Episode Transcript
[00:00:00] Not everybody talks about this seller financing from the seller's point of view. There have been countless books and videos and lectures and seminars and workshops about seller financing from the buyer's side of the transaction, usually from the investor side of the transaction, because most of the time it is an investor who is buying the property with seller financing foreign.
[00:00:29] So today I want to talk to you about seller financing from the seller's perspective, because we represent both sides depending on the transaction. Sometimes we represent the buyer, but sometimes we're asked to represent the seller. So let's get into it today and talk about seller financing from the seller's point of view. First of all, let's talk about what seller financing is. What I mean by that, it's also called a carryback mortgage or a seller held mortgage. It's when the seller typically owns the property free and clear and they are selling it to a buyer and instead of just getting all of their money at closing, they are going to get some of their money at closing, we hope a good chunk. We'll talk about that in a minute. But they are going to hold a promissory note and a mortgage signed by the buyer to make payments monthly, quarterly, annually, usually monthly, based on an interest rate. So in this case, the, the seller acts as the bank for the buyer. So some people also call it an installment sale agreement. So let's talk about exactly what some of the things are, some of the pitfalls that sellers may fall into, and some things that probably sellers simply just don't know about seller financing because it's not everyone every day who does this. A lot of times the buyer is very experienced with seller financing because this is how they buy their properties with little to no money down, if at all possible, because they are real estate investors. However, the sellers, unfortunately, this may be the only home they've ever sold in their life, and it's the first one, of course, that they've ever sold with seller financing. So I just want to talk to the sellers today about some of the things to consider when you're doing that. Number one, if the property is in Florida and you're selling on seller financing. And in most states, a lot of states, they have what's called a seller financing addendum. In Florida, the gold standard contract that most realtors use across the state, it's not the only contract, but it's, it's the, probably the most widely used contract across the state is the far bar as is contract to sell the property. And the buyer uses that to buy the property along with that contract, there is a spot where you would mark that the buyer is going to use seller financing, purchase money, mortgage or whatever you want to call it, to buy the property. And then there is an addendum that goes to that contract that is then filled out. And that addendum, the seller financing addendum, spells out in detail the terms of the new loan. So it's definitely something that gets attached. Sometimes the buyer may bring you a contract as the seller that they've done on their own, or they may be using one of our contracts from our investor Doc kit or our wholesaler Doc Kit. If they're doing that, the terms of the seller financing are right there in the agreement itself. But in any event, you're going to want to really scrutinize those terms and you're going to want to familiarize yourself with what banks are typically charging for mortgage interest rates at the time. Most buyers, especially investor buyers, real estate investors, are going to bring you an interest rate and they're going to want to pay very the lowest interest rate they possibly can. Of course they do, because they want to pay as little as possible every month for the property to increase their cash flow. Not unusual. It's capitalism. This is how life works, it's how finances work. However, you as the seller need to be a little careful of that because you don't want to cut the interest rate too much, you don't want to be too low.
[00:03:57] In our current era, the probably most interest rates you're going to see on a single family residence sale with a bank holding the mortgage is going to be somewhere between 6 and 7%.
[00:04:10] So you're going to want to be definitely in that zone, if not a little bit higher because you may be taking a little bit more risk. You also need to put yourself not only in the shoes of a bank, don't think of a bank like a bank just on the entry. Also think like the bank on how you're going to make this loan like a bank. A bank would request a credit report on that buyer on that borrower under the far bar, as is contract seller financing addendum, you are perfectly allowed to request their credit score. Most people now can pull their credit score, their FICO score, whatever they want to pull like that, or even their credit report.
[00:04:47] Everyone in America is entitled to one free credit report a year. Most investors, if they are buying properties, often should probably have a membership with one of the large three credit bureaus, have an account there. So at any time they can go in and pull a current credit report and hand it to you as the seller. That credit report should include a FICO score. You're typically going to want to score above 600, obviously. Above 700, preferably. And above 800, absolutely. Because credit scores go up to 850 or so. So you're definitely going to want to. The higher the credit score, the more likely it is that this borrower is going to be able to pay you back. Just like a bank, you should request the last couple of years of their tax returns to just to see, number one, to make sure they are paying taxes. Number two, to show what kind of income they're bringing in, gross income, taxable income, what kind of deductions they have, what kind of debts they have. You're going to want to see bank statements, proof of funds, proof that they have the money in their account to make sure that they can afford to pay, number one, the down payment at closing and number two, the monthly payment. Should they not have a tenant in the property after they buy it. Number three, talking about that, that money in the bank to pay the down payment. I want to talk about that down payment for a minute. Because the down payment is what they bring to closing. It's the skin in the game that the buyer puts into the deal. With most banks, banks are going to want usually, well, if it's an FHA loan, they're going to want want at least 3% of the purchase price in the game from the buyer. For more conventional loans, they're going to want 5 to 10%.
