Financial Education through Real Estate Investing: Creative Financing — Seller Financing (Part 2)

Some of you have asked from Part 1 of this series: what is a good deal?

That is truly the essence of every investment opportunity. If you’re also asking this question — Congratulations, you are on the right track!

I seldom speak in absolutes these days and that has been the result of my conscious effort to avoid that kind of trap and thinking. After all, all the ‘good investments’ that I was brought up on failed me (if you’ve been following the articles, you know what I mean). Some of them failed me BIG TIME, including real estate — before I was financially educated to leverage real estate to create income and wealth.

Through years of getting coaching and mentoring, I’ve adapted the idea that the world mostly works on spectrums. And this has helped strengthen my mindset tremendously as an investor and a business owner. There’s a Chinese proverb that loosely translates into: “If nobody was selfish, the world would end.” I remember thinking: Wow, this is such a horrible saying! As I grew up and life experiences built up, I simply realized that it’s actually a beautiful and insightful piece of timeless wisdom.

You see, like almost everything else in life, what’s a good situation might be a bad one for others. Vice versa. This is why, speaking more generally, seller financing is not always a good thing for active investors when the conditions aren’t just a fit for the deal. I have seen many over the years that would put through a seller financing deal just to say that they have done one and it ended up dragging them through court because the buyer didn’t know any better.

In short, seller financing becomes available when the necessary criteria align for both the seller and the buyer.

In this article, I will go into the first way of the most basic form of VTB. And that is VTB as a tradition/typical mortgage.

This is likely the most common way and really, the easiest way, to facilitate a bona fide VTB.

Since it’s a mortgage, this means that all typical criteria would apply: rates, length, payment frequency, etc. What’s more important to note (in my opinion — or IMO as the kids would text these days) is the position and the total LTV (loan to value) the VTB would be on the secured collateral.

Here’s a very simple yet important concept to be clear on — Seller financing is part of a bigger umbrella term of private lending. I’m sure some of you have already sniffed that out when I mentioned in the first article to offer VTB (as much as you can) when you sell your properties.

Many people are finding private lending deals these days to ‘park’ their money because they can generate double digit returns. These are also the same people who can get hurt without knowing how to analyze the deals their money is ‘secured’ on. Funny enough, these are also the ones who have been buying properties for the sake of buying them. Let’s unpack that a little bit more here, shall we?

From the Wheel of Wealth articles, we’ve learned that equity is like the piggy bank that we cannot open (often times especially with rental properties). Through offering VTB, you can automatically open that piggy bank and, often time, turn a non-performing asset into a performing one.

This example I’m sharing with you is hot off the press and a US-based deal.

After selling a few properties in May, the proceeds went into a 1031 Exchange as I had my eyes on a specific purchase (another story for later!).

Side bar: IRS Section 1031 — What is it? Section 1031 of the IRS tax code provides that taxable gain or loss shall not be recognized when property held for productive use in a trade or business or for any investment is exchanged solely to “like-kind” property. The term, “like-kind”, refers to the similarity in the nature or character of properties being exchanges, as opposed to the grade or quality of such properties.

I found a distressed seller who wanted to get out of her ‘leftover’ portfolio in the US. She was very motivated to sell and, as a result, open to 100% seller financing. Now, given that I had some funds in the 1031 Exchange to use, 100% VTB was not necessary in this case. However, whatever the balance of the total purchase price became VTB. Here’s the overview of how it came about:

• It’s a small portfolio of 11 single family properties with a total of 15 rentable units.
• The 15 units are split between 2 cities/states— in one city, all units are performing well and not so good in the other.
• The motivation for the seller to sell is that she did not want to stress over the non-performing units anymore.
• I negotiated for all 11 properties to be one package deal as they would be performing overall and giving me the time to stabilize the performance of the non-performing properties.
• The seller agreed to an 8% interest-only VTB on the outstanding balance — this is very comparable to most lending options through institutional lenders in the current lending climate for purchasing properties in corporations or LLCs in the US.
• The VTB saved both of us a lot of time because I did not have to go through the traditional qualification process (which can easily take 2–5 months right now after speaking to various mortgage brokers and lenders) for 11 properties in 2 states.
• The seller also agreed to the repayment starting 3 months after the closing of escrow to give me some runway to start to deal with the problem properties and tenants.
• We agreed to a 2-year closed VTB and can pay out the remaining balance anytime after that.
• The seller is now headache free, got a lump sum chunk of cash and will be cashflowing from her VTB. Meanwhile, I’ll be cashflowing and the cashflow can only improve.
• Best part about this: the seller did not lose money with the purchase price as agreed on and I still have money in the buy — VTB is funny like that when you structure it well!
• I also offered to pay for all closing costs as a gesture that helped with the negotiation process and shortened the closing timeline. This often times is a great tool to use as long as it still makes business sense.

As you have concluded for yourself, this was a process of alignment between the seller and myself.

And before some of you go and say “you’re lucky”, I want to let you know that I spent countless hours, spoke to 30+ people (between real estate agents, wholesalers, lenders and property managers) in 8 different markets before finding this opportunity. It also didn’t become a deal automatically just because the seller is willing to offer 100% VTB. All the necessary due diligence went into making sure it’s a viable deal.

For the conveyancing process and the mortgage documents, I simply commissioned a lawyer to create them. In certain cases and places, it’s perfectly acceptable for your trusted mortgage broker to help creating the mortgage documents or at least provide a template as your baseline. Upon closing, titles will be transferred and the VTB will be registered against hard asset. Her money is protected and I do not intend to default. Why? In this case, my 1031 Exchange — aka the downpayment — accounts for 55% of the total purchase price.

We have solved each other’s problems — she wanted to sell and I needed to buy (due to the 1031 Exchange requirements)! It’s a win-win. And that is the true essence of VTB.

Some quick tips for you to prepare your VTB offer:

• Build a financing track record to show your investing experience and existing portfolio.
• Include a snapshot of your financial statement — both corporation and personal.
• Demonstrate that you have some sort of expertise and knowledge in the strategy, market and or property type that you’re asking for VTB on.
• Be clear about your initial ask on your VTB terms and the reasons why.
• Remember that it’s often cash or terms — VTB tends to fall under terms and that means you likely will not get the cheapest rates but it will buy you the time you need to get your affairs together to buy out the VTB at a later date.
• If you do not have the experience or track record yet, showcase your financial/investing education (most people overlook this) and leverage your real estate investing mentor to help you in the alignment process.

More stories and examples to come with this series. Not to mention other ways of seller financing!

To my dedicated readers, I thank you for your support and feedback. If this is the first time you’re reading one of my publications, I hope you’ve enjoyed it and learned a thing or two.

If you’re wanting to be a part of a community of real estate investors from around the globe, here is the T.A.L.E.N.T.ed Investors Facebook Group. It’s a place where people come together to share experiences, knowledge, successes and challenges, and money making opportunities!

For those of you who prefer watching videos, here is the YouTube channel where some of my work (very raw) has been shared.

If you prefer the live interaction and delivery to help you build some foundation, go ahead and speak to a Strategy Coach on how you can attend our Workshops.

Lastly, I just want to say thank you for your continuing support. I aim to be authentic and adding value to your life.

It’s ultimately about LIFE and I appreciate you coming on this journey with me!

(Written at home in Edmonton, AB)

Written By: Tim Tsai - Principal & Founder at Trust Your Talent Academy