Episode #9: 5 Myths of Seller Financing
Listen to the episode on iTunes
In this episode, we identify 5 of the most common myths about seller financing, and then dispel them.
Myth #1: Seller Financing is What A Seller Does When They Can’t Sell Their Property Any Other Way.
Myth #2: Seller Financing Is Offered Because the Buyer Can’t Pay Any Other Way.
Myth #3: Seller Financing Loans Have Above-Market Interest Rates.
Myth #4: Seller Financing Loans Are For Short Terms.
Myth #5: Seller Financing is Only Possible When A Property is Owned Free and Clear.
We begin a discussion about how Thoughtful Real Estate Entrepreneur’s approach seller financing.
Free PDF Guide: 5 Critical Mistakes That Make Most Real Estate Investors Accidentally Lowbrow
We’ve created a free PDF guide just for listeners of the Sleaze-Free Real Estate Investing Podcast, called “5 Critical Mistakes That Make Most Real Estate Investors Accidentally Lowbrow.”
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The theme song is an excerpt of “No More” off the album “Golden Era” by Forest For The Trees. You can check them out on Amazon, iTunes, and Spotify.
Full Episode Transcript
This is Jeff from the Thoughtful Real Estate Entrepreneur, welcome to episode number nine of Sleaze-Free Real Estate Investing a show for those of us who’ve never felt at home. We Buy Houses crowd in the show we take a stand against what we call the lowbrow approach the mainstream guru seminar distressed sellers approach that ends up giving real estate investors, a slimy reputation. Instead we focus on the strategies tactics and philosophies that we call the thoughtful way an enlightened approach to real estate entrepreneurship, to focuses on constantly sharpening the sophisticated real estate, entrepreneurs, three most critical capabilities, number one seller relations skills number two deal architecture skills. And number three, opportunity efficient. When all three of these capabilities are successfully in motion, you can make an excellent living today, and be building long term wealth while creating value for everyone that you touch along the way. Show Notes for today’s episode can be found at www.thoughtfulre.com/E9. So please do yourself a favor and do us a big favor by hitting the subscribe button that’s in your podcast app right now, so that you always know exactly when next episodes are coming out and actually that really helps us spread the word about our podcast as well, and get it into the hands and the ears, as it were, of more and more awesome Thoughtful Real Estate Entrepreneurs. In the last episode we discussed the second half of a two part conversation on relationship wholesaling. So if you didn’t catch that one for some reason or those two I should say, go back and listen to those were making sure that our episodes sort of build on each other in terms of their content. So the more you know about relationship wholesale and the more relevant, all sorts of the future episodes will be for you. And you can also if you’re interested in learning more about relationship wholesaling go to relationship wholesaling calm, where we’ve got a bunch of information you can start out with a free download on that page as well. In today’s main course we’re going to be discussing the five myths of seller financing and begin a discussion about how Thoughtful Real Estate Entrepreneurs approach seller financing so this will continue into at least the next episode, if not even further beyond. But as always, a little bit of food for thought. As Thoughtful Real Estate Entrepreneur, we definitely do like to think about things and be feeding our minds are things to think about. So here’s what we’re thinking on today. Today’s Food for Thought is about the idea of surrounding yourself with people, bigger and more advanced than you are not necessarily physically bigger but more advanced than you are. Further along the path from where you are. So we’ve we’ve probably all heard the expression about, you know, you’re the average of the five people that you surround yourself with. And I definitely believe in that, but allow just want to go beyond that particular quote today, and just ask you the question which pack. Do you hang out with. So this week I was at a meeting for a group that I am a member of called Genius Network and Genius Network is, I think he protocol a high level mastermind group and network group of entrepreneurs doing amazing things like there’s some really amazing things simple, very, very large businesses, and they’re the types of people that you see on the cover of ink magazine Entrepreneur Magazine and the New York Times those types of folks. And every time I’m in one of the sessions, I can’t help but we’ll just kind of look around and go. How did I get in here because this, what I’m doing is not on the same level that some of these people. And a lot of these people. And so I definitely get a bit of an imposter syndrome thing going on and, maybe, you know, maybe you can relate to a sense of imposter syndrome maybe it’s even you know as simple as like sitting down in a seller’s living room to talk about buying their piece of real estate and feeling like they’re going to see right through you know they’re going to see the don’t know exactly what you’re doing and this is my version of that, but I had an opportunity to take a ride. Just one on one with a guy in his car, who’s been part of Genius Network for quite a while, and I was sharing that. I thought with him. And he said, you know, if you wanted to improve your golf game. Who is it that you go and play wish. And the answer of course is you go, you play with people who are better than you. If you want to, you know, increase your drive by 50 yards. You don’t play golf with people who already hit drives as far as you know or people who have drives less than you, you, you, you make sure that you are a small fish and they’re bigger pot. And I started thinking about that and I realized that I have experienced