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Many real estate investors think that Seller Financing is only beneficial if it results in a tiny—or zero—down payment. In other words, they think that unless they get 90% or higher LTV financing, it’s not worth it. This simply is not true. In this episode, Jeff asks the question: “what if the Seller Financing you could get is only 10% of the total purchase price—would you still do it?” and explains why YES, absolutely you should. Learn the five simply reasons why you should happily get Seller Financing for even just 10% of the price!
Episode Transcript
So I have this thing where I really like to ask people questions. Now, a lot of these questions are seemingly simple and easy to answer. But kind of when thinking about them a little deeper, there tends to be more to it than might immediately meet the eye. And the reason I like to ask people these kinds of questions, is that I think it helps us all as we process those questions, to determine our own philosophies and helps us not take things for granted, rethink things with our own minds, and then formulate our own philosophies and our own investment opinions and rules and parameters and things like that. And that prompted me recently to ask the following question. If you could have a seller be involved in the financing and provide you with seller financing, but only 10% of the overall purchase price? Would you do it? I want to talk about that. In today’s episode, I’m going to tell you why yes, 100%. Absolutely, I would, and I do, so Let’s cue up the theme song. We’ll jump right into this discussion.
Welcome to Racking Up Rentals, a show about how regular people, those of us without huge war chest of capital or insider connections, can build lasting wealth acquiring a portfolio of buy and hold real estate. But we don’t just go mainstream looking at what’s on the market and asking banks for loans, nor are we posting We Buy Houses signs are just looking for “motivated sellers” to make lowball offers to. You see, we are people-oriented deal makers, we sit down directly with sellers to work out win-win deals without agents or any other obstacles, and buy properties nobody else even knows are for sale. I’m Jeff from the Thoughtful Real Estate Entrepreneur. If you’re the kind of real estate investor who wants long term wealth, not get rich quick gimmicks or pictures of yourself holding fat checks on social media, this show is for you. Join me and quietly become the wealthiest person on your block. Now let’s go rack up a rental portfolio.
Thank you very much for joining me for another episode of Racking Up Rentals. Show notes for this episode can be found at www.thoughtfulre.com/e194. Please do us a big favor by hitting that subscribe button in your podcast app, it does make a big difference in helping other fellow thoughtful real estate entrepreneurs who are searching for a community in a message like this to find it. Alright, so onward with today’s episode.
So it’s probably no secret. I’ve talked about it a lot that there are quite a few myths and misunderstandings around seller financing in the real estate investor community. And I would say that the one we’re talking about today is just kind of an extension of that.
Now, there’s a lot of people there’s a lot of sentiment that says the only reason really why you’d want to do seller financing is if you can basically get a zero down payment so that on its own is just completely false. There’s lots of reasons why you would want to do seller financing, even if you had to make a very reasonable down payment. But I thought it would be interesting to take that sentiment and stretch it like the exact opposite way as far as possible and sort of ask the question, what if you could only get 10% seller financing? And now you’re looking at how to fund and finance the other 90%? Would it still be worthwhile? And the simple answer is yes.
And I want to just give you a simple rule of thumb to think about is that we always want to get the seller involved in the financing whenever we can. Is more better? Yeah, I would say generally speaking, that is probably a simple rule of thumb also. But we always want to get the seller involved in the financing whenever possible. Even it’s for a small amount.
I recently made a post on Facebook, into the communities that I am fortunate to be part of and ask the question. If you could only get 10% seller financing, would you and hear the responses. A lot of people said no, it’s not worth it to me to just get that much seller financing is too much work. It’s extra complexity, etc. Some said I would but only at a larger scale. So I remember one person said yeah, if it’s $150,000 purchase and the 10% would be $15,000 seller financing. No, I wouldn’t do that. But if it was a $1.5 million purchase and the 10% ended up being 150,000 Then guess I would and I got several answers that are kind of along those lines that said well, it adds complexity. So there has to be kind of a threshold of what makes it worthwhile. Many said, Yes, I would do seller financing, even if it was only 10%. And they cited one major reason. And the major reason that they tended to cite was it would reduce their downpayment. In other words, if they were going to get an 80% LTV loan in the sellers involved in 10%, that means there’s only 10% left for them to put down, and they liked that idea. And while I didn’t push back too much in the comments, I thought to myself, maybe that’s true in some cases, but it’s certainly not true in other cases.
