How to Structure Owner Financing Deal with Seller Financing Example - YouTube

YouTube, I know the lighting in here is a  little terrible and so it's the paint job.  

But hang in there with me people have really  been emailing me a lot asking me to do a more  

in depth to seller financing video. And that's  not really something that I can do with someone  

professionally recording. So I'm going to make  you a Zoom video on my computer in my office and  

hopefully Hayden won't bark that's my Doberman so  that we can get this in one take. We'll see how  

that goes. I'm going to do a screen share with  you. For those of you that don't know my name  

is April Crossley. I'm a real estate investor in  Berks County, Pennsylvania. And I flip houses here  

buy and hold small Maltese and do a little bit  of private lending. And I really have a passion  

for educating people about real estate and if  you hear that clicking that's Hayden's nails  

on my hardwood floor in my office. So if he can  stick his big chunky head up here, he'll say hi,  

but you can see pictures of him on Instagram at  April Crossley. So let me see if I can figure out  

how to share my screen and I'm actually doing  a seller financing offer tomorrow morning. So  

I'm gonna take you through the numbers on that I  love getting small multifamily buildings seller  

financed by small mom and pops because they  usually don't need to take one large chunk of  

money right away. So they like to take payments  over time. So let's do a screen share. And I'm  

gonna share my desktop with ya. And we're gonna go  to the property. Okay, so this is the property I'm  

looking to put the seller finance offer on. And  I just have some information here about it like  

it's in Coomer township tenants pay electric, I'm  not going to show you the address, they're all one  

bedroom unit and two units are vacant, which I  really like because that means that I can kind  

of set the rent, the owners actually asked me if  I wanted them to rent the two units and finish  

fixing them up. And I said no, I prefer to finish  fixing them up myself. And I prefer to rent them  

myself. That way I can set the brands. So they're  all one bedroom units, and the one unit that is  

occupied is occupied for a quarter, he's paying  a very low rent, so his rent will go up day one,  

or he can give his 30 days notice that's fine as  well. So make sure everyone's on a month to month  

before I make that decision. Because I have to  take over their lease. So we're gonna have all the  

apartments at 700 a month, for the one bedrooms  on paying all the utilities. So everything's  

included. So that's why we're doing I'm all at  700 a month, then these are all my expenses,  

my taxes, my insurance and vacancy maintenance,  the oil heat, I'm skeptical of this number right  

here. So I'm going to ask to see bills, I live in  the northeast and Pennsylvania is very cold here  

and snows in the winter. And Oil Heat is very  expensive. So I'm very skeptical that it only  

cost $1,500 A year, I'm thinking that's probably  not the case. So what I do is I'll ask to see the  

landlord's bills, so that I can verify those  expenses. So I will verify that. If it's more  

than that, then I'm going to go back and I'm going  to ask for a price adjustment. And I apologize, My  

glasses are broken. So that's why I keep pushing  my glasses up, but I have to get new ones that  

just haven't had time. For two years. I really I'm  gonna make time. So um, then I have lawn care and  

snow removal. And cap x, which is like a little  bit of money I set aside every year for for major  

stuff like roof Heater, Hot Water Heater, anything  major that needs to be done to the building. I  

really decide this number after I see the building  and kind of see like how old is the roof? How old  

are the hot water heaters stuff like that. I put a  little bit of money in for property management, I  

self manage. We have a great video on systems that  we use to self manage our properties. But I do pay  

a real estate agent to fill my vacancies. So I  don't show my properties or deal with tenants and  

applications or anything. So I pay someone else  to do that because it's just I have so many other  

things that I'm doing. So I do put a little bit of  money in there for that. So what am I doing here?  

What you'll see is like my old rents are over  here. They're very under market and my new rents  

are over here on the right. Sorry, it just keeps  highlighting everything. So we're going from  

9920 a year in income to 25 200 It's the only  way I can buy the building for remotely near  

what they're asking. They're asking 150,000 That's  what they want for it. The net operating income  

which is your income minus your expenses,  so the 19 920 minus all my expenses is oh,  

I have it new rents over here. So I must have  been messing around with my numbers over here,  

I apologize. But just focus on the new rents  because this is what the rents are going to be. So  

they're all going to be at 700. So my noi, my net  operating income is going to be 11 937. So I take  

that divided by point oh nine, and I find that for  my multifamily is to cashflow what I want them to  

cashflow, which is around $100 per door, I need  to buy them in a nine cap in my area in my market,  

this property is very rural and out in the  country. So I'm putting a nine cap and my value at  

that nine cap is one 132,000. So I basically want  them to sell or finance at 132,000. You can skip  

all this jargon here, I play around with a lot and  numbers until I decide when I'm doing. So. I like  

to think out loud to myself. So unfortunately,  you guys are gonna have to think out loud with  

me. So we're going to start with this right here.  When I was playing around with my numbers, which  

