how do i conduct a seller financing plan start to finish?

Question

I understand the high level idea of seller financing, and i am now faced with two properties that I feel could be perfect for this. I have never used seller financing, as i am currently house hacking with an FHA loan, so I am not entirely sure on certain details detail such as what kind of documents you must sign and best business practices conducting the entire process from start to finish.

Is there any BP, or any other authors, Seller Financing books that can give me more detail into carrying out this method?

Derek Dombeck · Answer

Seller Financing is more about creating a solution that benefits all parties than it is about following a procedure. That's what makes it so fun and powerful. Here's 2 deals I did last week. Notice I solved multiple problems in each deal for the seller.

#1. Seller had to sell quickly but could not discount price to meet my cash offer. So I bought for almost full retail because this 3bd 2.5 bath house will cashflow based on the terms we structured. I paid $100,000 for the house total. I gave the seller $15,000 cash, she is carrying a 2nd position note/mortgage for $16,000 @ 0% interest, collecting $200 per month until paid in full, and I bought subject to the 1st mortgage balance of $69,000 which is fixed at 4.125% interest.
The seller had this house listed for $104,900 when she contacted me. So she was able to get almost full asking price from me as long as I could get my terms. What her realtor didn't know was, she was 2 months past due on her loan and she has a sick family member out of state that she needs to be with asap. I solved her problems.
Side note..... I sold an option for part of the current and future equity to a friends Solo 401k to provide the $15,000 cash I needed. I would rather use my knowledge than my wallet when buying assets.

# 2. This seller has a 3bed 1.5 bath house that needs about $10,000 in repairs and it is a rental property for him. He's 70 years old and doesn't need a chunk of money, he just doesn't want to be a landlord anymore. Also, taking a chunk of money this year puts him in a bad tax scenario. ARV is $95,000, and he didn't like my cash offer of $35,000 (which I made strategically low to make my terms offer more appealing) so I made a terms offer of $70,000 to be paid in installments of $350 per month @ 0% interest with a balloon due at 5 years. He will be collecting Principal only payments which are taxed at long term cap gains rates. This gets him more money when compared to offering him 50 to 60k and paying him an interest rate of 5% because he would have to pay ordinary income tax rates on any interest collected. This structure also gives me a higher tax basis for when I resell someday.

I will again sell an option to a financial friends IRA to get the $10,000 I need to rehab the house.

You see, all I did was solve their problems. The paperwork can be drafted AFTER you figure out the terms. Hope this helps

Aaron Montague · Answer

@Jantsen Locke Start by talking to the current owners to see if you can get a deal.  You'll save yourself a LOT of time if neither place wants to do owner financing.  Approach them with a deal and see what they say.

Once you have the deal in place I recommend you use a lawyer and/or title company to prepare the deal for you, at least for your first few.

Derek Dombeck · Answer

@Daniel Dietz,

There's many different ways to structure these Retirement Account transactions. Feel free to call me if you want to brainstorm. I see we are not that far apart in WI.

On these deals I referenced, my friends are not seeking tax benefits such as depreciation or any monthly cash flow. So, they are buying an Option to purchase a percentage of ownership at a later date (25% of the future equity in these deals works out to be a 25 to 30% annual yeild). Let's say I decide to sell the property in 3 years. They will exercise their option simultaneously as my end buyer is buying the house outright ( essentially, they are selling their option at that time). By doing this, the retirement account never had ownership of the property during my holding period, thus preventing liability and UBIT for their account.

Again, this is only 1 way of many to structure. If they wanted cash flow, I could give them some. We could accomplish the same thing with a performance note/mortgage too.

Jantsen Locke · Answer

@Derek Dombeck very unique ideas. In my particular situation, I had lived in this property two years ago and now one of my friends currently resides. The current owner is in her 70s and lives about two hours away - my friend told me that she is looking to sell, but wasn’t happy with the offers she had received.

After reading various books and listening to some of the BP podcasts, I thought this may be the perfect opportunity to try to use seller financing. This is only my assumption, but the current landlord has grown tired of responsibilities of a being a landlord over two hours away.

With seller financing I may be able to get closer to her target, as long as she is willing to receive monthly payments and not the initial lump sum from selling.

Daniel Dietz · Answer

@Derek Dombeck could you elaborate a bit on how you are doing the part with others Self Directed Accounts?

What I am wondering specifically is are you just doing a JV, LLC, or something else? We are planning on doing this in the near future and have read varying things on if a Self Directed Account can own a different share of something than the % equity they bring to the deal. I am going to be talking to the lawyer who set up our own Self Directed LLC to get input soon too.

My goal is to set up an LLC and have the Partner bring the down payment with their Self Directed Account of say 20%, and *I* would sign the LLC Note for the 80% loan, but we would EACH be 50% owners as neither of us could have done it without the other.

Daniel Dietz · Answer

@Jantsen Locke I would second what the others are saying about figuring out the sellers 'pain' and figure out how to take care of that.

I have not read any book DIRECTLY related, but Brandon Turners book on 'No & Low Money Down' address that a bit.

I have been trying to find 2-4 units in our area that people are willing to sell by 'cold calling'... there is virtually nothing on the MLS in our rural area like that. I found one seller with 12 units free and clear but could not convince him to Seller Finance even though he was going to just put it  into CDs :-(

On the good side, when calling a rental applicant's reference to a fellow contractor I know I *may* have fallen into a sweet deal. I knew he had rentals and it was a chance to 'plant a seed' that when he is ready to sell I want to talk. Turns out that he wants to start selling NOW :-), and ONLY using Seller Financing.

His goals are to avoid realtor fees, spread taxes, and have a steady income stream for 15 years or more. He also has concerns about 'finding someone qualified that will take care of the places' as lots of newbies or less attentive owners might not keep them up and then weasel out down the road.

On the really good side, I think it will work to buy these with our SDRIAs and SOLO401Ks, with low down payments compared to non-recourse loans.

how do i conduct a seller financing plan start to finish?

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