The BEST Real Estate Investing Strategy No One Understands | Seller Financing Explained
This is how to do a seller finance deal.
We've got a real estate topic that has made me a ton of money. I want to teach you exactly how we do it. That topic is seller financing.
We are going to talk purely about seller financing, where the seller owns a property free and clear. They have no existing debt. Typically when you buy a home, you either pay cash yourself or you go get a mortgage. But there is a third way that most people don’t know about, and we can really ask the seller to be the bank for us. That's what seller financing is.
So here's how I teach my sales guys to get seller financing. Their first job is to figure out what exactly the seller owes. The next follow up question is, “if we are to buy your property, what are you gonna do with that money from it?” Then that will kind of tell us if seller financing is an option. If they need to pay off debts or to use it as a down payment for something else, they already have a use for the money.
They probably don't want to seller finance. But if they don't know and would just put it in the bank and let it chill. Well, then you can talk about seller finance. They would get a better return than the bank because the bank makes them 0.01%. But if they become the bank for you, they can make an agreed upon interest rate on whatever you agree on. It's typically going to be better than the bank. So before you go to negotiate a seller finance, there is one thing you need to do, and that is to have the right contract. You can get the same exact contract that I use by just going to future flipper.com. You can download my contract completely for free.
Now that you've got the contract, let's talk about what you actually have to negotiate for seller financing. There are five things you need to negotiate in seller finance.
- Purchase price
- Down payment
- Interest rate
Let's talk about this from the buyer's perspective, you have all five of these terms that you can negotiate. So obviously we want as low of a price as we can get. We'd also want as low of a down payment as we can get. We always want to conserve our cash. We don't want to give any extra cash that we don't have to. If I can get no money down, that's what I'm gonna do.
We want to get as low of an interest rate as possible. If we're able to get 0% interest, that is the goal. Essentially, that is principal only payments. That means that if I have a thousand dollars a month payment, it goes strictly towards principle every single month, that's the best type of interest you can get. It really starts to help you gain equity quickly. If you're principal only with terms, we want the seller to hold for as long as possible. If we can get them to go 30 years, that's the goal. You may not need it for 30 years. You might sell it before then or refinance, but the longer you have, the more options it gives you. With amortization. It's really dependent on you personally. I'd prefer a 30 year period, that would make my monthly payment lower. It'd give me the ability to cash flow better. if you get principal only payments or interest only payments, then amortization doesn't even matter.
So what I just explained is our best case scenario of what we're looking for as the buyer for each of those terms. Now, when you're negotiating with the seller, your job is to figure out which of those terms is the most important to the seller.
Maybe the seller is dead set on getting a certain price for the home. Well, you have four other terms that you can negotiate in your favor. Maybe you say to them, “I'll give you the $200,000, but I need no down payments. I need 0% interest and I need you to do the deal for 20 years.” Then it becomes a negotiation. Maybe the seller needs a certain interest or a certain down payment. You just keep going back and forth until you find a deal that fits both parties' needs.
With seller financing, you have so many different options. Maybe you find that the seller is willing to take a lower price, but for them to finance, they want a higher interest. They want a higher down payment. Whatever the case may be, all you have to do is just figure out what is most important to the seller and then try and get better terms to make it a deal. This is actually how we convert a lot of dead deals into deals. Here's why.
If a seller wants $200,000 and the property is worth $200,000, we can't buy it to flip it. There's no point for us to buy property and pay market value. It just doesn't make sense. But if I can go to that seller and say, “I can actually give you $200,000 for this home, here's how.”
I explain to them what seller financing is. Then I buy the property for little money down, maybe $5,000. Then I get principal only payments. Then I get it for a long term. Then it's totally worth it to me. If I can get principal only payments, let's say at a thousand bucks a month, and then it cash flows for $1500 a month. I know that I'll make good cash flow and I'll also be paying $1,000 a month. Over a year, I've paid down the balance $12,000 over five years, I've now paid it down $60,000. So in five years I've got cash and significant equity while paying market value.
Most investors don't understand this concept and they leave these market value deals out there hanging, and they think they're dead. When in reality, we capitalize on them.
In fact, earlier this year, we had a deal where the seller had three homes combined. The homes were worth about $800k to $825k. The seller wanted $900k. Pretty much everyone told them they were crazy including realtors because a realtor doesn't wanna list all those homes when they're way overpriced and they can't sell them. But I said, “I'll give you $900,000. Here's how it's going to look. I got all three properties locked up for $15,000 down. So basically $5,000 a property, principal only payments, a 15 year loan. (amortization doesn't matter because we got principal only payments.)
The way that I did the calculation was, “I'm into this deal for $15,000. My payments for all three properties are about $3,600. I'm renting them for $4,500. Yes, I am paying $900,000 right now. But after 15 years of making these payments, I was gonna only owe around $300,000. In 15 years they could easily be worth $1.3 million for all of them. Now I have a million dollars in equity and I only invested $15,000 down. These were newer homes that didn't need any work.
This is me overpaying for a deal by $80,000. But because of seller financing, it ends up being a really good deal for me. It was such a good deal I was able to wholesale it for $90,000. I sold it to an end buyer who saw what I saw in terms of principle, only payments, good houses, good neighborhood, good cash flow and they wanted them. We made $90,000 on that one deal, a deal that everyone else thought was junk.
So seller financing is definitely a very good strategy. Now, if you and the seller can agree to all five of those different terms, all you simply do is go to the additional terms section and write all five of those terms. Seller to finance at the following terms, $200,000 purchase price, $10,000 down payment, 5% interest, 10 year loan, 30 year amortization.
That's all you'd write. Then you'll open up escrow at the title company and the title company can write up a note and deed of trust. This would be between you and the seller. They will take care of all the legal paperwork, and I'm sure they can also recommend a loan servicing company so that you are now making your payments to the loan servicing company. They're keeping track of everything, and then they're gonna take your payment and give it to the seller that way you're not having to pay the seller and wonder if they got it or not. The loan servicing company is definitely the way to go. I would just let the title company handle all of the legal side of it.
That's how we do seller financing.