It would have a lot to do with who the primary financing lender is, and what their guidelines are. If they say we’ll loan you 80%, it’s up to you to come up with the other 20%. We don’t care how you do it. I think that might be a rare lender. But if they were to say that then sure the 10% seller financing loan, reduces your down payment to the remaining 10%. But there would be a lot of lenders out there who instead would say, Look, we’re comfortable with you having 80% Total financing, so we can provide 80%. Or if you want the seller to provide 10%, then that means we’re only providing 70. But anyway, you cut it, we need you writing a check for a quote skin in the game for 20%. So that’s a high possibility with certain lenders as well.
So for all those people who are saying, Yes, I do seller financing only 10%. Because it would reduce my cash, it begs the follow up question. What if it didn’t reduce your cash? Would you still do that deal with and get this out the seller financing at just 10%. And I want to give you five reasons that I think you should five reasons that even if it doesn’t reduce your down payment by a cent, that you should do a small 10% seller financing loan whenever you can get it.
Here is reason number one, when you do this, you are creating a new lending relationship with a new person. What does that mean? That means that now there is another person for whom you are a borrower, and you have an ongoing financial relationship with overtime, this person, these people will see that you pay your bill like you’re supposed to on time, every time that when they have a question. You have a prompt, polite and professional response to that question. And you provide good customer service, and that everything is going smoothly. Now, why would this matter? Well, a couple reasons. But the first one that I want to attack here in point number one is that oftentimes, as a real estate entrepreneur, you’re going to be looking for capital that you can put into future deals. Would you not take your funding proposal for your next deal to the people who you are already doing business with and the people who already feel good about your dependability, reliability and performance? Yes, you would do that? Absolutely, you would do that. So that by itself is a reason that this 10% loan, even if it seems like an insignificant amount of money is a good thing, because you’re now creating a new relationship with somebody who you can talk to about financial opportunities in the future.
Secondly, and this is a little bit related to point number one. But Reason number two is that every seller financing lender you have whether you owe them 20 bucks, or you owe them 20 million bucks is now a potential reference. In the future when you are doing seller financing proposals. Making those proposals part of that conversation might be Hey, you know what, I have seven other people who I pay on a monthly basis, I’d be happy to give you their names, and phone numbers and email addresses if you’d like to call them and you can just find out what their experience has been like with me. And that is truly invaluable. I’ve seen this play out in my own business so many times. In fact, one really cool story that I think of often because it just it makes me feel good but also gives me encouragement is a couple years ago I bought a property and the sellers in our conversation, you know indicated that they would appreciate having some references, so I typed up a list of references and I sent it over via email. And what the seller did was she printed out my page that I had sent her. And she just used that to take notes. When she would call somebody, she would take notes on what they said right next to their name on this sheet of paper. So, over the course of a couple of days, she got in touch with all these people. And then she called me back. And she said, Jeff, I talked to all of these people whose names and phone numbers you gave me. And man, they really love you. She said, in fact, I’ve been taking notes here, right on this page, of all the things that they said about you would like me to scan that and email it to you, I think you might like to see it. And I said, Oh, my gosh, yeah, please do. That’s fantastic. Thank you so much. And she scanned it. And she sent it back to me. And it was just filled with all sorts of just nice, complimentary comments about their experience with me. One said something like this is the Eagle Scout of real estate. And other ones said, this is the best transaction I’ve ever done. Another one said completely reliable pays on time, every time always answers my questions, etc. And so I actually printed that out myself. So I printed out my printout of her printout. And I just sort of keep it next to my desk as as something that I like to glance over at just gives me confidence. And yeah, you know what we’re having mounting. And growing snowballing momentum, the more sellers that we work with the more seller financing deals that we do. And this reference is the same in terms of its value to you. For future, potential seller financing lenders, whether you owe them a small amount of money, or a large amount of money, it’s another point, another data point that says, this person does what they say they’re going to do.