[00:06:27] For seller financing, it's not unusual to ask for 15 to 20% down of the purchase price. The reason we like to get a big purchase down payment when we're the seller on seller financing is because if that borrower stops paying, if that buyer stops paying you, it may a year or two that you may have to wait while you're trying to foreclose them. If they're not very cooperative, it may take you a long time to get it foreclosed. And meanwhile, you're carrying that property. You are the one paying the insurance, you're the one paying the taxes on the property, you're the one maintaining the grass and paying the HOA fees, if there are anything like that. So it's up to you to pay that. So you're going to want to get a, you know, a pretty good sufficient down payment that you are comfortable sitting with that house for a couple of years. Now let's talk about interest rates that you typically charge on a seller financing. As I said earlier, you're going to want to educate yourself about what are the current interest going, going interest rates with banks for single family residences or condominiums. Whatever you are selling, you're going to want to know, you know, what is this? If you're represented by, if you have your own listing agent, Realtor, they should be able to give you an idea of that because most Realtors are keeping up with those interest rates every day, day to day. They know what interest rates are running at and they should be able to advise you. Well, interest rates are this today and this this month. This is what I've been seeing. So based on how much money that borrower is putting down, based on their credit worthiness, how much money they have in the bank, their credit score, their credit report, their tax returns, you're going to look at all that and you're going to go, okay, well based on this, I want to get this much of a, an interest rate. Another thing you're going to want to have in your file as the lender, not just as the seller, but as the lender, you're going to want to have maybe the comps, the com, the, the cma, the comparable market analysis that your listing agent ran for that property when you listed it to show the value, the loan that, that gives you a loan to value ratio though for that property. So that's very important.
[00:08:35] A lot of people go, well, why are we doing all this? I'll get to that in a second. But first I want to talk about the terms. A lot of, of course the, the buyer real estate investor is going to want to stretch those payments out as long as possible. Usually 30 years is going to be the maximum amortization that you're going to have with a seller financing deal. So you're going to consider that they're making 360 payments on the loan paying you back. Now, of course, you may not want to hold that loan for 30 years. So most of our seller lenders will say, yeah, we'll amortize it over 30 years. So it's as if you're going to make these payments over 30 years, so your payments are smaller. However, we want to be paid off at the end of two years, five years, 10 years, 15 years, whatever you feel comfortable with. So you can set all of these terms and you want to negotiate these. Don't just poo poo it, don't just ignore it. Don't just go, oh well, this is what they're going to give me. Don't think that your property is in such horrible shape that you have to give really favorable loan terms on seller financing to get rid of the house. Now, when we're in, of course, when we're in a buyer's market, you may have to give up a little bit more than you normally would than when we're in a seller's market market. But always keep in mind that you don't want to give up everything just to unload this house. Don't be desperate, in other words, because that buyer is getting a great deal, typically just by buying with seller financing, because they're not going to have to go through all of the expense and all of the underwriting and all the headache that they're going to have that they would have to go through if they went to a private lender, a hard money lender, or especially if they went to an institutional lender, even if it's a DC DSCR lender or someone like that, they would still have to go through a lot more hoops that are lit on fire to try to buy this property. As opposed to going to you as the seller and saying, hey, I'm going to bring this much money in, you're going to sell me the house and I'm going to pay you this much over time. So definitely negotiate those terms, negotiate the down payment, get as much down as you possibly can, up to 20%. Typically you don't go over 20%.
[00:10:43] Somewhere between 5 and 20% down. You're going to want an interest rate that is close to what the market rates are from banks at the time. You're going to want to really still do your due diligence on that buyer to make sure they're going to have the ability to pay you back and also maintain the property. They're going to be able to pay the taxes and insurance, and you're going to want to determine how long you want to hold that mortgage out there. Another thing to think of is whenever you sell like this, typically whenever you sell a property, nine times out of 10 when we see seller financing, it is someone who is selling an investment property. They're not sell, they're selling something that they've been renting for years out to other people.
