Can You Get Better Financing Terms From a Bank Than a Seller?

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Many investors scoff at the idea of seller financing, saying, “Nah, I can get better terms from a bank.” But is that true? In this episode, Jeff dissects this question, and compares the terms of bank loans to the terms of seller financing loans, to get to the truth. In one scenario, the applicant borrower has no say over the loan terms, and in the other scenario, the borrower has say over every element of the terms.

Episode Transcript

Sometimes when you talk to real estate investors who have never been involved with seller financing about the idea of doing seller financing, they often say things like, but I can get better terms from a bank. But is that true? In this episode, we’re going to dissect that conversation a little bit and I’m gonna show you that that is not a true statement at all. Let’s keep the theme song we’re going to dive right into it.

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 for joining me for another episode of Racking Up Rentals. Show notes for today’s episode are at www.thoughtfulre.com/e70. Please do us a massive favor by hitting the subscribe button in your podcast app. It really does help fellow thoughtful real estate entrepreneurs to find the show onward with today’s episode.

So recently, I was chatting online with a friend and coaching student of mine. And he was telling me about a seller conversation he was having. And the seller said, Well, you know, yeah, I would want this and I’d want that price. And I want that down payment and this interest rate. And my friend said, Well, he said to me, I need to find a way to tell them no, because I could get better terms from a bank. And it just made me stop and think but could you because I actually hear that sentiment, quite a bit from real estate investors that they don’t take the idea of seller financing, or really any type of private financing. But let’s call it seller financing specifically that seriously because they feel like they could get better terms from a bank. So we’re gonna spend this episode dissecting that a little bit. And if that is your mentality that you could get better terms for bank, I want to give you some good news: You, my friend, have an opportunity to learn more about what terms really are in this episode.

So first of all, I want to just point out to be fair, that better is relative, right? What’s better for you and better for me are probably very different things, you know, better shoes for you or not better shoes, for me a better car for us not better car, for me. So better is relative to each person and what each person is trying to accomplish. But that said, when people say I can get better terms from a bank, by and large, you know, 99.9% of the time, what they’re simply saying is, I can get a better interest rate from a bank, they’re really boiling the whole concept of a loan down to interest rate. And it’s easy to see how that happens. But that would be a mistake of massive proportions. So let’s just dive in here a little bit and compare and contrast and take a look at what terms really are.

So when you go to a bank, and you apply for a loan, first of all, you are applying for a loan, we’ll come back to that in a moment. But a bank has a loan program, that loan program is pretty much one size fits all, they might have a little variation here or there for you if you want to do this or that. But it’s like a waiter handing you a menu and the whole the whole menu is got one, maybe two items on it. You have no say in what is on that menu. Literally zero, say your opportunity is to say, Yes, I will take that or No, I won’t take that. But you don’t have any say in the terms of bank. The mortgage lender doesn’t sit down and say all right. How much down payment Are you feeling like making? What would be fair? Do you think on an interest rate? Obviously, none of that is happening. When we look at a bank, we are doing business on their terms, no pun intended, but it’s really like the terms of engagement. So let’s take a look line by line item by line item at what makes up those different things.

First, first of all, is an interest rate, of course. So when you’re doing business with the bank, the bank says well here is the interest rate. This is the program might vary a wee bit based on your credit or something like that, but they don’t say how do you feel about this interest rate they say this is the interest rate then they say

This is the down payment required minimum down payment required for this loan program. So the flip side of that is the LTV, what is the loan to value that this bank is willing to go? also no say in that one. They say at closing interest will begin accruing on this loan? Well, no say in that one no ability to delay the deferral or delay the accrual of interest for a month or two, nope, there’s none of that happening, that they’re saying the interest starts accruing at closing. They also say, here’s how this loan is going to amortize. And in most cases, of course, that amortization is going to be over 30 years. But they don’t say, Well, hey, what do you think about 35 years? What do you think about 22 years? It’s like, well, there’s 30-year program, and there’s a 15-year program, pick, pick your poison.

They don’t really give you options on maybe what comprises your payment, or how you could make any flexibility decisions throughout the course of that maybe you can make some extra principal payments through that loan. But how does that affect next month’s payment? Not at all, it just means your loan gets paid off a little bit earlier. They provide you with a collateral agreement. They say we’re loaning you money for this property. So if you sell this property, you got to give us the money back. Okay. Fairly standardized, but no flexibility on that. Really no negotiating on that. And they say, Okay, if you would like to have the privilege of us have entertaining your application for this loan, here’s our qualification process. Here are all the exact standards you need to meet. Here’s our process. Here’s our requirement. It involves an appraisal; it involves filling out these papers. It involves us looking at all sorts of information about you, including your DTI, I have come to learn recently that DTI or maybe the three letters that get the most focus in the traditional real estate investing worlds, not something that’s very much on my radar screen, which we’ll talk about in a moment. But they say, here’s how we go about doing this.

