Seller Financing Structure

[Brian Tran]

I've been looking around the BP forum and youtube but other than tips I'm unsure if I understand the whole seller financing structure.

From my understanding once you get the seller it's mainly creating terms of the seller financing (whether there is down payment,etc) and then having the contract drafted by a title company and using escrow. That's my understanding of structuring seller financing, am I missing any crucial details?

[Account Closed]

Some of my ideas:

What are the seller's motivational issue (problems)? - if you can't get to the bottom line of their problem - you are not negotiating with all the facts and you are negotiations for the best possible price will be flawed.

• It really is about why does the seller want to sell?
• Is the asking price below market value - (if not, it should be if you are going to earn cash flow or equity). You as the investor need to be eminently knowledgeable of the retail marked in your area.Without this knowledge you are just playing a guessing game.
• What does the seller owe - how does that compare to the market - what's the equity - as you know real estate investing is ALL ABOUT EQUITY.
• Are the mortgages current - what's the interest rate and term - why is he late - is there a foreclosure pending, how many mortgages? Can you make an offer to buy the mortgages at a discount - this will increase your equity. IDEA: you may want to take an option to buy the existing mortgage - flip the property and take your discount in cash.
• Is there an opportunity to take over the existing mortgage - sub-to (oh, always suggest a subject-to the existing mortgage). Doing this will reduce the cash you need to close.
• Has it been listed, when, for how long, why didn't it sell (sometimes it pays to call the agent to get some inside information about the No Sale) you could have your agent call the listing (expired) agent to get some inside information. Make sure you read the; remarks in the expired listing (the remarks may give you a clue as to sellers motivation; seller motivate, must sell, short sales, needs work, seller financing, will trade, all offers considered, and look at the DOM - days on market how long as this building been sitting on the retail market, what's the problem (the problem is most all the time it is PRICE! - there will be information about how many times the property has been reduced ----- all of these items are clues to motivation and information to be used when negotiating.
• How much work does the house needs - what's the "After repair value"? Is it worth it? If not MOVE ON!
• The seller has a dominate motive for selling (which he may not tell you (you need to dig for that reason; debt, divorce, back on taxes, going to be incarcerated, serious illness -sick of real estate )

When I work with investors - I need to know why they are investing - usually there are several reasons:

• Need for quick cash - we solve that problems by assignments -fast turn over for cash settlement - wholesale-flipping, Control and Roll - public auctions, Guerrilla marketing - radio ads to find that 1 out of 10 who we can negotiate with.
• Some investors will do 5-10 assignments to build a capital reserve than go pay cash for houses or commercial buildings.
• Some investors have all the cash they need - they want to build a portfolio of rentals - houses and commercial. They know as I do that making cash offers is the best way to acquire great equity.

What I have done here in Maryland and other states for the past 40 years, is to only deal with a problem ownership and that problem usually has equity.

• If you can solve the seller's problem situation - you can make money - (I do not mean to take advantage of others - we make money by solving real estate problems) I take my time with the sellers, talk about all their issues related to the property - look at all the facts to see how to approach the offer - make an offer or a proposal that will satisfy the seller's needs as well as our cash flow or equity needs.
• it is important to build a rapport with the seller - talk about things that interest him, retirement, fishing, hunting ----- forget real estate for awhile - and try to communicate on a personal level with the seller - sellers like to do business with folks they understand and like - be likable!

As all of us know - the absolute best financing in the world is seller financing - sellers usually don't care about your past credit history - they don't take months to approve you, there is no turn downs, they don't expect a ton of documents from you and they are easy to get alone with --- NO SO WITH HARD OR SOFT MONEY LENDERS!

At 76 years old now I've learned a thing or two about seller financing:

• Always ask for for seller financing - if rejected put it in your offer anyway! Verbal offers don't mean much - if you are a serious buyer/negotiator -PUT IT IN WRITING along with a copy of a check (I always use what we call a "Skinny Contract", this is a one page document.)
• Show the seller what he will receive over the period of owner financing --if seller took back $100,000 @ 8% interest, interest only payments, paid monthly with a balloon at the end of 60 months - would look like this 8% x $100,000 = $8,000 a year ($666.66 a month for 60 months = $40,000 plus the principal balance in a balloon payment of $100,000 - so the seller get his equity of $100,000 plus $40,000 in interest) these facts can be very motivating.
• Seller needs to know about capital gains and the benefits of seller financing and installment reporting.
• Seller can use the financing note as a down payment or other real estate or sell the note at a discount.
• Seller can split the note - 4 $25,000 notes or 2 $50,000 notes - again these notes can act as down payments deposits on other real estate, sold or retained as monthly income or given to relatives as gifts.

When seller financing is accepted - you may want to consider the following agreements or clauses:

• Always build in a discount in the event you pay the note off early (big savings here).
• Always make the mortgage a First Subordinated mortgage - this means that if you refi - you can place the seller's mortgage in 2nd position - since a lenders usually wants to be in first position.
• Make that mortgage fully assumable with release of liability - that means when you sell the property, your buyer can assume it, and you are released from the obligation (this is good)
• When selling the property - you can do a wrap-around - meaning if your interest to the seller is 5%, you can wrap the mortgage at a higher rate - like 10% - that means you are making 5% on money you owe - this is sandwiching the mortgage (this is good - never stop negotiating)
• Build in a clause that allows you to walk the mortgage to another property with equal or greater equity - this is called substitution of collateral. This is good - because if you sell the property you would have to pay off the existing mortgage - unless you have this clause. So instead of paying the mortgage off- you move it to another property and you get to get to keep the money that normally would be paid off.
• Always negotiate for a "principal mortgage", this is good because there is NO interest - every payment you make goes to pay down the mortgage. NOTE: You can offer the seller more for the building if the seller will accept a principal mortgage. This mortgage will reduce faster and gives you an accelerated equity position and if you do a wrap you can charge interest on money you owe (It don't get no better than that!)

Real Estate Investing can be the most rewarding business entity. Learn the rules - have fun and your cash flow desires will be realized----

Charlie