that many times before in my life you know actually in a sports example myself was in middle school, playing soccer. Once I sort of moved up in leagues from being the big fish in a small pond. To play traveling soccer team, I was clearly and distinctly the worst person on the, on my new team, but I got better a lot faster as a result of that and it was a little uncomfortable. And I was a little self conscious but it really to help me progress a lot faster. Around the same time, I had a similar experience in a math class I got advanced to another math class and while it was much harder I got so much better so much faster by being challenged by bigger players around me. So the takeaway for this is. Ask yourself, you know, is it you’re surrounding yourself with you know that you can ask yourself that question on a personal level, which I think a lot of people do and it’s very valuable to do. But, professionally. Who are the people in the real estate community that you are hanging out with Are they the people who are already doing the things you want to be doing. If so that I think you’re on the right track. If not, then maybe try to look up the ladder a couple rungs and find some people who are a little further up the ladder or down the path or whatever analogy, you want to use toward doing the things that you’d like to be doing in the future because they are the ones who will help you grow, just by the proximity to them. That is today’s food for thought. Hey everybody, just a quick interruption to tell you about something we’ve put together for you. I don’t know if you’ve ever heard this funny expression, but a powerful one that says you can’t read the label, when you’re inside the bottle. Well, real estate investing is kind of like that when I got started, I was just reading and listening and studying everything I possibly could and taking massive action based on that, which was fantastic. But it took a long time, like a long time for me to realize that so much of what I was learning was actually pretty low brow I just didn’t have that perspective, and you know you might be in the same kind of position right now. It’s very difficult to know and to see your own situation clearly when you right in the middle of it. So we’ve created a free PDF guide available for download and suggest for you guys as listeners to sleep screen real estate investing, not available to anybody else. And it’s called Five critical mistakes that make most real estate investors will accidentally lowbrow. So you can go get this right now if you’d like it is free PDF guide and pod pod dot thoughtful rt.com pod.com go grab it and see if you were making any of these five critical mistakes. Alright, moving on to the main course of today’s episode, the main course today is about seller financing and specifically we’re going to talk about five myths of seller financing that are just so common out there in the conversation around seller financing seller financing is just a very big and in my opinion, sir. Awesome topic, and we can cover all that in a podcast, not a single episode it’s difficult to you can cover it in several episodes. So that’s our goal but we are going to dissect a few different angles of it. In this episode, and over the course of another couple more episodes as well. And today, first we’re going to start this conversation off by looking at some of the false beliefs and myths that are out there that are super common surrounding seller financing, then and then the very next episode, we’re going to discuss how TREEs–Thoughtful Real Estate Entrepreneurs–approach seller financing entered using to create a thoughtful portfolio of real estate and a thoughtful business. I wanted to tell you a short story of the first seller finance property that I bought it was maybe 2012, or so and I got a pocket listing call from a broker. And oddly enough as a broker does commercial real estate and multi family, and one of her clients happen to have this one particular house, and the house was had been a rental property, and the last tenants had left his house and the landlord was just tired, he was just tired of being a landlord he was selling office multifamily properties. And he just sort of had this one left. And so for some reason this broker thought of me and she gave me a call. And this guy, his name is jack. He just wanted out he was so cute weary, basically from the situation to manage his own properties, just tired of fixing things up and people not treating treating his properties Well, he owned the property, free and clear as well so I went and took a look at it with the broker. And I thought, This isn’t my kind of property you know at the time, this is the type of deal that I’d like to do it was a modest house and you know about us neighborhood. And I didn’t have a lot of money to work with. So I just simply asked the broker I said, Do you think jack would be open at all to seller financing, and she said that she would ask. And so she did ask him jack came back and he said that he would and he laid out a few terms that he, you know that he wanted but he wasn’t too demanding about it he really just one out of the property. You just wanted to be done. And he was pretty motivated to, to just move on. And I think because I was coming to him through somebody here and trusted that I’ve just had a had a higher level of credibility for him. So, I did end up buying the property, made a very low down payment, I think, less than 20% or less than 10%. And it was a nice low interest rate, I think it was for four and a half percent or so I’ve since paid this love off, and had a seven year maturity date with a balloon payment was doing, as I recall, interest only payments along the way. And so this was my first son My only experience with seller financing and I thought well this is just how it works you know i mean someone comes along, they’re motivated, they own it free and clear. And he just wanted to be done with the property so he