I will obsessively, I'm only showing you guys like  three sets of numbers, but I will obsessively run  

numbers and play with different scenarios. So I'm  thinking, Okay, it's worth 132 at a nine cap at  

the new rent, so I'm gonna go in and bump up all  the rents and finish the apartments. So I'm gonna  

offer 130, if I financed with a bank, I'll have to  put 25% down, so I'll have to put 32 Five down if  

I finance with a bank, okay, so then I'm taking  130 minus 32, five, some financing 97, five at  

interest rate, probably 5.5% for 20 years, that's  about the terms that I'm getting right now,  

this will be my monthly payment 670 69. This will  be my payment per year. So I go back and look at  

what my total expenses are. So I'm basically  adding my payment per year to what my expenses  

are up here. Okay, because it basically I'm just  adding my mortgage debt back into my expenses. And  

then I take my income minus my expenses to figure  out my cash flow per year, divided by 12. That's  

my cash flow per month. And this is my cash flow  per unit 100k per unit, not the right like, okay,  

that meets my criteria of $100 per door. But it's  not just all about cash flow, okay, you still I  

like to have a good cash on cash return. So in  this scenario, I would have to be out of pocket  

32 Five, that's my 25% down money, plus probably  about 15,000, or repair upfront just to get the  

apartments up and ready. Plus my closing costs,  that's with CCS. So I'm just guesstimating like,  

I might be out of pocket 50 to 55,000 in closing  costs, which means what I mean, not closing costs,  

like my repair costs, my down money and my closing  costs. So I have all this money out up front. And  

my cash on cash return is like 7%, which isn't  good. Why do I think that's not good? Because  

I can private lend my money at 10 or 12%. So  why would I buy a building that's gonna give  

me a 7% cash on cash return? Where a max out  on rents maxed out not gonna get any higher  

than the 700 per month per unit? Why would I do  that? I don't want to do that. So I was like, oh,  

yuck. I don't want to finance at 130,000. Now  remember, they're asking 150,000. So I'm going  

back to the sellers to say your building is worth  not worth 150,000. If you would see this building,  

you would see why they think it's worth 150,000 to  someone that would live there. It's worth 150,000.  

It has a beautiful view, someone could live  there and rent out the other two apartments would  

totally make sense. But it doesn't make sense for  an investor. It's like a big house. But it only  

has three units, or only one bedrooms, you can  only get so much rent. And it's on a big plot of  

land, which has a high lawn mowing cost, it has  a parking lot when there's only three car three  

units for three one bedroom apartments, which  means there's a snowplowing cost in the winter.  

So it's just like more expensive. It's oil he. So  expenses are high, rents aren't very high. So it  

doesn't really make sense for an investor but it's  someone that lives in it makes total sense at 150.  

That's a lot. I hope you guys are getting all  this I'm sorry, you can rewatch and rewatch.  

So I decided, well, I'm going to ask them to  sell or finance it. So I write I wrote down  

three different seller finance scenarios for them.  We'll go over the first one. Okay. So I don't want  

to like overwhelm you too much at once here. So  I decided I don't want to pay 130 But I'm going  

to try and get them close to 150. So how about I  seller finance at 120,000? Why did I pick 120,000?  

I'm basically playing around with numbers. So  I know. My bank, my bank will give me 75% of  

the ARV. If I do a cash out refinance, so I know  if a seller finances it at the end of five years  

I have have to at least not owe the seller more  than 75% of ARV because at the end of five years,  

what will happen is I will go back to my bank  and ask them to give me a loan so I can pay off  

the seller, okay? So if we take, I'm gonna bust  out my calculator here, if we take 130,000 times  

point seven, five, it gives me 97. Five, okay,  is what my bank would refinance me. So if the  

building is worth 130, my bank will refinance 75%  of that, or 97, five. So at the end of five years,  

I can't go more than 97. Five, that if  rents don't go up over the next five years,  

and here's a little hint for you and why we  like being landlords, rents always go up, okay,  

I've never had a situation where they came down.  So rents always go up. So likely the building will  

be worth more. So I'm just talking like, worst  case scenario, if you don't increase the rents  

over five years, which won't happen. Okay. So I'm,  what I basically did is I knew I had to be around  

97, five at the end of five years. And if you see  her, I have, we will owe at the end of five years  

one on one, how did it get to that number, so  I want to get them, I was thinking of offering  

them 130. So I just play around with numbers. I'm  like, Okay, on a seller finance offer on 120 with  

10,000 down. So that means I'm financing 110. This  is where the Brett whistle amortization schedule  

really comes in handy. So I'm going to bring that  up on my screen. And hopefully, you guys can see  

this. So you go into the amortization calculator,  let me just minimize this one to make sure you  

can see this one. So we're gonna go into the  amortization calculator. And remember, we offered  

on 120, but we're putting 10,000 down, why are we  doing that, we don't have to put 10,000 down. But  

if people are gonna hold a note mortgage for you,  they usually want some money down, I do give them  

an option with no money down and a higher interest  rate. So like, I'll pay you a higher interest  

rate, but I'm not giving you as much money down.  So I tried to give them several seller financing  

options. So if we give them 120, but we put 10.  Down, we're actually only financing 110. Okay.  