[00:11:22] Or it may be an office building, or it may be an office warehouse, but they're going to want to get their money as soon as possible, get the highest rate of interest that they possibly can. But the great thing about that is since you are selling an investment property, typically you're going to have capital gains tax, you're going to have depreciation recapture tax whenever you sell that property. And that can be pretty substantial. So selling on an installment sale like this stretches out that capital gains and depreciation recapture tax. It defers it over time. You're not paying it all in one lump sum in one year. So maybe you're making a lot of income this year and you're in a really high tax bracket, but in future years you'll be in a lower tax bracket. So this will just be nice interest income coming into you. Now there's another party to this deal that a lot of people don't know about because they don't exist yet in your life.
[00:12:17] But whenever you make a mortgage and you're holding a mortgage and a note for someone, that is an asset to you, that is an asset that you hold just like you held that real estate. Now you hold a debt that someone owes you. And not only that, but it's a secured debt. And you hope, you plan and you strive for making that debt a first mortgage lien on the property that you just sold. So you are the first superior lien on the property. The only thing ahead of you would be real estate taxes. If they don't pay their real estate taxes, that can wipe you out. So you'll definitely want to watch their tax bill every year, check it, put it on your calendar, make sure that you're making sure that they pay the taxes every year on time. Make sure that you are listed as a loss payee on the hazard and liability insurance so that if there is a fire, vandalism, hurricane, anything like that and it destroys the property, there is going to be insurance there to ensure the property can get fixed so that your collateral is taken care of. And you're going to want to make sure that you're going to get notices of that. If you're listed as a lost payee or a mortgagee clause, you will receive notices. If they are not paying, the insurance company will mail that directly to you as well, saying, hey, your insurance is about to be canceled because it's not being paid. At that point you can step in and pay it under your mortgage. If they don't pay the taxes, if they don't pay the insurance, and of course if they don't pay you under a well written mortgage by your attorney, it will be sure to have those paragraphs in there to ensure that you're, you're going to get the ability to foreclose on that property to take it back. If they are not paying the taxes, insurance or paying you on the note, or if they may damage the property in some way horribly, that can also be a default under the note and you get the property back back to this third party out there that we haven't talked about yet. And this exists also with banks. It's this other party out there that a lot of people don't think about. Nobody ever talks this third party. Whenever you're the seller and the buyer, the borrower, those people, you typically don't think about this third party. But this third party is the market. It could be other investors, it can be life insurance companies, it can be pension plans, it can be Wall Street. But these are the people who provide the money to the lender that the lender then lends to the borrower and secures with the property that they are buying. With a first mortgage on the property, you don't have that person. You don't have those people in the background with you. At this point when you are selling the property, when you're just making the loan, it's just you and the buyer borrower, nobody else is involved. So at that point, you're not really thinking about this. But I want you to be thinking about it as the seller I want you to be thinking about, because like I said, that mortgage, that note is an asset that you have. It is an asset that you can sell just as easily as you sold that house. But just like that house that you put a new fresh coat of paint on it, maybe put a new roof on it, put new carpet down, maybe a new air conditioner, the same exact thing applies to this note. In this mortgage, you need to make it as attractive to a buyer as you made that house attractive. Because you could sell that note in that mortgage, you probably won't be able to sell it for the full face value of it. So if it's $100,000 mortgage, you may not sell it for $100,000. You'll sell it for something less. But the better documented that mortgage was, the title insurance is in place, there's hazard insurance in place. You know you're a first mortgage, you've got background information on your borrower's ability to pay. You've got that credit report, you've got their bank account statements, you've got their tax returns, you've got all this information in your folder along with that original note and that mortgage. You can sell that note and mortgage. Now, one of the things that I talked about this weekend at a workshop, one of the things that makes that note and mortgage more valuable is if that interest rate that you are charging is a little bit higher than what the market rates are now, if you've got a balloon mortgage in five years, again, the value that goes down, the value of your note mortgage goes down because the amount of return, the yield that that person buying your note mortgage from you is going to make over time is greatly reduced because they're not going to be holding it as long. So to make that note mortgage more valuable, typically you're going to want to have a longer balloon term, maybe a 10 year or a 