made it super easy for me, and I was in easy negotiation. And I just thought, hey this is how it always works. But what I’ve now realized is that that was really luck. It was really lucky combination of things that I experienced it just sort of found myself in the right place at the right time. Having met that broker recently having told her what types of things I was looking for. And it really was just sort of a lucky bit of timing and circumstance. This situation sort of reinforced to me. What I haven’t read what I’ve heard and whatnot about seller financing that it happens just when somebody can’t really sell the property easily any other way. They’re just super motivated they want to move quickly. They’re kind of reluctant to do so but they just you know it’s worth it for them to do it because they’re just so ready to be done. But it turns out that this this experience you know my sample size of one here which made me think I knew everything about seller financing. Turns out it wasn’t true at all. And for the next three or four years. I never really pursued seller financing very aggressively. Unless I thought that I had those exact circumstances in the cellar and if I didn’t sense that those things were there you know strong motivation to to sell just feeling we’re tired, owning the property free and clear. I didn’t even. I didn’t even consider seller financing for those deals I didn’t even propose anything that involves seller financing, because I thought oh well there’s sort of a template for when seller financing as appropriate. And it took me years actually to sort of default my level of sophistication and my understanding, around seller financing and what it is. And when it works well and what you know what things have to be true for it to work, and other situations when it might really solve the sellers needs well. It took me a long time to kind of really figure that out and as I look back over the course of those years in which I was not fully understanding seller financing I realized that I missed out on a lot of deals I’m sure that I did because there probably was seller financing potential and so many of those deals that I just passed over, because I thought I understood exactly this perfect little predictable cliche template of when seller financing works. And when it doesn’t, and I was wrong, and I’m sure they miss out on tons of opportunities. So let’s just talk about for a second what is seller financing from a Thoughtful Real Estate Entrepreneur’s perspective. You know, it’s really a broad thing. So I’d like to just simply define it as a seller is going to participate in some way. In the financing of the purchase and there’s lots of different ways that that can happen. They can be involved with providing some of the financing partially part part of the financing. They can be involved by providing all of the financing. They can be involved with either part or all of the financing are short basis or on a longer term basis. There are lots and lots of different configurations and this is not actually meant to overwhelm you. Even though there are so many different ways we could be configured but rather simply to offer this perspective. Here I think this is the most important point. When you buy a property, one way or the other, you are buying the property. And you’re also buying financing. Even if it’s your own cash that you’re using to buy the property, you are buying the financing, one way or the other, because in the event that you’re using our cash there’s an opportunity costs that cash right it could be singing sitting in a bank earning a tiny bit of interest. It could be used for something else you could spend on anything else. There is an opportunity costs so you are buying financing and buying a property both at the same time. And in the seller financing scenario. What this means is you were buying at least some of the financing from the same person who you’re buying the property from everybody gets so focused on the price for property but depending on your, your time horizon for owning the property and what you plan to do with it. The terms, the seller financing terms and you’re able to negotiate, very well may be far more important financially than the price of the property that you are buying. The other thing that’s really notable about seller financing from the perspective of a Thoughtful Real Estate Entrepreneur. Now, this probably doesn’t really matter to people who are not in the TREE camp and category but the thing that’s really cool about seller financing is that it takes the purchase and sale conversation and makes it like three dimensional because it’s impossible to talk with somebody about seller financing, without really digging deeper with them, without really getting them to open up more broadly about what they’re trying to accomplish. Because, in order to negotiate all the little terms on seller financing. Everything from the interest rate two types of payments of a balloon payment. It just naturally opens up a much deeper conversation. And so it’s a really nice thing, because that’s what we as TREEs want to do anyways have a better, more real and more meaningful conversation with our sellers in the first place so seller financing is really nice for facilitating that. So let’s start talking about myths, in general, when I meet people in asked me what I do within real estate investing and entrepreneurship. I often say, I’m kind of a specialist in off market purchases and a specialist in seller financing. And when they hear that I’m a specialist in seller financing they start to ask me questions about this and that and what it means that seven, as I listened to their questions and their comments. It occurs to me that there are just so many misunderstandings about seller financing. So many just wildly generalized assumptions that really are myths and are just totally untrue. So I want to start a conversation by sharing some of the most common myths and just