So let me make sure that's what we said back here.  Yeah, 120 with 10 Downs, we're financing 110 at 5%  

for 30 years, and you can change this however you  want. So 5%, for changes to 5%, three, six to 360  

is months, which is 30 years, we're going to click  Show amortization schedule, because we want to see  

the whole schedule and you'll understand why in a  second, we're going to click calculate my payment,  

excuse me is going to be 590 50. So I'm going to  go back. And right in here, you'll see payment  

590 50 per month, which is 7086 per year. So my  total expenses, my mortgage debt plus oil, heat,  

lawn mowing, taxes, insurance, all that other  stuff is 20,003 49. So my cash flow comes out  

to 134 unit, okay, so better than this, so less  money down, then when we finance with a bank,  

less money down 1010 grand down versus 32,000  down, that's a big difference. Okay. So,  

and we're amortizing over 30 years instead of 20.  So it makes my cash flow better. Okay? What was  

my mortgage payment up here 670. And my mortgage  payment down here is 590. So that's the difference  

between a 20 year amortization and a 30 year  amortization, you're just stretching it out.  

So you're making your payments a little less,  I will pay them $26,441 in interest. Okay. So  

let's go back to the amortization schedule. Here's my monthly payment, and you're gonna go  

down, and this is every year, they separate with  a little line, they make it so easy. So you're  

gonna see how this, this here says cumulative  interest. Trying to highlight it, hopefully, guys,  

you see that and this is principal balance. Those  are the two columns columns you're most interested  

in. So in the cumulative interest column, you're  going to go down to your five, which is 60 months,  

and in five years, I'll pay them $26,441.80 in  interest, okay. So let's go back to their page.  

That means they're going to net the 120 Okay,  One plus the 26,004 41 and 80 cents, so the  

offer price plus 26 441 80. So they're gonna net  146 441 80. Okay, that's what they're gonna net,  

we're gonna owe at the end of five years 101 Where  does that come from? Let me show you that. So  

we're gonna bring this up, it comes from this  right hand column, my principal balance at the end  

of five years is gonna be one on one, one on one.  Now, I said, if my bank cash out refinance is 75%  

of what I think it's worth, so say it's worth 130,  they do 75% of that, they'll cash out 97 Five,  

will it be worth more than 130 In five years, I  hope so no one can really say. So I'm basically  

basing that off of rents will go up, okay, rents  will go up, and therefore, the value of the  

building will go up, because expenses will stay  somewhat the same, they might go up a little bit,  

taxes might go up a little insurance will go  up a little, but rents usually go up way more  

than what your expenses go up. So I should even  if the bank only cash out refinances, 97, five,  

that means I can do a cash out refinance. And I  might have to come out of pocket with, I don't  

know, seven grand, maybe depends on what your  closing costs are on the refinance. So when I do  

a cash out refinance, the bank will pay them off.  And I will have a loan then with the bank. Okay,  

so let's bring this sheet up again. So that's a  seller financing zero. Now what I do is I give  

them three seller financing options. So I give  them one with less money down at a higher interest  

rate. And I give them one with no money down.  Okay, I'm at kind of middle of the road interest  

rate. So I like to give them a bunch of options.  But bank versus seller seller is much better. And  

basically, I just tell them, the property doesn't  meet my criteria for cash on cash return actually  

told these people to put the property on the  market. So I feel like when you're honest and  

transparent with people, they want to sell to you  even more. They just really appreciate honesty  

and transparency. I just said the house is nice,  it's on a whole bunch of land, someone would love  

to live there and route the other units and it  will work perfect for them. But for an investor,  

the cash on cash return just isn't good. The cash  flow may be okay. But I'm just not willing to  

come out of pocket with that much money for that  amount of cash flow per year. Like I'm just not,  

it doesn't work for me. So I hope that was  helpful for you guys. I know that was a lot  

of information. I know this is a video a lot  of you have been waiting for. And we can always  

do another one. So we've seller financed three  small Maltese in the past couple of months. So  

I'm always willing to run through those numbers  as well. I know it's a little overwhelming, you  

might have to watch it a couple times. And I'll  take a little bit of practice and I talk a little  

fast but if you want to find out more about what  we teach because we certainly go over this and  

over this and over this in our coaching program.  You can find us at lazy girl rei.com You can also  

follow us on Instagram at April crossly or you  can follow us on Facebook at lazy girl real estate  

investing. Thank you guys. Have a good day Transcribed by https://otter.ai