep rolling and rolling to get bigger and bigger, and then we'll pay it all off and then we'll seller finance it all as notes someday. We're not there yet.

Yeah, not today. Why else would someone not want to do seller financing? They need to get all their money out. What else would deter them from doing it?

Well, if they don't trust you, they don't know who you are, then they're definitely not going to finance it for you. Because why would they loan you a whole bunch of money? A bunch of people say, well, why did the first person ever loan me $1,012,500 on my first deal? I'll tell you, if they didn't trust me, then they sure as heck weren't going to do it. That would have been a big reason not to. I had to call them up. I let them know I was working on a 24-unit. I was. It fell through. And this was half the size of the 24 units. So, or I think, no, it was 22 units. It was 6 of 4 and 12. But anyways, it was 22 units, almost twice as big as that very first deal. That inspired confidence, number one. And I was able to talk the lingo. I was in the beginning, but I knew what I was talking about. I knew about income, knew about expenses. I inspired trust. If there was no trust, there's no way they would ever self-finance to me. Mm-hmm.

And the last reason I can think of is they really truly don't have the education of what seller financing is. Not everyone fully understands creative finance. Some people only played in the conventional box. You want to be very careful here when you're having those conversations because if you try to over-educate them, you're going to come off as salesy and you're going to lose that trust that we just talked about.

You got to keep it super simple. People that overcomplicate this game don't buy a lot of real estate. They definitely don't buy a lot creatively.

However, if you can explain the benefits like you're talking to a 5th grader or maybe a 3rd grader and break it down very simply. Look, I want to give you your price. Identify what's important to them. If it's the price, that, if it's the interest rate, If it's a, hey, you're just trying to close this deal, this is how we're going to structure this to get you your money. Keep it very, very simple. Make sure that you hit on what's important to them, and you'll probably get your offer accepted if it's a good fit for them.

And that's it really for today's video. So if you've made it all the way through, make sure to like, comment, and subscribe. We appreciate you following along, and we'll see you guys next time.