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Strategy Saturday
SS8: How to Obtain Seller Financing for Multifamily Real Estate
February 7, 2021
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Charles discusses why seller financing is so appealing and how to obtain seller financing from multifamily owners.

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Transcript:

Charles:
Welcome to Strategy Saturday, I’m Charles Carillo. And today we’re going to be discussing how to obtain a seller financing for multi-family real estate. So why is seller financing so great and you’re taking away the whole aspect of the bank when you’re doing seller financing, right? So this allows you to be more creative in your deal structuring, right? You’re still gonna have a mortgage on the property, but you don’t have to overcome all the hurdles that you would have to with being approved and funded with a traditional commercial bank. You can, when you’re structuring it, do low down payments, low fees or no junk fees, you’re going to get junk fees on all sides of the transaction. When working with a mortgage broker and then working with a bank, whether what they call them points, or if they’re a loan origination, or you’re paying ’em $10,000 or 1%, whatever’s higher to your mortgage broker for finding you the bank, all of this comes out of your pocket and you can structure it.

Charles:
So you don’t have to pay this when you’re doing seller financing, because you’re going right to the lender. It’s not going to show up on your credit report and to be able to do longer terms. This is a great thing. This is one of my favorites because when you’re working with a commercial bank, it’s usually five or 10 years. Some of them will go longer, but majority of commercial banks are going to do their loans at five years or 10 year terms. And now since you’re negotiating and proposing directly to the lender, you can do 10 years, 15 years, 25 years, 30 years, whatever you agree on you can do. And we do interest. Only interest only is fantastic where you pay interest only monthly, and you don’t have to pay any of the principal. Okay? It’s much cleaner when you’re dealing with the seller.

Charles:
When you’re sending them just that monthly, there’s it doesn’t have to be anything complicated. It’s very simple. So a million dollar loan, and you’re sending them 1% a month. Let’s say it’s very clean, cut and dry. There’s no prepayment penalties. This is another huge thing. Another junk field, let’s say from a commercial bank. And what this allows you to do is untraditional, like say a 10 year traditional commercial mortgage from a bank will have, what’s called a step down. Typically we’ll have a step down prepayment penalty. And this is usually denoted as five, five, four four three three two two one one. Meaning the first two years, it’s going to be 5%. They’re going to charge you. If you pay off that mortgage, then next two years going to be 4%, then 3%. Then 2% than 1%, you’re paying a junk fee, no matter where you pay off or refinance throughout the term of the mortgage.

Charles:
This is something you can avoid when you have seller financing, okay. Allows you to purchase properties that you wouldn’t be approved for, for a traditional mortgage. Now, some banks will have a different products and services for construction loans, and they might go into some of those non stabilized and heavier repair properties. But a lot of them will not. Or they’re going to gouge you with short terms in high interest rates, maybe even variable as well, and allows you to buy non stabilized properties. So properties with less than 90% occupancy or heavy repair, high renovation heavy lifts as we call it properties as well. Okay? Your likelihood of finding seller financing for a deal is for properties that are owned for 15 plus years, preferably 20 plus years, you’re really looking for mom and pop sellers. You want them to have high equity minimal. If any debt, when you’re talking to these sellers, you’re going to build rapport with them.

Charles:
And you’re going to ask them what they’re going to do when you buy the property for them, what are they going to do with those proceeds from the sale? Now, if they’ve owned a property for 15 or 20 years, they’ve depreciate it almost to the max, which means they have minimal depreciation and minimal tax deductions left. Since they’ve been depreciating it so long, they’re most likely only going to be able to keep 65 or 70% of the sale price of that property after taxes. Now they know this property they’ve been owning it for decades. They still want cashflow. Okay. It’s pretty addictive to have that cashflow every month, but they don’t want to deal with the hassle of it. And since they’re paying a significant amount or they will be paying a significant amount in, in taxes after they sell, it’s a very easy suggestion for you to say, maybe we do seller financing and you’re paying taxes on what you receive.

Charles:
So most retirees are not going to reinvest the proceeds into risky investments. Like another commercial property full-time investor. If you’re buying a property from a full-time investor, that’s going to reinvest in the property. They’re probably not going to be interested in seller financing. So you’re really looking for older mom and pop sellers. 20 plus years they’ve owned the property. They don’t want to pay broker fees. No one does of horse. This is a great way. If you’re going direct to the owner, there’s no broker, there’s no middleman there to take a percentage. These sellers know they have a solid asset. They’ve been paid off it for 15 or 20 years, however long they’ve owned it. So they’re going to be very comfortable with taking back and holding paper on a property that they know so well, because they’re most likely going to take that money and put it into a CD or a savings account.

Charles:
And what you can do is offer them a seller financing at an, a great interest rate. That’s going to be paid monthly for the term that you set. You can get a life insurance policy to pay off the loan if you pass away. So the great selling point, and it’s very important that you need to build rapport with these sellers. It’s not going to be something on a first call you’re going to do. It’s going to be something once they know that you’re a legitimate buyer. Once they’ve spoken to you and you start asking, you know, when you feel comfortable about asking where proceeds are going, would they be interested in holding paper on it? People that are going to have sellers that are going to advertise, they want to hold paper, or they want to provide seller financing. They’re most likely going to be asking a higher price.

Charles:
The best way of getting the best deal is going to be going direct to the seller. And when you’re speaking to them directly, you want to bring up seller financing, okay? Because they probably won’t price that into the value of their property marketing strategies. When you’re looking for these sellers is direct. Mail is a big one, texting cold calling. If you see them, they might be self managing the property. They might be there. You can literally stop by. If you drive for dollars, you might be able to find these properties and stop by and actually speak to the owner. If you see them out front, you’re gonna want to store all the information in the CRM. Okay? There’s a number of free ones out there that you can utilize and work with an attorney. This is a big one that has done seller financing deals before you want to speak to them beforehand and have everything lined up.

Charles:
So once you’ve put out the LOI and you tell them, Hey, I’m buying your property for a million dollars. I’m going to put down 15%. And all this type of other terms, you know, 25 year emiratisation and all this kind of other stuff, you can then give that to your attorney. And they’re going to know how to draft the mortgage and the purchase and sale agreement. You don’t want to have to be searching for one. When you have a seller that wants to move forward. And now you’re looking and trying to vet out attorneys and most real estate attorneys have done it, but there’s a lot that happens. So make sure that you fed them beforehand and that they’ve done it before. And it’ll be very easy for you to go from LOI stage into PSA. So I hope you enjoyed, please remember to rate, review, subscribe, submit comments in potential show topics at global investors, podcast.com and look forward to two more episodes next week. See you then

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar incorporated exclusively.

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