talking about how we can chat with those myths right off the bat. And you’re going to see a theme here. You’re going to see a theme in these myths that seller financing happens because one party has more leverage than the other party. It’s a creep like it’s a lopsided situation. And I’ll point that out as we go through these myths, but nothing could be further from the truth. And this is really a scarcity mentality and scarcity mentality is one of the hallmarks of a low brow mindset. You’re going to see that it’s not about when one party has more leverage over the other, they can negotiate certain terms, it’s about when it can be a win, win and work for both parties. So first let’s start with Myth number one, low ground Myth number one seller financing is what a seller does when they can’t sell their property, any other way. A few years ago, I bought a property that’s a four Plex, and it’s a property that we lovingly referred to in my offices scrubs we try to name all of our properties because it’s much easier to refer to them when they have proper names rather than just addresses. And when I bought scrubs, it all started because I had sent a letter of course to this particular property owner, and I got an email back from the seller This is my first contact from the seller was via email. And I never talked to them before. And they said, directly in the very first email communication they sent me that they knew exactly what they wanted to sell the property for what price, and that they insisted on selling it with seller financing, and they were hoping that that wouldn’t be a problem for me but if it was a problem for me. They would understand and no hard feelings but that was very important to them that they sell it with seller financing and if I was open to that and they would talk to me. Of course, you know I’m like almost laughing side because they’re acting apologetically with this email like you know like I was going to be doing them a favor by doing seller financing but it illustrates a really important point, which is that seller financing is not just something you do when you can’t sell your property, any other way. There are lots of reasons why sellers, absolutely specifically want to do that if not actually insist upon doing that. And these folks who I bought scrubs from New before they ever reach out to me that that was a game plan, they wanted to do. So the assumption here. The assumption that’s baked into this particular myth that seller financing is what a seller does when they can’t sell their property in the other way. The assumption here is that the buyer has leverage over the seller, the seller has this property they need to sell it, the buyer comes along, they’re the one who’s willing to take the problem off the sellers hands. So the buyer has more leverage. That’s the assumption, but that is just not a true thing here at all, there’s a lot of assumptions actually baked into this myth. It really this myth implies that all sellers would prefer to just be cashed out upon sale implies that the seller, if they’re going to provide seller financing at all. will do so reluctantly, and they will do so gradually, you know they wish they didn’t have to but so because they can’t do it any other way that they will do so. It implies this huge assumption that it will need to be as short of a term as possible to because again the seller wants their money back sooner than later. Right. Isn’t that what also as one implies that the seller or the property must not really be saleable at this point. Maybe that’s because the market is bad or because the property itself is bad. But as we can see from the case of scrubs and lots of other similar examples. Those things don’t have to be true at all. Sometimes a seller just wants to do that because they have their own reasons for wanting to do so as well. Now it is really important to point out though, that not all sellers. Come pre installed with an understanding of all the ways that seller financing could possibly help them. In fact, most of them don’t. And so there are a lot of sellers themselves who really buy into the myth that seller financing is just what you do when you can’t sell your property, any other way. And those people then believe that because they just haven’t had an opportunity really to think it through from any other perspective so sometimes as a TREE, your job is actually to educate them about what some of those benefits could be to them, should it be aligned with what they are trying to accomplish. So it has a lot to do with how much experience. The seller has maybe how much sophistication they have especially around financial topics and tax consequences and things like that. So seller financing may happen because it’s the sellers preference for a lot of reasons. So let’s just go back to the story of scrums for a moment to illustrate this, you might be asking yourself, why was it that they insisted. From the very first email that we do the transaction. This particular way. Well, in their case, they were very very interested in a couple things. They wanted to defer their capital gains obligation. They didn’t want to get a big capital gains tax bill, the year that April after if they sold this property to me. And they did not also want to have to go and find a 1031 exchange replacement property. They were ready to be done being landlords, with this property and didn’t want to have to replace this responsibility with another responsibility but also to want to pay all their capital gains at once. So they wanted to structure the sale in a way that was going to sort of feather out the timing of when they have to pay the capital gains over time. The other thing that was important to them is that they wanted to continue generating income for their retirement. This property was their source of income and if they sold the property and just that cashed out, regardless of the tax consequences. Then they’d be scrambling to find something to do with