Rookie Reply: Seller Financing 101

Ashley:
That is Actual Property Rookie, episode 140. My title is Ashley Kehr, and I’m right here with my co-host, Tony Robinson.

Tony:
And we wish to welcome you to the Actual Property Rookie podcast the place all we do is concentrate on that starting a part of the journey in order that the listeners like yourselves can get the inspiration, get the motivation, get the willpower that you might want to get began in your actual property investing profession. So, Ashley, I’m tremendous pumped to be right here with you right now.

Ashley:
Sure. And right now we now have one other query from my Instagram DMs. Me and also you, I used to be fascinated by this the opposite day after we have been speaking about, we at all times liked to say slide into the DMs.

Tony:
Yeah.

Ashley:
So we now have Brendan Flannery who slid into my DMs and has a query for us right now. He stated, “Hey, Ashley, my title is Brendan. I attended BPCON2021, and my largest takeaway was go larger, do offers with extra zeros.” Initially, I really like that, and Brendan, I want we may have gotten to satisfy on the BiggerPockets Convention. In case you guys didn’t go this yr, be sure you test it out for subsequent yr. It’s not been introduced but the place it is going to be, however someday within the fall of 2022, and you may get nice takeaways like Brendan right here.
Okay, so Brendan says, “I’m taking a look at a ten unit. The numbers work rather well on the ten unit at any time when it’s totally occupied. The present proprietor doesn’t owe any cash on the property and stated he’s prepared to contemplate proprietor financing.” Tony, do you need to clarify actual fast what proprietor financing is?

Tony:
Yeah. Completely. So sometimes when a purchaser appears at a property to buy, most individuals don’t have 100% of the funds to go on the market and simply pay money for a property, in order that they sometimes go to some sort of lending establishment, a financial institution, a credit score union, non-public cash lender, somebody like that to get entry to the funds. After which they get a mortgage to purchase that property, then they make funds again to the financial institution or to that lender over time to repay the mortgage that’s due.
With proprietor financing, as an alternative of going to a financial institution or credit score union or another lending establishment, the proprietor is definitely appearing because the financial institution in that state of affairs, so the customer agrees to a purchase order value with the vendor, who’s additionally the proprietor, after which they make month-to-month funds to the proprietor for some predetermined time interval till that quantity is paid again. In order that’s the final premise of proprietor financing.

Ashley:
Yeah, that was an important clarification. Thanks, Tony. Okay. So Brendan continues to say, “At present the property is listed at 1.9 million. I’ve been attempting to go to all of my native banks to get financing for the property. The issue is the present proprietor solely has 4 of the ten models rented out and he isn’t promoting, nor does he need to tackle another renters. The banks are requiring at the very least 75% occupancy. I wrote the vendor a letter and talked about proprietor financing. He stated he can be concerned about proprietor financing. Now the issue I’m having is I don’t know the place to begin. I used to be questioning for those who had any solutions and what phrases ought to I begin with?”
Okay. So the primary advice I might have is for Brendan to do some analysis on the property. Discover out if there’s a mortgage on the property in any respect, so if the vendor perhaps want some cash to repay a portion of the mortgage. You are able to do that by going to PropStream, a software program, then you possibly can put within the property deal with and they’ll let you know if there’s a mortgage or a lean on the property. That does price cash to join PropStream, however they do have a free seven day trial. And I do know I sound like an advert proper now, however they aren’t an affiliate of us. I simply use them.
You may also go to your county data, so the clerk data and pull them up. So I do know for Buffalo, for Erie County, they’re software program program they’ve, it’s to make use of, however it solely works on Home windows computer systems, it won’t work on a Mac. However for those who do sufficient looking, you could find the place to drag these data to search out out if individuals have loans on the property. After which the place it will get a bit difficult is, in PropStream they estimate what the precise mortgage steadiness is and on the clerk’s data in your county, it’s going to say when the mortgage was taken out and what mortgage quantity was taken out, however doesn’t estimate the steadiness for you, however you possibly can guesstimate that by working backwards and placing collectively an amortization schedule. However in fact, that’s simply going to be a guess as to what they owe and even simply ask the vendor in the event that they owe something on the property.
The second factor you might want to determine is how a lot cash do you’ve for a down cost or do you need to put down? And simply because you’ve massive sum of money, it doesn’t imply you need to put all of it down, however simply begin working off of that. How a lot do you’re feeling snug placing into the deal of your personal money?
Or do you’ve companions? There undoubtedly is such a factor as 100% vendor financing. In order that doesn’t imply you possibly can’t attempt to go after that, however earlier than you go into negotiating with the vendor, I might begin to consider that as what you’ve after which taking the property, operating your numbers on it and say, “Okay, what cost quantity does it make sense for me?” So I simply did a vendor financing deal for a cellular dwelling park. And the vendor really informed me I want $2,500 a month. And so I labored backwards. Okay. That is the imbalance of the proprietor financing. I must get him to $2,500 a month. So I amortized it over 25 years at three and a half %. Increase, I obtained that quantity for him. So what quantity do you want? And begin there. Tony, what else would you add to this?

