This is Why I Like Seller Financing in 2024 – with Michael Zuber

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Folks, we have the author of The Mighty Real Estate Investor, the Small and Mighty Real Estate Investor, Coach Carson. How you doing, Chad?

 

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It’s great to be here, Michael. Thanks for having me.

 

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Absolutely, man. Congratulations on your latest book release. It is awesome. I have gone through it. I appreciated being given a shout out early in the book, so that was really nice and cool and unexpected.

 

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Your work has been a big influence, and you’re helping a lot of people, so thank you.

 

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Awesome. Well, hey, one of the things that I think that you have in your background, your experience that I really don’t is creative financing. And I really do believe we’re in a broking housing market. We’re going to see inventory disappoint, active listings disappoint. We will see days on market rise as the market is just going to be slow. We’re going to be below 4 million transaction for last month and this month, and I don’t think we get back to 6 million transactions for five, eight, maybe even ten years. That said, sometimes people need to sell, and sometimes they need to sell, and maybe they have equity, maybe they don’t. But I think your experience with creative financing is something we should really talk about. And in the first conversation, we’ll do the generic seller financing in topic two. We’ll do subject two, and we will come back next week to do even more. But I think creative financing and your background in it will serve you and your followers extremely well. So why don’t we dig in? Yeah.

 

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I’ll give a quick background on why this was relevant to me. When I first started investing, everybody’s got a different path. I got out of college. I didn’t have a job. I was not a w two earner. I had decent credit. But for me to walk into a bank and get two or three loans was just, like, off the table.

 

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Sorry, son.

 

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Yeah, that’s it. That’s it. I thought I was in good shape because I got A’s in college, and they’re like, no, this is the real world.

 

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We look at money report card.

 

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So anyway, I had to get creative, I guess, is the main point. And it was both a disadvantage and an advantage for me. The disadvantage, of course, was like, all right, I got to think outside the box. And I like to use the metaphor of a real estate investing financing toolbox. So I had an empty toolbox in the beginning. I didn’t have all the traditional tools, so I had to go out and find these different tools seller financing, subject to lease options, a lot of different private money using self directed retirement accounts. So these tools that you might not be your first choice, typically, especially if you have good credit, you get put 20% down. The advantage for me was, though, I learned how to use those. It’s like, I did that weightlifting. I did that Olympic training. And so I needed it. Most people didn’t. But in markets like this, I think you’re right. This is the time when creative financing shines. And I would just also mention, historically, perspective wise, if you study the history of real estate, the seller financing was a big deal. And all these variations we’re talking about because there were some broken markets.

 

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So that’s just kind of the context on why I think this is really important. But the thing is, you got to get your head around a little different approach. Almost like a carpenter who’s used to using a hammer. You can’t just go and use the same approach that you use with a hammer to use that tool. You’ve got to use a screwdriver, you got to use a saw. You got to think differently. I can get into kind of different angles, but just to tell people the basics of what seller financing is, I’ll compare a traditional transaction to a seller financing transaction. So, like a traditional transaction, you go in, we all know you have a seller, you have a buyer. The buyer brings the money. The buyer uses their down payment money. So that’s just money they have from the bank and they go to a third party lender. They go to usually a big institutional lender that lender loans them the money, and then they sell their loan off to Fannie Mae, Freddie Mac, all sorts of secondary markets. That’s a typical transaction. So the seller just gets all their money. They walk away.

 

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That’s the transaction.

 

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The seller doesn’t care where the money comes from.

 

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They don’t care. It could come from cash. It could come from the bank, it could come from a private lender. Doesn’t matter. The point is, the seller gets their money. That’s the typical situation.

 

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Yeah. And then the last thing on that, just to round it out, is whoever is the debt gets a secured position, right. The note is recorded against the deed.

 

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Exactly. So there’s the debt, like what you owe. So if you owe $500,000, you owe that to the bank, and then they secure it with a deed of trust. A mortgage depends on the state, what you use. But that’s kind of a vanilla situation, right? Most people, if you get into real estate, you at least learn that typically the difference between seller financing is, let’s take that same situation, but you talk to the seller. And let’s make it real simple here. Let’s assume the seller owns that property free and clear. They’ve paid their debt off, which I don’t know if you know these stats. I haven’t looked at them lately, Michael, but there’s a surprisingly large number of people who have owned a property free and clear. It’s not insignificant.

 

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No. By some accounts, it’s over 30% of residential properties are owned free and clear. 30%.

 

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Big chunk.

