Real estate entrepreneurs get paid for solving problems, don’t we? And, the more problems we solve for sellers and buyers alike, the more profits we create. In this highly illiquid market, Americans are experiencing serious obstacles to buying (no loans are available) and selling (no loans for buyers). This is where savvy real estate entrepreneurs have an opportunity to build incredible fortunes by using their intellectual capital.

The beauty of this market is that there are no limits because so many people need our help. By learning to buy and sell using creative financing techniques, you will serve a great many people and leave your competition in the dust. In this post we’ll discuss my favorite financing technique! The best part is that anyone can learn to do this.

Seller Financing 101

This model works in all markets, anywhere in the country, but it works best in markets that lack liquidity (that is, available bank financing). It works with residential as well as commercial real estate. The technique is simple to use and only requires common sense and a little understanding of numbers. I know, “you don’t like math.” As my friend Gary Johnston likes to say, “it’s not math…its money.” And he’s right. You can easily build an entire business around this model because each step in the buying and selling process can be made easy and systematic. I’ve been using it as part of my business for years.

Here’s the Model:

Think of all the ways we could buy property as a ‘transaction engineer.’ To begin, we have four primary types of property you might target; such as pretty houses, ugly houses, multi-family or commercial. Next we have a variety of NO BANK acquisition strategies to buy or control the property; such as options, leases, subject to, owner financing, or paying all cash. Finally, we have our exit strategies which help us get to the cash or cash flow. We can employ numerous ways to rent, sell or hold a property; such as quick turning (a/k/a flipping), renting, lease optioning, retailing or selling with owner financing.

A good system addresses the whole transaction, from acquisition to disposition, and that’s what differentiates the newbie from the seasoned pro. You need to consider what you buy, how you will finance it, and how you will sell or rent it. This approach gives you a solid business model. We all know there are multiple strategies to do great deals. My coaching clients and I have made millions of dollars using all of them but there is one technique that is my #1 favorite.

My Personal Favorite

If you remember the classic movie Caddy Shack, the wild and crazy Chevy Chase gave the young caddy, Donnie, a putting lesson and used a line echoed by golfers ever since. He said, “See the ball, be the ball.” Well, I am a benefits-driven investor and whether it’s wholesaling, retailing, lease options, rehabbing, short sales, or whatever, I look for the technique which provides the most benefits for each transaction. But, my favorite technique provides the maximum benefit while eliminating virtually all the transaction related hurdles real estate entrepreneurs’ face. It is a truly powerful technique. I call this awesome technique, “Be the Bank.” Like Chevy Chase’s, “See the ball, be the ball,” I prefer, “See the Bank, Be the Bank.” As an entrepreneur, I don’t want anyone or anything to restrict my ability to do business, just look what’s happening in the US economy…the banks can’t perform so the country can’t perform. That’s absurd!

This is how “Be the Bank” works

Begin by focusing on free and clear properties.

Seasoned real estate entrepreneurs know that when there’s more equity in a deal, we have more ways to create offers and more exits. (No equity means you have fewer options because you will have to create equity by discounting the debt or wait for the property to appreciate.)

The benefits of focusing on properties that are free and clear include:

• The ability to buy using installments, paying the seller with a fixed monthly payment provided by the income from the property. This is because frequently sellers with free and clear properties do not need any of their equity in cash now. If they did, they could easily have pulled it out sooner.

• The flexibility to borrow against the equity (without using a bank) by using hard money, private investors or better yet – the seller. This can provide funds for buying, holding and getting a house occupied with little or no out of pocket expenses.

• The possibility of negotiating very favorable financing terms. The seller’s goal is to sell the property so they may be willing to offer low or no interest, deferred payments, additional repair funds etc.

• Many free and clear properties are non-owner occupied and the seller could face a big tax bill if they collected all their cash at once. By having them finance the sale, you can help them defer or reduce their tax bill.

• You might find landlords with multiple properties who want to eliminate all their management hassles and sell their portfolio. They may even be willing to start by leasing the properties to you with options to buy (so you can generate cash flow) and then buy them on a tax efficient schedule.

• You can even re-sell the property and offer seller financing to your buyer by leveraging the existing financing you just created with the seller.

Now we create offers based on monthly payment and end up with low or 0% seller financing.

Long term seller financing reduces my resistance to price because it really doesn’t matter what price a seller wants with a free and clear property. I can always pay it. Terms are the key. I frequently ask my seminar attendees if anyone is willing to sell me their house for a million dollars. Lots of hands go up and then I tell them they’ll receive $1.00 a month for one million months. So when it comes to price, the only question is how long I have to pay. The longer they can wait, the more I can pay. The benefits of creating a seller held note at low or 0% interest include:

• Low or 0% interest allows us to offer a higher purchase price and get more of our offers accepted by having the seller defer payment on part or all of their equity.

• You could offer a balloon payment due in several years and enjoy the cash flow from the property until the balloon comes due. Personally, I think this choice is a little short sighted. History has taught me that balloon payments always come due at the most inconvenient time. However, you can protect yourself with a simple clause in the note which allows for an extension until borrowing rates improve.

• Another option is to give all the positive cash flow (cash above taxes, insurance and maintenance) to the seller and quickly pay down the principle and build a large equity position. Again, not your best choice.

• You can structure the payments low enough that the property will cash flow from day one. Rents will rise over time and so will your net cash flow. Over 10 to 20 years the value of the property will rise and so will rents. Now you’re creating wealth with a low fixed payment. A very good choice!

• You can increase your yield by offering multiple payments in exchange for a discount; i.e., “Mr. Seller, if you ever need a lump of cash, I’ll give 3 payments in advance for a 10% discount or 6 payments for a 15% discount.” That’s like getting one or two months free. The seller gets a nice lump of cash and you get a great yield. An even better choice!

• If the seller wants to be paid off early, you can discount their entire note at an even larger yield. That’s the deal after the deal…extra profit!

• Lastly, when negotiating seller held financing, we can negotiate the ability to substitute collateral (move the mortgage to another property) or subordinate the mortgage so that you can borrow on the property and the seller note remains in second position. That’s financial flexibility!

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