15 year balloon term out there. Also, the longer that the repayment term is, the farther out that balloon is, the farther out that maturity date is. You're going to want to really consider maybe an adjustable rate mortgage. So you're going to want to build in maybe. Yes, the interest rate is this for the first two years and after the first two years or after the first year, the interest rate may start adjusting and it will float according to maybe the Wall street prime rate, Wall Street Journal prime rate that's published in the Wall Street Journal, or maybe it's tied to the treasury bill, five year treasury bill or 10 year treasury bill rate. At a certain point in time each year you would look at that and go, okay, in of each year, the T bill rate is this and we add one point to that or we add a half a point to that. Again, you can see how this makes your note a lot more valuable to someone in the future because they're going, they're looking at it going, well, the T bill rate for five years is going to be this. And I know I'm always going to outperform it by at least 1%. If I put my money, if I, if I buy this mortgage, I will outperform it. Now, of course, typically the buyer, smartly and rightfully so, is going to say, well, I want a cap on the max. It can go up to. And you as a seller is going to say, well, I want a floor. It will never go below this. It's typically you don't, you never want to go below what you're initially charging as an interest rate. And the buyer will say, well, I don't want to go more than two or three points above where it is initially. So that can all be built into your promissory note documents. If you've got a good lawyer who's preparing those documents for you, who knows what they're doing. Another thing to think about, think of who the buyer is. If the buyer is an entity or a trust or anything like that.
[00:18:33] What could happen is that entity or trust, maybe that's the only property it owns. And then they stop paying your promissory note. They don't pay the taxes, they don't pay the insurance, they've completely defaulted, they just disappear off the face of the planet. Now you're going to have to sue them and get it, but all you're going to have is then maybe a, if the property is not worth as much as you were owed when you foreclose and you get the property back and then you go even deeper in the hole. Now you've got what's called a deficiency judgment. But that deficiency judgment is just against that entity, that llc, that, that trust, whatever it was, that probably has nothing else in it now because all it held was that property that you had sold to it. So if you are ever selling to an entity and that entity is going to be your borrower, you're going to want to make sure that you include in your purchase contract that there will be a personal guarantor, a human being with deep pockets, probably the person who's listed in that tax return and the person who owns that bank account, the person who's, who has that credit score, that human being will personally guarantee the loan. So if the LLC or the trust or whatever stops paying, you can, then you can still go after that human being and their assets to try to, to get your, the balance of your money back. So those are some things that we, we like for the sellers to be considering and thinking about, thinking about the terms of your loan, thinking about the, the credit worthiness of your buyer, getting all this documented, getting all that in your file, having a lawyer to draft your note and mortgage and other loan documents have, because a lot of people, they go, well, the title company just prepared the note, mortgage. I didn't really think about it.
[00:20:17] The title company, a lot of times, especially if it's not owned by an attorney and the attorney's not involved, or an attorney's not involved in the closing, then a lot of times they're just going to pull a form off of their software and spit it out. And that may not meet what you need it to do as the seller. It may be a little too even handed, it may even bend a little bit toward the buyer. And we've even seen where the buyer has prepared their own note and mortgage and just had just given it to the seller. And in those cases we've seen a lot of pretty egregious terms added to those at the last minute. But it's definitely something to consider. One last thing I would leave you with. If you're making a a seller held mortgage, if you're holding that, one of the things as estate planning attorney that I'm always thinking of is, well, how am I going to pass this asset outside of probate that I don't need to worry about a probate in when this seller, should this seller die or should they become incapacitated, what are we going to do with this mortgage and this note that is owed to them, this asset of their estate? Because we don't want to have to go file probate action and have a full court case for this mortgage or multiple mortgages you may be holding in that case, if you don't already have a revocable living trust, number one, if you do, we would recommend that the revocable living trust be the lender on your seller held mortgage. So even if you sell it out of an LLC or out of your personal name, you would want to assign the mortgage after closing and endorse the note over to your revocable living trust. So that asset, that note and mortgage is now held in your trust, so it will not have to go through a judicial probate. Now, assuming you do not have a revocable living trust, one of the things that we point out is what we call the mortgage land trust. A land trust in Florida can hold land, but it can also hold interest in land. Any mortgage is considered an interest in land.