Reason number three, Why think you should do even a small 10% seller financing loan. Now, this one is not something that you would probably think of too often. And I’m not suggesting that this is what we are hoping for by any stretch of the imagination. But when you’re doing business with real people versus institutions, life happens. So let me just give you a simple scenario. You buy a property with seller financing in one year, you start making payments to that person. And let’s say you have a 10 year term, well, three years into that term, that seller might call you back. Now they’re not a seller, they’re the beneficiary of a promissory note. But that person might call you and say, hey, you’ve been making nice, consistent payments for the last three years, we’ve got seven years left on this term. But you know, life has changed. And you owe us $200,000 On this note, but life has changed. And we would like to move across the country. We want to build a new dream house in another state, we want to be close to our family. And we’re just wondering, would you be interested in paying off our note early at a discount? You owe us $200,000? But if you could pay us now we would accept 150? Would you be interested in that? In other words, you could call this shortening a note. Right? So the beneficiary of the note might come back to you and they say, we kind of like to sell our note, we’re effectively selling the note back to you. Because at the time getting the $200,000 over a 10 year term made sense to us. But life has changed. And now our preference would be something shorter. Would you like a discount in order to cash us out early? So that’s a possibility. Now, you’re never gonna get that possibility from a bank. I’m pretty sure Wells Fargo doesn’t call people and say, hey, you know, you owe us 420,000 On this four Plex. You know, we’ll just sell for 300. If you want to do it right now, like that doesn’t happen with banks, but it does happen occasionally with regular people because when a regular person is the beneficiary of a promissory note, that note is an asset to them, and they can sell the note and they’re effectively selling it back to you at a discount.
Reason number four, and this is the big one that will also lead us into reason number five. Reason number four, is what I refer to as supercharged seller financing. Now, the 10% seller financing loan by itself, even if it’s not supercharged, could be a very good thing for the reasons that we have just discussed and points one through three. But if this loan, this 10% loan, even a small amount of money is a supercharged seller financing loan. A watch out it is a whole new ballgame in a whole new level of value. Now what is supercharged seller financing. Supercharged seller financing is a series of terms that get negotiated into our deal. deal with the seller who becomes the beneficiary basically clauses that are written into our promissory note that provide us a tremendous amount of flexibility. And one of those major areas of flexibility is what we call a substitution of security clause. What does that mean substitution of security clause means that the collateral the piece of real estate, that is the collateral for a loan can be changed. Your $100,000 loan is secured by my property at 1234 Main Street. But as long as I have enough equity and cash flow in 4567, Oak Street, it’s totally fine for me to work with you to remove the deed of trust on Main Street and place one at the same time on Oak Street, you’re equally collateralized. Nothing has changed. It’s just the property, that collateralize is the loan that has changed, not the quality of the collateral or anything like that. But simply the piece of real estate is a different piece of real estate that is your security for the beneficiary’s security. This begs the question, how does that help us and I can tell you, I could gladly excitedly talk about that topic for about the next 46 hours because it’s been absolutely crucial to my own business and my own portfolio. But let me just give you a simple perspective you are buying, let’s say a four Plex, from Bob. And Bob is going to be involved in 10% of the financing. So your four Plex costs $800,000, Bob is going to be involved in an $80,000 loan. Now, if you were to, after a while, sell that four Plex or refinance that four Plex, by default, you would pay off all of the debt associated with that four Plex. So your new lender, whoever that was, and Bob would get paid off because both of those loans would have due on sales clauses in them. But in this case, Bob’s loan doesn’t have a due on sale clause and instead has a substitution of security clause. So you go to refinance this property. And you don’t need necessarily to pay Bob off if you don’t want to, what you do need to do is look through your portfolio, and then say, Where else can I secure in my portfolio, this $80,000 loan from Bob, what other property in other words has enough equity and cash flow to support Bob’s loan, and if I were to move Bob’s loan from my four Plex to this other property, now, there’s less debt that needs to be paid off with this refinance, and when there’s less debt that needs to be paid off with the refinance, there’s a chance now you might be getting cash out in your refinance. And so the substitution of security clause really takes a lot of close training and thought to understand it conceptually to certainly to understand how to negotiate it, and then to understand how to apply it in a really advantageous way in your portfolio, but a supercharged seller financing loan that allows you to basically take them loan and move it around throughout your portfolio is a completely different animal. I don’t know if you’ve ever thought to yourself, like why can’t a bank or somebody just make me a loan for one house. And then as soon as I get it fixed up, and I sell it or refinance it, I don’t have to apply for a new loan, I’ll just take the existing loan and just move it to the next one. And I’ll just keep moving it along, everybody’s getting paid. Well, that doesn’t happen in the regular world of lending. But it can happen in the world of supercharge seller financing. And even a small block of supercharge seller financing loan money, as long as it’s supercharged, can be tremendously valuable. I mean, tremendously valuable.