Tony:
Yeah, you’ve made some actually, actually good factors thus far, Ashley. I believe, alongside the identical traces of what you simply talked about of that vendor saying, all I want is $2,500 per 30 days. That’s golden data for you as the customer. He simply gave you the… I don’t know. I’m attempting to consider some woody metaphor of how essential of knowledge that’s. however I can’t consider something, however that’s simply golden data. As a result of as the customer, you need to be knowledgeable data getter or a pig, I’ve heard this on one other podcast earlier than.
You need to be knowledgeable data getter, as a result of the extra data that you’ve got in regards to the vendor, about their state of affairs, the higher job you are able to do at making a win-win state of affairs. So for you, Ashley, you stated $2,500 per 30 days, that’s nice data, as a result of now you possibly can construction the deal in a method that will get the vendor to the quantity they need, however nonetheless provides you the phrases and the construction that helps what you are promoting purpose. I wished to spotlight that as a result of I believe it’s a extremely, actually essential level.

Ashley:
I’ll simply add to that actual fast. That was not my preliminary provide. I discovered that he wished that $2,500 after my third time and visiting the property. And I used to be sitting down with him with, I believe, was my second provide. And we simply sat down and we scribbled out my letter of intent that I gave him exhibiting what my provide was. And that’s when he was like, properly, I want $2,500 a month. And simply me spending a variety of time with him listening, I used to be capable of get to that time. In order that’s an enormous factor, is simply listening to the individual. And if you may get nose to nose with the vendor, that’s even higher.
So even for those who don’t include a proposal straight away to the vendor, Brendan, you possibly can go and ask to sit down down and speak with him and see if he’s open to that. And that’s the place you’re going to get some data. And that’s a bit due diligence interval, earlier than you even make your provide.

Tony:
It’s undoubtedly in regards to the relationship constructing, whenever you’re going with proprietor financing. Now I’ll say, being tremendous clear, I’ve by no means closed on an proprietor finance deal. I’ve had a pair offers the place we obtained fairly shut, we ended up going a unique route, however I simply need to make clear what the important thing elements are if you find yourself speaking about vendor financing.
So there’s the precise buy value, which is what you’re shopping for the property for. There’s the down cost, which is how a lot money you’re given to that vendor upfront. There’s the time period of the mortgage, which is what number of years you’re going to be making these funds. After which there’s the amortization interval, which is how lengthy is that buy value? What number of years is that buy value unfold out over? All of these completely different levers, your buy value down cost time period and amortization interval. All of these are negotiable.
And folks usually ask us, Ashley, “Hey, what’s the right construction for this partnership. What’s the right construction for this proprietor finance deal. What’s the right construction or X, Y, Z?” And we are able to’t say what the right construction is as a result of we don’t know all of the distinctive, particular circumstances that you end up in, however simply know that these are the 4 completely different sort of bins you possibly can play in to raised swimsuit each your wants and the vendor’s wants. So once more, it’s the acquisition value, the down funds, the amortization interval, and the time period of that mortgage.