their money in order to generate an income. And in today’s market where very conservative investments like bank deposits are yielding almost nothing in terms of interest. It’s really difficult to take a lump sum of money and generate an income safely out of it. So between those two things that those two reasons. They wanted to insist upon selling the property with seller financing. And another thing too, that is important and significant to point out is that these sellers have scrubbed had done this exact same thing before. And anytime somebody has done something before doing it again a second time or third time or fourth time feels way more familiar to them, obviously, and so they were already comfortable with this particular approach. So, it didn’t take any persuasion on my part, or even education to help them see the benefits of this. They came a pre installed from their previous experience in their previous research on the benefits of seller financing, with an expectation and a requirement that this is how it goes and again for them. This year, with this particular property. This number two is that seller financing is offered because the buyer can’t pay in any other way. So in this case we have a overgeneralization and assumption that the seller has leverage over the buyer because the buyer isn’t able to fund or finance the property in any other way. So, the assumptions here that maybe the buyer has bad credit or they can’t qualify and other ways or they don’t have enough money to put down. But in the truth is that this is completely a myth because the buyer very well may be able to pay in other ways. It’s very possible that the deal, maybe structured this way, because it’s what helps the seller game what they want most not because it’s what allows the buyer to buy a property they couldn’t otherwise but if we go back to the scrubs example I just mentioned in the first myth. The same thing is true here. This is not a situation where the seller financing is offered because the buyer can pay any other way, it’s, it’s a situation where the seller financing is offered, because it is what allows the seller to accomplish their goals in the best manner. Now, we can’t forget to acknowledge the fact that when the seller does provide financing. It is generally considered a good thing to the buyer from their perspective because when ever buyer does not have to go to a bank to get a loan, take the time and energy to apply jump through the hoops way and worry about an appraisal and wait until the last minute to get a final approval. The buyer can avoid a lot of brain damage as they, as we say in the business. When the seller provides financing so it is considered certainly a good thing to the buyer, in most cases, it’s also important to note that the seller may feel that they can get a higher price for their property. If they provide the financing, and in a lot of cases, this may be true for many buyers. And I would say that’s very true for myself. I am normally happy you’re happy to pay a higher price for the property. If the terms of getting our. Correspondingly, excellent, in a way that is offsetting the higher price than that might be paid. And as I mentioned before, that it’s especially relevant, if the vision for the property is a longer term vision, if we’re going to be holding it for a long time, the price matters less, and the financing matters more. And if you need an example of that to prove it to yourself, think back to what you bought your first time, and if you haven’t bought your first home for yourself to live in and you will see this when you do, but when you sign all the massive stack of paperwork to buy your first home, and the escrow officer the closing attorney gets to the point where they say, this is the amount you will fully spend over the course of 30 years interest and you realize it dwarfs, the price of the property that you actually are are paying, then that listen becomes very clear, very quickly. Myth number three seller financing loans have above market interest rates. So the assumption with this myth is that the seller has leverage over the buyer. It’s like saying that because the buyer doesn’t have the means to buy the property in another way. And since the sellers sort of quote, doing a buyer a favor. In the price of the money the interest rate will be higher. Right, it’s almost like the seller would be exploiting the buyer because the seller has more leverage over the buyer, but again, nothing can be further from the truth. Now with all of these myths, there are certain, certain situations where the myth is true, but the danger in the myth is with the massive overgeneralization and assuming that this is how it is in all seller financing situations which people tend to do when it’s not that way at all. When I tell people that I do a lot of seller financing. Maybe I’m just meeting a new colleague or a meeting, more of a civilian you know somebody who’s not involved as much in real estate entrepreneurship to hear I do a lot of seller financing they often asked me what my average rates are. And, you know, I’ll answer them obviously don’t calculate down to the, the hundredth of a percentage, you know every day to give an accurate answer but I said yeah it’s probably somewhere in the four and a half or 5% range. And then just looking at this confused look on their face, because it’s shattering some of their biggest assumptions about this they’re they’re assuming that if the seller is financing the property for me, that the seller is doing me a favor and versus charging me a fee to do me that favor and in my particular case and then a lot of cases. Nothing could be further from the truth so it’s just a major assumption that the seller is providing the financing because they have leverage over the buyer. Myth number for seller financing loans or for short terms, again, based on an assumption that the seller has leverage over the buyer. And it’s again also based on this assumption