 

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Ten. That’s a big chunk.

 

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It’s a big chunk. So you have a lot of properties to shop for that are possible for this. And so if you talk to the seller now, I’m not saying they’re all going to agree to this, but let’s just assume that you talk to a seller who agrees to do this. You could give them that down payment or not. You could negotiate a smaller down payment. It’s all negotiable with the seller. And then they, instead of taking their chunk of money and putting it in the bank or investing in the stock market, they could agree to take that portion of the purchase price and let you make payments to them over time.

 

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Yeah, no, I think it’s wonderful. Just a couple of other differences between the vanilla and seller financing in this example. And again, we’ll get into subject two in the next video. One is you can negotiate better terms, right? The bank, if you’re going to get your traditional loan, you can always go type in mortgage rates or whatever, and you’re going to be within an 8th or a half of that. I’ve done deals where the sellers take substantially less interest rates. Second, in a traditional practice, you have to get an appraisal. Why? Because the lender wants to know their position is secured. I don’t know if you’ve done this, Chad, but I’ve actually overpaid on a seller financing deal. I thought the building was worth 100. I paid 120. Why the heck would I do that? He gave me a zero or maybe a 1%. Mortgage. Gladly keep that property forever and overpay. So there’s other differences, but at the end of the day, the seller is the bank. Their position is secured by the same thing a note, a JIT, a mortgage, whatever it is in your state or location. But the beauty of it is you get to play with price and terms.

 

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When you go to a bank, the terms are kind of set. Hey, you want our money? Here’s our terms. But with seller in the equity, play with down payment, play with term, play with the balloon payment or no balloon payment. Interest only fully burdened. There’s lots of levers that you can pull.

 

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I’ll give a real quick example. I bought a property in 2009, middle of the Great Recession. This gentleman was in his eighty S. The property was a piece of junk. It was a great location, but it has eaten up by termites, needed all sorts of work. And he was stuck on price, though, which is not uncommon today, right? People are stuck on price. He wanted $125,000. This property is now worth about 250. He wanted 125,000 for the piece of junk that needed $40,000 worth of repairs on it. And so I paid him his price. I gave them a cash offer as well. I made multiple offers. Cash price a lot lower. I said, all right, I’ll pay you 125, but I have to pay you like $3,000 down. I’m going to do another 40,000 repairs and I’m happy to show you that. Prove that I’m going to do that, and I’m going to pay you 0% interest. $200 per month for the first year, 300 for the second year, $400 a month for the third year until the thing’s paid off. There’s a whole negotiation story behind that. But the point was that the interest rates at the time were like, I don’t know, 2009, probably five or 6% somewhere in there.

 

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So you can get 5% or 6% less than the going rate for market. Interest rates is not unreasonable. 3% less definitely doable. So this is why this is one of those levers that if you understand quality properties, all the things you teach michael, how do you find a good property? How do you find a good location? How do you run the numbers? Well, if you can change the lever of the payment interest rate, the amount of down payment, like you said, you can overpay a little bit. You don’t have to, but you could overpay a little bit in order to get great terms if you’re going to hold that property for a really long time. And that’s something that a lot of people don’t get their heads around until you really start studying this. Yeah.

 

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Again, the beauty of seller financing is it opens up a whole nother avenue of negotiation. Now, you typically do got to talk with the seller doing this through multiple agents. Right. Buyer’s agent, listing agent. Adds a level of complexity. I will admit to never successfully doing one through multiple agents. I have done a couple through a single agent. The listing agent. Right. I went direct to the listing because the more people you have to educate this, the more people that can mess it up.

 

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Yeah. I’ve done one through one agent. I’ve had multiple agents. Never happened. 21 years. Not to say it’s never going to happen, but if we get in a seven, eight year market like you’re saying, you’ll see agents be a lot more motivated back in the they would actually put their commissions into the seller finance sometimes just to get a deal done.

 

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Right.

 

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But that’s not the case right now.

 

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Yeah. Again, folks, if you’re going to go back and research some books, there’s a gentleman named Robert Allen that wrote a book called Nothing Down for the 80s. It’s way out of print, so it might be expensive. That was that’s the environment I think we’re going in is there’s going to be a dearth of transactions. There are going to be people that need to sell that don’t have equity, have equity, but maybe they’re stuck there’s. Opportunity is coming for the people that are skilled up on seller financing and creative financing. Chad, thank you so much. We will get into subject to next. Take care. Great.

 

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Thanks, Michael.