And that point leads us to reason number five, which is sort of related to supercharged, seller financing. And I would call reason number five, the ability to provide different initial collateral for the sellers loan. Now, by default, just the standard knee jerk thing that happens when you buy a property with seller financing that property, the subject property that you’re buying, is the collateral for the sellers loan, right. But does it have to be? And the answer is no. It wouldn’t have to be. Every real estate loan needs collateral. But as we’ve just discussed in point number four, that collateral can change over time. What if that collateral were to change before the loan, even closed? Right, so you’re going back to our example you’re buying this $800,000 4 Plex, from Bob. Bob is going to be involved in a 10% seller financing loan, so $80,000. Does Bob’s collateral need to be on day one the fourplex itself? No, not necessarily. or perhaps you have another duplex somewhere else that has more than $80,000 of equity and more than enough cash flow to make the negotiated payment with Bob. So even on the day of closing itself, perhaps Bob’s loan is not encumbering the four Plex you just got, perhaps it’s uncovering a property that you already owe.
Now, how could that be beneficial? Well, a common question if you go out into the world of Facebook groups and forums and chats and discussions among real estate investors is people asking the question, how can I get a home equity loan on my rental property? How can I get a second position loan on my investment property? I’ve called a lot of banks and a lot of credit unions, nobody seems to do it. And they’ll make this post. How do I tap into the equity? Well, tapping into the equity through a new loan from a lender who’s going to write you a check, secured by a second position deed of trust on a property you already own is one thing. But it’s a different thing when you are tapping into the equity of a property you already own by way of a new seller financing loan from a completely unrelated seller, right? So Bob, you’re buying Bob’s four Plex, and Bob is providing $80,000 of the financing just 10%. Now, if you have, let’s say $100,000 of equity, and an equivalent amount of cash flow in this triplex that you own, down the street, by using the triplex, the second position, equity there and the triplex to secure Bob’s loan, you have now just created the loan that all the rest of your real estate investor buddies, and peers are out there trying to find trying to ask a bank or credit union to do and getting turned down in hearing No, no, no all the time. But guess who was willing to do it? Bob, the seller of the fourplex, Bob was happy to do it. He just needed collateral from the sale of his four Plex. So you’re tapping into the equity in in what is effectively the same way, but through a very different way of originating alone.
Sometimes people ask me, What does thoughtful real estate entrepreneur really mean? What does this thoughtful word mean? And I always tell people, it’s two things. One is, it’s taking a people oriented approach, which we’re kind of seeing in this episode, in the sense that we are working directly with sellers negotiating seller financing. But the second aspect of being thoughtful, is just being willing to learn to think of things from a different perspective, to not have to do everything the same way all of the rest of the mainstream real estate investors do to think about what opportunity looks like in a different manner to think about what deal structure could look like in a different manner. And that’s what I love about seller financing is it provides us a lot of opportunity to be creative. Every seller financing loan is just a completely custom tailored situation. And it provides us with so much flexibility and opportunities to do things differently than other people would. So I want to leave you with this simple rule of thumb. We always want to get the seller involved in the financing whenever we can, for whatever amount is possible. Now while I take a 90% seller financing loan over a 10% one Oh, yeah, absolutely. Absolutely. I would rather have more. But if I could only get 10. Would I still do it? The answer is absolutely yes, I would for the five reasons we’ve discussed today.
That is it for today’s episode of Racking Up Rentals. Again, show notes for today’s episode are at www.thoughtfulre.com/e194. Please do us a big favor by hitting that subscribe button would be so appreciated. And if you would rate and review this show just real quickly, doesn’t have to be long or eloquent. Just a rating there and a couple words would be super, super helpful and very appreciated.
Did you know that we have a Facebook group for Thoughtful Real Estate Entrepreneurs too? We do and you should be a part of it. It’s called Rental Portfolio Wealth Builders and we would love to have you join us there. Just go to group.thoughtfulre.com and you will be taken right to that page we can hit the Join button. If you liked this episode, please take a screenshot of that and post it to Instagram and tag us; we are @thoughtfulrealestate. I will see you in the next episode. Until then, this is Jeff from the Thoughtful Real Estate Entrepreneur signing off.
Thanks for listening to Racking Up Rentals where we build long term wealth by being win-win dealmakers. Remember: solve the person to unlock the deal and solve the financing to unlock the profits.
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