that the seller doesn’t really want to be doing seller financing in the first place that they really are only doing it because they kind of have to, they’re not able to sell the property and another way. So they’re doing this seller financing thing reluctantly, and part of their reluctance is to make it for you know more than a few months, so then they make the term as short as possible so they can get their money back as quickly as possible. But the truth is, sellers don’t always want to get their money back as soon as possible. You know major assumptions victim to this myth. What if the sellers goal is to lock in a predictable income stream for the rest of their lives. Now that’s quite likely it’s quite feasible isn’t it. That would run absolutely counter to this assumption that seller financing loans are for short terms. What if the seller’s motivation to do seller financing is all about tax deferral of capital gains and planning how and when they want to pay the capital gains spill in a methodical and deliberate mare. Consider the idea that the lender actually could refuse to be paid off before a certain period of time. So not only is our assumption that seller financing loans or for short terms not accurate. Sometimes it’s absolutely the opposite of that sometimes the seller will refuse or even prohibit being paid off earlier than they want to be paid off. I mean, have you ever heard the term prepayment penalty. Well, in that situation, a lender, whether it’s a bank or an individual or a seller anybody is saying we don’t want to be paid off before particular timeline, and if you do pay this off before then you’ll be paying a financial penalty to do so. Myth number five seller financing is only possible when a property as opposed to free and clear. So the assumption here is not about a lopsided power dynamic between a seller and a buyer, but the assumptions here around the limits of the structure that could be put in place to accomplish seller financing. Now, I will say, If a property is owned free and clear and there’s no existing debt is certainly simpler. To do that, there are certainly more options, and it’s like a blank canvas with which to paint a plan that works for both the buyer and the seller, but it doesn’t have to be that way at all, and just the fact that there is some existing debt that exists, doesn’t necessarily mean it’s going to be much harder or certainly impossible to find a way to make it happen. Think about this, just as a simple analogy, think, think of a situation where you bought a lot of piece of dirt, where you wanted to build a house, and that law has got some trees on it, trees, actual trees not to be confused with Thoughtful Real Estate Entrepreneurs. If the law has some trees on it, you either need to work around those trees with your building plan your design, and your architecture and either need to work around those trees you need to incorporate those trees into the design, or you need to remove the trees and existing loans are kind of like those treats you either need to work around the existing loans to wipe out the existing loans or somehow you actually need to incorporate them into the plan for how the financing is going to happen. And again, there’s lots of different structures that could be used in in those different situations. If there is existing debt and how much and what type and how many different ones and things like that. And our goal here today is not to get into all of those options because that would become overwhelming and confusing very quickly but the point is that the existence of debt, does not mean that seller financing is not possible. That’s what makes this a myth. Again the seller hears participating and providing some of the financing, in some way, and the existence of debt associated with the property, does not mean that they’re prohibited from providing some of the financing, in some way, there’s still a lot of ways that can happen. Just a few simple examples of structures of how these things happen, a buyer’s downpayment could pay off an existing mortgage so if you went to buy a property you could your down payment could just pay off the existing mortgage of the seller and the rest of the property that the balance could be put on a promissory note and paid off by you to the seller. Over time, with seller financing that existing debt could be kept in place through iraq dumped. It can be kept in place through a subject to transaction where the sale is subject to the existing financing, or it could be accomplished through a lease option and again lots of different paths here, and our goal today is not to discuss each of those but the point is, there are lots of different ways that you can accomplish that. The important point that I want you to remember is this the seller of this property has some equity, and some proceeds are coming their way, if they sell the property. The big question that we’re really addressing is regarding the equity, and the proceeds that they have coming their way. What are the different forms and structures that they could receive those proceeds. It could happen all at once. It can happen over time. It can happen in a million different ways, over time, I want to tell you the story of a seller, that I worked with, whose property I bought with seller financing, so his name was Mike and a microphone, a small little house in. So So condition that that’s probably putting a generously. But in a great area, and improving areas on the, on the fringe of a really good area, and was in itself an up and coming area, his rent was way under market, he was charging about $750 for ram when it could have easily been 1500 dollars so use half of the market rates for it. I got to know Mike a little bit and we kind of do the thing that we call slow dancing for several months. And after that period when we finally got to the right spot I made my proposal that involved seller financing, and she had given me lots of indications