[00:22:20] So we actually can prepare just a trust that holds your mortgage or mortgages. It can hold multiple mortgages. And inside that trust we can name successor beneficiaries. So a couple of good things come from that. Number one, your name does not appear on the records. So your name is the lender.
[00:22:39] As the holder of that mortgage does not appear anywhere. Our name would appear as the trustee of the mortgage trust that holds the mortgage. All payments are still made directly to you as you've directed in the note. So that that's not a problem. We don't actually receive the payments as the trustee of the mortgage trust, but we do hold it. Our name appears on the public record. We're the one who gets all the phone calls and all the emails and text messages about that mortgage and notices and court notices. So it's definitely something we like to put out there for fol.
[00:23:11] Maybe you're only doing one seller held mortgage in your life and you're pretty elderly and you're concerned and you want to make sure it passes, but you don't have a revocable living trust. In that case we can establish a special mortgage holding land trust that will hold that mortgage and that note for you. And upon your incapacity or death, it's automatically going to pass to your successor beneficiary that you name inside the trust without having to go through probate. So just like to put those bugs out there in everybody, everybody's ears. I know that I'm probably going to tick off a lot of real estate investors I work with out there because we, I've worked with, with real estate investors for 30 years now across the state of Florida, North Carolina and everywhere else. And I know that seller held financing is of course a great way to buy properties. But lately I've had just a lot of especially elderly sellers who are starting to phase out of their rental properties and they are selling them on seller financing for the capital gains installment sale treatment so they can spread out the capital gains hit to them to provide them, to continue to provide them with some interest income each month that they to sort of replace the rent that they were getting without the headache of dealing with tenants and getting tenants and dealing with the maintenance of the property. They just sit back now and collect the mortgage payments. And I've seen some deals coming through that not from real estate investors I've ever represented, but from other real estate investors that I felt were a little egregious in how they were negotiating their terms. The interest rates were usually one to two points below what the market rates were. They were buying into an entity. There was no personal guarantee promises. The amount down to purchase the property was only about 5% on pretty expensive properties. So I wanted to get this out there because I've been seeing this again. It came up this weekend during the workshop I was giving in Sarasota. So I wanted to talk about it as well because at that we talked about how you can sell your promissory notes. Another thing that going back to the mortgage trust, if you do ever sell your note and mortgage to an investor, a buyer and just cash out of it. If it's held in a mortgage trust, there's a couple ways you can assign it over. You can just assign your beneficial interest in the trust to them as the new buyer. Or you can do the more traditional route where we, you endorse the promissory note and you assign the mortgage and an assignment of mortgage is recorded and then a notice is given to the buyer borrower that hey, you're going to make your payments to them. Now we, we're out. We're no longer servicing your note and mortgage. We're no longer worried about the taxes and insurance the new note buyers owners issue at that point to deal with. So just like to put those bugs in your ear if you guys ever need anyone some advice about this. If you are selling on solar financing, there are some restrictions on how many you can do in a one year period, what kind of terms you can put in them if you're doing more than one in a one year period, and definitely very strict restrictions if you're doing more than three in a one year calendar year period. So just keep all that in mind if you ever need anything about that. We definitely handle these. I've done these going on. Like I said, I'm on in my 30th year now of doing these. So I've got a lot of experience with it and the best time to start thinking about this is before you ever execute that contract. Don't just sign the contract because if you sign the contract and it already has all these terms, there's not a whole lot we can do about it because we have to draft documents, loan documents that conform to what you've agreed to do. So don't, don't go ahead and just sign the contract. If you're going to be selling on seller financing, it's best to reach out to an attorney at that point to start talking about terms and down payments and what you're going to do to underwrite that buyer borrower. You may want to get all that information about the buyer borrower before you even sign the contract to sell them the property. And again, they should be able to gather that information together pretty quickly for you and get it to you so you can review it. So anyway, that's what a lot of people don't talk about when it comes to seller financing. And if you ever have any problems with it, we'll definitely discuss it and if you ever need anything else about it, we're happy to talk about it. Make sure you like and subscribe make sure you subscribe to our newsletter because we talk about these kinds of things in our newsletter. Follow our website so you can also keep up with the latest news there about seller financing and other topics related to asset protection, real estate and business law that may be circulating around you out there. Talk to you later. Thanks for listening to this edition of Trust this. If you got something out of it, please press like and subscribe and give us a five star review to help us reach others who can benefit from this series. Until next time. Keep aspiring to a better life.