And in some, you while you may end up with a loan, that is a good tool for you to use, because that’s really what a loan is, right? alone is a tool. A loan is not really intrinsically good or bad, it kind of matters what you’re doing with it, right? If I hand your hammer, a hammer isn’t intrinsically good or bad. It’s just a matter of what you’re going to do with this hammer, you’re going to go smash somebody’s windshield in Are you going to build a Taj Mahal with the tool, but I’ll tell you, your skills as a negotiator. They don’t have any impact in that conversation, right? It doesn’t matter how much influence you have, how good you are at asking the bank questions, listening, understanding the bank’s needs know, you are going to take or leave their particular program. And this loan, when you’re talking to a bank is completely independent of the rest of your transaction, right? You may have negotiated the best deal ever on the property itself. And that has absolutely no bearing on this loan conversation whatsoever. So that’s what it’s like to work with a bank. And we’re all familiar with that. We’ve all done that before. We’ve all stumbled through it, we’ve got it done. And we understand what it is. The problem is when we think that’s really the only way to go. And when we think anything else could not be as good. The headline of working with a bank is they have 100% of the say the only decision you get to make is whether you take them up on their two-item menu or not. So let’s just compare and contrast them. If you are then working with a seller to provide financing for this property that you are buying with them. Well, first of all, that conversation starts with a blank sheet of paper, there is nothing pre-determined about that conversation at all.

Now your seller might have some thoughts about some things that are important to them. But the point is that you have a say in every single, little tiny detail of that loan. I like to think of this, I think of this visual very often myself, I will even occasionally I did this yesterday with a seller paint this visual picture for them. Because I just think it’s a very apt analogy. If you have ever seen a movie or picture or know somebody who works in an audio studio, they’re sitting in front of this mixing board, it might be a mixing board on a computer these days or it might be a physical one, but it’s a board that’s got about 1000 dials and knobs on it. And every single one of those dials and knobs is a little different element or detail of our loan negotiation that could be adjusted so you can grab this one over here and crank it to the right and then this one over here you might just adjust ever so slightly about it seems like about a millimeter to the left and this one. Just a tiny bid and this one, we move quite a bit. Well, every turning of the dial, you have something to say about when you’re dealing with the seller, you have a say, in everything, your negotiation skills can have a major impact on this, and not just your negotiation skills. But in this case, whereas with a bank, that loan application, the prospect of getting that loan lives in a vacuum separate from your transaction, separate from anything else related to the purchase of the actual property. Well, in this case, your loan negotiation is just another component of your overall purchase with the seller. So if you are really helping the seller out in a certain way, if you are tailoring a transaction that gives them exactly what they need, if you are giving them the price that they’re obsessed with.

And if you are buying this in a certain manner, in a certain timeline with certain contingencies, or lack thereof, all of that stuff is factored in. So your loan is just part of a much bigger picture when you’re working with the seller. And if you are helping the seller out by offering them $10,000 more than you both know this property is really worth, then that counts a lot in your loan negotiations. And so not only do you have a say, but you have a tremendous amount of say, in those situations. So let’s break down the same elements. Well, how about an interest rate when working with a seller? literally anything that you both agree to? Some sellers don’t even necessarily want to earn interest. Others want other certain things others don’t care about the interest rate at all. What they’re what they care about is getting a certain payment. So you can just kind of work backwards to create an interest rate based on the payment that they want. Interest Rate 100% negotiable. down payment Well, 100% negotiable now, in this case, maybe there’s some existing debt that needs to be cashed out on the sale of this property. But there is no standard approach to this. 100% negotiable I would say generally speaking, I find that seller financing loans result in a lower down payment for me a higher loan to value. This is an important point too. We’re not worried about a bank’s LTV guidelines; we are worried about what the seller thinks is reasonable. And what will work for the sellers situation. How about the accrual of interest?

Well, back with the bank, the interest begins accruing on the day of closing first payment is due 30 days later, no big surprise there. In this case, does the interest have to begin accruing at closing? No, not necessarily. It could that would probably be the default standard thing to do. But this is a bigger picture conversation with the seller this loan is just one element in your overall conversation with them. So maybe you both agree that gosh, you know, there is a problem tenant here, I am buying this property knowing that there’s a problem tenant. So we’re gonna have interest begin accruing the day that that tenant moves out the payments will be due 30 days later. Oh, okay. So in other words, you have a lot of say, in that term. How about the amortization? Gosh, there doesn’t necessarily need to be amortization at all, maybe your payments are interest only, maybe it’s fully amortized over five years, I’ve had a loan that did that $200,000 loan, they amortized fully over five years, with five payments of $40,000, once a year, zero interest, no monthly payments. That is extremely unique. But the point is the amortization can be whatever you want it to be, you want to amortize it over 18 years and three months, Okay, no problem, you don’t want any amortization, you want to have a minimum interest only payment required. And then you have the option of making additional principal payments at that time. Oh, and if you do make additional principal payments, that means your outstanding balance has decreased. And now your interest calculation next month is going to be smaller, because there’s an outstanding principal balance that is smaller, very, very different than the bank scenario. Better worse, I don’t know, that’s up for you to decide to determine. But you have a lot of say in that. Well, let’s talk about collateral.