along the way that that would work for him. And that’s of course why I proposed it so he seemed to like it when I shared it with him, and with his wife I was at their house at the kitchen table and I shared it and they seem to like it. And he said all right well let me run this by my advisors and just think about it and I’ll get back to you, so not an uncommon request and absolutely reasonable. So he calls me one day a couple days later and then he says Jeff I’m sorry I just can’t do it. I guess we’re just gonna have to keep the property. And I’m confused. So I asked him why, and he says that he spoke with his accountant and his accountant who he trusts says it’s just not a good idea for him, that this is not a structure that makes sense for him, and there’s too much risk involved. So I got off the phone with Mike and I was, I was upset I was disappointed. And I was steaming, you know that I lost a deal. And I just sort of sat on those feelings for a day or so, but about three days later, I decided I need to call Mike back I can’t, I can’t just let this go without a fight because I don’t think about the CPA accountant here is really thinking correctly and straight about all of the benefits that this really, truly honest to goodness has for Mike and his wife, so I called my back I said Mike, I would like to come see you again man Please come back. I want to chat with you about something related to this. And he said, Sure, come on by. So I went back to their house and I sat back down at their kitchen table with them. And I said Mike. I’d like to respectfully push back on the advice that you got from your accountant. And here’s why. I would like to push back on it. I showed him the math of his current cash flow. I created a spreadsheet for him that showed his current cash flow so took his income, $750 and read subtracted the expenses to manage the property taxes, insurance and utilities that he was paying. I subtracted his loan payment, because he had some outstanding debt on this property. And what we saw that he was netting about $125 a month which is obviously not a lot, but it is what it is. $125. And then I showed him the income that he would be receiving each month from the promissory note that I had proposed. And that was going to be more than double his current cash flow, and he would achieve this more than double cash flow, without any management responsibility on his part at all, whereas right now he manages this property that blew it was 10 miles away. And whenever something comes up he personally has to go over and take care of it. And so, I respectfully said, look, I think that your CPA is looking out for you, but I don’t think they’re looking at all the different aspects of this for you. And at that point that opened up his mind and made him feel like he actually really wanted to think for himself. So again, he took a day. He spoke with his wife about it, and they called me back the next day, and let me know that they wanted to move forward. So he took my offer. We wrote the deal up and I bought the property. And to this day. Mike is a great beneficiary who I pay every month without fail. So here’s how it ended up being. She had about $50,000 on this property. And I was buying the property for him for about $175,000. I looked at the many different options and how we could handle this. It was a bank loan in place and so we looked at. Could we wrap the existing financing. Could we buy the property subject to existing financing, what are the different options, and ultimately what we decided, is that we would simply make a down payment that was big enough to pay off his existing loan. So we gave him a down payment at closing of $60,000 which is enough to cover his $50,000 of existing debt cover his bit of the closing costs and then give him some lunch money walking out of the closing office, and $60,000 is more than I usually want to put down on a property of that of that size right that’s about a third down, which is more than I wanted to do but given the various options we had for handling the existing debt he had on this property. That’s the one that seemed to clean us to me. The easiest and I had the resources to do it, it matched his goals and his needs the best as well. And that’s what we, that’s what we did. Then we put the balance of that of those proceeds that I still owed him of about $125,000. On a promissory note with a maturity date 10 years down the road with a monthly interest only payments at about 4%. And so, even today I’m still paying in. On that note, but we handled the, the existing debt that here you have there, and manage to still pull off excellent seller financing that was an absolutely for me, and an absolute win for him. So why is seller financing good for sellers. Now this is a bit of a trick question. And it’s an opportunity that I’m always looking forward to make a philosophical point here. Okay. Nothing is intrinsically good for sellers. And so, it’s a trick question is seller financing good for sellers. It’s not that it’s necessarily good for sellers. It’s a matter of whether seller financing matches with their goals. OK, so again, there’s nothing intrinsically good about it, it’s just a tool to have in the toolbox that you can use to accomplish certain ends that the seller needs to accomplish. There are several common goals that sellers have though that seller financing can be very useful as a tool in helping to accomplish. One of those is about tax. As I mentioned in the scrubs example previously seller financing. If structured correctly, and with this particular goal in mind can be an excellent tool for different a significant chunk of the capital gains tax bill that’s going to come to with the sale of this property, and it’s a way for people to do further games but without needing to do a 1031 exchange which is another way of different those games but might not be what they really want for their life seller financing can also be an excellent tool when