Ashley:
Yeah. And that’s so essential that you just stated that there’s no good construction and it’s going to differ by vendor, it’s going to differ by purchaser, it’s going to differ by the deal. And there’s no incorrect construction, so long as it’s authorized, however whenever you put that collectively, if the numbers give you the results you want, you’ve a deal. It doesn’t matter how you’re employed it out. And one factor to recollect too, is that anyone else could also be getting 2% vendor financing, $0 down. And perhaps you’re going to finish up paying $20,000 down at 5% curiosity. However if you’re nonetheless cash on that deal and also you’re nonetheless getting a return, that’s higher than you not getting the deal in any respect. So so long as it doesn’t find yourself being a foul deal.
One other factor to consider too is that if this vendor financing goes to get you into the property and also you already know that there’s a price add, and also you’ll be capable of refinance out of the property simply, simply you want a bit little bit of time. I believe it is a good state of affairs for Brendan, the place as soon as he will get that 75% occupancy, perhaps you might be prepared to barter and work with the vendor extra on worse phrases, reminiscent of perhaps the next rate of interest or one thing like that, realizing that you just simply must pay that for a pair months, and you then’re going to have the ability to refinance out of the property.
After all, you don’t need to be dropping cash. You continue to need to be money flowing and you’ve got the chance to place this worth add in. But when these phrases get you into the property, that doesn’t imply they’re dangerous. And likewise assume exterior of the field too, what are another issues the vendor would possibly want? So the one I’m engaged on now, in yr three, in yr 4, he’s getting a $25,000 money cost every of these years on prime of his mortgage funds. And that was to lower my down cost. So the sum of money I’m giving out now could be decrease. And that’s simply being deferred till yr three and 4, which provides me more cash to do enhancements to the property and extra time to provide you with that money.
So assume exterior of the field and be prepared to barter, don’t be afraid to do three, 4 gives. And also you don’t should have your provide good the primary time, so don’t stress. Toss something on the market that works for you and let the vendor know that you just’re prepared to work with them and negotiate.

Tony:
What nice recommendation, Ashley, on being inventive and proving that, once more, there’s no field you need to match inside. If you wish to inform the vendor that you’d purchase them a automotive after three years, you are able to do no matter you need. It’s no matter will get the deal achieved. I need to speak about perhaps one other different to proprietor financing simply in case Brendan’s not capable of work this out. Do you’ve the rest so as to add on the proprietor financing piece?

Ashley:
No, let’s transfer on.

Tony:
I need to convey this up as a result of we’re combating this at a property that we’re taking a look at right here in Southern California as properly. It’s a small motel and a lake metropolis right here. And the proprietor’s monetary recordkeeping is sort of nonexistent. We’ve requested for financials. They don’t have them. The property’s solely partially operational for the final 12 months. So only a mess to lend on. So I reached out to a couple lenders as properly, and so they’re all saying, “Hey, with out higher financials, it’s a motel. That’s mainly bizarre proper now.” They’re not prepared to lend on till they see that it’s a stabilized property. So what we’re in search of now could be what’s known as, bridge debt or bridge lenders. And these lenders primarily assist you buy business properties which might be in transitionary durations.
So this property that’s solely 40% occupied, that will be a superb candidate for bridge debt as a result of what bridge lenders help you do is, they’ll say, “Hey, we’ll provide the cash to buy rehab, stabilize the property.” Usually, it’s 12 to 18 months, typically a bit bit longer. Barely larger rates of interest, however it’s simply sufficient money to get the property bought, stabilized and you then return out 12 to 18 months later and also you refinance with extra cheaper, decrease prices debt with one of many conventional lending establishments.
So Brendan, if for no matter purpose, you’re not capable of come to an settlement on the proprietor financing piece, don’t really feel just like the deal is useless within the water, exit and see if you could find some bridge lender and speak to different buyers in your space to see what different choices they could concentrate on.

Ashley:
Effectively, Tony, nice recommendation. So hopefully Brendan, you possibly can take some worth from that and I’m going to really bullet level every part we talked about and ship it to him after this, so he doesn’t have to attend a pair weeks to listen to this episode. However thanks all people for listening and be sure you ship Tony or I a message on Instagram if in case you have a query that you just wish to play on The Rookie Reply. My title is Ashley @wealthfromrentals and he’s Tony @tonyjrobinson. And we’ll be again on Wednesday.