Learn a few ways to structure seller financing from today’s REI Classroom expert, Jim Ingersoll.
Jim explains seller financing with example deals, making it easier to grasp the alternative financing concept. Visit http://bigmoneyinvestor.com/flipnerd/ to get your free Flipping Houses Swipe File.
Mike: Welcome back to the Flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Jim: Hey, everybody, I’m Jim Ingersoll with the REI Classroom. Thanks for tuning in today. I’ve got some really awesome content to share with you on seller financing so that you don’t have to go out there and suck up to loan officers and hope that you can get a bank mortgage.
Mike: This show was sponsored by Passiverental.com.
Jim: Go directly to the seller. Now, you might be wondering, “Why would a seller ever want to be my bank?” They’re trying to get rid of this deal, this house that they own, and they’re motivated to do so. So why would they want to do it?
Well, let’s talk about that real quick before I tell you how to do it. Because you’ve got to believe they need you as bad as you need them as the bank. First of all, you’re going to buy it as-is. That means when I write my contracts directly with sellers, I write in there that I don’t care about lead-based paint, I don’t care about mold, I don’t care about termite inspections, none of that. All of that goes away. They can’t do that with regular investors.
Now, number two, let’s talk a little bit about the price because, as real estate investors, we’re taught we’ve got to nail that price as low as we can go. But, in some cases, there’s a gap and you can never close the gap with some sellers. They want 80. Your max buy formula says you can’t go a penny over 70. Well, what if you went up a little bit above 70 outside the confines of your cozy max buy formula and it allowed you to have that seller be your bank? Could you do that deal? I think the answer is yes, in many cases. It goes back to rehabbing your financing before you start rehabbing that house. So you can give them a little bit more money as well. It’s a good way to do it.
Now, one of the questions I ask the seller when I’m trying to get seller financing is, “What are you going to do with this $100,000 you’re going to get? Because you’re a high equity seller. You’re selling. You’ve got tons and tons of equity. What are you going to do when you get all this pile of money? What are you going to do with it?” Their most common response is, “Well, I’m going to put it in the bank.” Well, then you can talk to them about, “Wouldn’t it be nice instead of earning 1% in a certificate of deposit right now if you earned 6% loaning your equity back to me?” See how you frame that and you sort of shift it during your negotiation?
Now, let me give you three examples of seller-financed deals that work very, very well in today’s market. The first one is free and clear in 100 months, free and clear in 100 months. I hope I have your attention. Would you love to start lining up free and clear houses in 100 months? Let’s say the seller is stuck on $77,000. They’ve got to have nothing less than $77,000. Your max buy formula said you shouldn’t go above $70,000. But, let’s say for a minute you agree with me. You’re willing to go up to that $77,000. Here’s how you can do the deal. You could give that seller a 10% down payment, $7,000, and the remainder of the money which is the $70,000 balance let’s give it to them in 100 months of payments of $700 a month.
You know what the interest rate on that is? It’s a big flopping zero. I love 0% interest. That’s 100% amortizing loan. That’s why I love that and that’s how you get to free and clear really fast. If you didn’t have to pay all the interest on your loans, you’d pay them off in less than half the time. So that’s number one.
Number two, let’s say they really want a fair price, they want to make sure they get a fair down payment and a fair interest rate. Why don’t you negotiate something else that I love, which is the term called deferred first payment? If you had the ability to buy a house, seller-financed, you give the seller the price they want, you give them a fair interest rate, say 6%, and you give them a fair down payment, say 10%, then why don’t you negotiate in this term: you won’t make your first payment for six months.
That gives you six months to get the house rehabbed, to get it occupied with a great tenant, and it gives you six months of no payments due at all, which really juices up your cash flow for a while. Deferred first payment, you can’t do that deal with the bank, but you can do it with the seller as your bank.
Finally, one of my favorites is called the 50/50. This is where you tell the seller, let’s say your buy formula said you can’t go above 100K and the seller says, “That’s great, but I won’t sell for less than 110.” All right. Then you say, “Mr. Seller, I’m going to give you full price for your house, it’s very fair, $110,000. But here’s how we’re going to do it. I’m going to give you 50% at closing and I’m going to give you the final 50% in six years, one payment.”
So, at closing, you give them $55,000. They feel [inaudible 00:04:49] down payment. You make no payments for six years, and then you pay them off the other $55,000. That gives you six years of a ton of cash flow coming in because you don’t have any payments due. It’s like having a free and clear house for six years. At the end of six years, you can either pay them off or sell the house.
That’s three ways you can go out and structure seller financing directly with the seller. Talk them into being your bank so you don’t have to go to the loan officer, get a portfolio loan, a hard money loan, or a Fannie Mae compliant loan. I’m Jim Ingersoll with the REI Classroom. I hope you enjoyed that. You may want to go back and listen to this one again. I’ve got a free gift for you today. Go to bigmoneyinvestor.com/flipnerd because Flipnerd is the absolute best. Have a great day.
Mike: passiverental.com is your source for turnkey, done-for-you rental properties. If you’d like to be an investor and not a landlord, please visit passiverental.com to learn how to purchase cash flowing, professionally managed rental properties in the hottest rental markets across the country. We can also help connect you with financing for your next property. Invest the easy way today and get started by visiting passiverental.com.
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