the sellers objective is is income, when they want to create an income stream or in this case maybe maintain an income stream, and they want to do so, better rates than deposits, at a bank will provide because not everybody’s comfortable with giving a lump sum of cash and just handling having it to a stockbroker for a speculative securities types of investments they, they often want something that’s more stable more secure. And that brings us to the next point which is that a seller finance note has got an element of safety to it because their investment their loan is is collateralized, and that collateral is actually insured and then insurance names that particular beneficiary the seller themselves, who now has become the beneficiary of a promissory note is named on the insurance policy itself as well so there’s an element of safety, that often meets, one of the things that’s important to sellers. Sometimes, as I mentioned, seller financing can enable the seller to get a higher price for their property, then they feel they might be able to get. Otherwise, because if they’re providing the financing that just makes it easier for the buyer, and they may be able to fetch a higher prices result. So their financing from the perspective of the seller also makes the transaction easier. And it provides more certainty, you know when a seller is selling a property, and the buyer needs to get a loan from a bank there’s a certain amount of risk there. It’s not entirely a slam dunk that the buyer is going to get the loan that they need that the appraisal is going to come back as it should, and all that. And so, the seller eliminates those risks when they agreed to be the bank themselves. So in summary, generalizations and assumptions are really dangerous. And as we look at all these myths that we see that’s what the common denominator is the myths are centered on assumptions about what’s what sellers want what buyers want and the dynamics between them. And anytime you’re making generalizations and assumptions. You are not being thoughtful and that’s an important point that I really want to drill home for you today. What’s amazing The more that you get into this business you realize is that just because you think that you know what you would want, if you were the seller. You can’t assume that the sellers want the same thing. Just because you think you know what you would want. Don’t assume they would want the same thing every situation is different. You may think you don’t want any given situation, but if you were in that situation, you might want something different than you think you would today as well. So the lesson there is so clear, which is don’t make any assumptions about what other people want, it’s best just to guide the conversation that uncovers what it is that they really want and then assess the possibilities. From there, there really is no quote normal, no standard no default way that seller financing, typically works. So there are a few truths around seller financing for thoughtful real estate, entrepreneurs, and this is going to be kind of our lead into the next episode where we’re going to dig deeper into these things now that we’ve looked at some of the myths. Well, let’s look at the flip side let’s look at some of the truths and a few ideas that I want to plant in your mind, as we get ready for the next episode coming out is number one seller financing is one of the ultimate tools in the toolbox of the Thoughtful Real Estate Entrepreneur. So financing is one of the most powerful ways to truly serve a seller, and to create value for them. When seller financing is an option. There’s just so many more ways to create value and really do right by the seller, while also creating a good situation for you as the buyer to what truly matters is not about which party has more leverage or anything like that, what truly matters is asking the question, what vehicle is going to get the two parties the buyer and the seller where they want to go. And if seller financing is a vehicle that’s going to help get both parties where they want to go this fantastic to have it at your disposal. And the last thing I’ll leave you with is the truth that there is so much more to seller financing than what most people think there’s so much more than just the downpayment the interest rate and the term mean the duration of the know, those are the things we first think of but there’s so many little details that can be discussed and negotiated early on in the podcast I described to you the idea that a seller that a transaction of real estate is like a mixing board in an audio recording studio, just picture that mixing board with 1000 little dials on it. But one of the things, one of the reasons, there’s so many dials. Is that seller financing represents a lot of those tiles themselves so the control panel of seller financing is very detailed and there’s lots of little things that can be adjusted in a transaction to really tailor it to meet the needs of both the seller and the buyer and Thoughtful Real Estate Entrepreneurs love to have more dials to work with because making something better and better tailored is a real priority for TREEs. So thank you for listening to yet another episode of Sleaze-Free Real Estate Investing. On the next episode we’re going to be discussing this topic of seller financing more, and we’re going to talk about why TREEs love seller financing, and how we approach it. Again, please do yourself and do us a big favor by hitting that subscribe button in your podcast out. If you would also be so inclined, we’d love to have more ratings and more reviews of the podcasts, especially on iTunes. So, if you wouldn’t mind doing that we’d be very, very grateful. And a reminder that the show notes for today’s episode, including a transcript is that www.thoughtfulre.com/E9. Until next time, this is Jeff from the Thoughtful Real Estate Entrepreneur signing off.
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