Maybe the collateral agreement for this property has the property you’re buying as the collateral for the loan, that would probably be the most obvious and standard way to do it. But maybe it doesn’t, maybe your primary residence is going to be the collateral for their loan, maybe a second position deed of trust on another property you already own is going to be the collateral for their loan. Maybe they don’t really want to be paid off and they’re happy to have you changed the collateral that secures their loan throughout the loan. Maybe there’s no due on sale clause at all. Well, maybe you have some say in that with this seller. How about the qualification the application process, the Credit requirements and the DTI – debt to income requirements. Well, with this seller, I can tell you that all sellers are different. But in my experience that my sample size is pretty decent. And I haven’t asked, I haven’t been asked by a single seller to fill out a piece of paperwork, applying for a loan, I have provided a credit report a few times, I have provided some basic financial information, I have provided voluntarily tax returns, things like that, but I’ve never filled out anybody else’s form. And all of those things I did voluntarily, just so that they would know that I was going to be a great borrower, I can give them other references. But the point of that is, I dictate that process, the seller often, because they’re not an experienced lender, they don’t have any pre-determined thoughts about how exactly that should work, what they know, is that they need to feel good about you. And they will do what they need to do to feel good about you. If that’s asking for information, maybe.

So if it’s spending time talking with you what you’re already doing with them anyway, that might be good to go as well. Zero times, has anybody ever asked to calculate my debt-to-income ratio. So you have a lot of say, in that process, and generally speaking, that process is going to be pretty casual and very informal. So if we look at just simply the summary of what it’s like to work with a bank and what it’s like to work with a seller, the real difference is again, not that one is better, or one is worse, necessarily. But in one scenario, you have almost no say whatsoever in how that goes down. And in the other case, you have 100% say in how that goes down. And I would like to add a bonus point, that is not to be underestimated. And that is that if at some point during your alone, you feel like you might need to see if you could adjust any of the terms. Or if something like I don’t know, say a pandemic hits the world, and you are worried about your rental income, and you need to negotiate a little bit of flexibility with a lender. I personally don’t know about you. But I would rather call Bob and Susan and go swing by their house and sit on their couch, the same couch I sat on when I negotiated to buy their property in the first place. And see if we can’t work out something that would be a win-win that would allow us a little flexibility to get through a rough time, rather than going down to the local Wells Fargo branch knocking on the door, saying hey, can I talk to a loan officer? and have that person say, Well, let me look at our policies and procedures. And no, unless the government tells them they need to offer some kind of a special program. They’re not going to be doing that. So if the crap hits the fan, so to speak, and I needed to scramble to create a solution to that I would rather scramble with regular people than with giant institutions. So let’s bring it back to this. Is it possible that you could get a lower interest rate from a bank? Oh, yeah, for sure. It’s not guaranteed. I’ve got plenty of interest rates with sellers that are just as low if not lower than bank rates. But it is possible you could get a lower interest rate from a bank. Yeah. But that would be like judging a whole person. And the complexity and nuances of a person based on the color of the belt that they chose to wear that day is just one element in a much bigger picture.

When you have a say, my friends, that is better. Now, better is relative, as I mentioned at the beginning, but I would argue that when you have a say in a conversation, you already have an advantage over a situation where you do not have a say. So the next time you hear somebody say, Well, I can get better terms from a bank. Just stop and think, maybe encourage them to look at the broader picture too and say, What do you mean when you say that? What are all the things that you think would be better? And when we consider the bigger picture, I would argue that in many ways a loan from a seller is a better tool. But either way alone is just a tool. And a tool is only as good as what you decide to build with it. But don’t judge a tool by its simple interest rate.

That is it for today’s episode of Racking Up Rentals. So again, show notes for this one are going to be at www.thoughtfulre.com/e70. Please do us a big favor by hitting that subscribe button. I would so appreciate that. And if you could take just a second to rate and review the show on your platform. That would be great. Don’t worry about giving a Shakespearean level review just a couple words selling what you think would be fantastic.

Did you know too that we have a Facebook for ourselves our thoughtful real estate entrepreneur community? We do, it’s called Rental Portfolio Wealth Builders. We’d love to have you join us over there. You can search Facebook for that or just type group.thoughtfulre.com into your browser. And the magic of the internet will take you right there.

If you liked this episode, please take a screenshot of it from your phone post that to Instagram and tag us @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 a win-win deal makers. Remember, solve the person to unlock the deal and solve the financing to unlock the profits.

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