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The DON’Ts Of Seller Financing With Chris Seveney

June 26, 2024

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Creating Wealth Simplified | Seller Financing

 

There has been a huge influx for the love of seller financing recently. Despite having its strong points, Chris Seveney has several reasons to believe it is awful. In this solo episode, he goes on to bash its negative aspects and why it increases risks instead of opportunities when mishandled.

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The DON’Ts Of Seller Financing With Chris Seveney

I am going to apologize in advance. There are certain days and certain times when I can get a little boisterous, heated, and excited. It’s one of those days. Honestly, I hope I’m proven wrong with this, but I don’t think I’m going to be. “Chris, what are you talking about?” I am talking about the huge influx and the love for seller financing.

Now there are good ways to sell or finance and ways to sell or finance. There’s times when seller financing is a good option but also times when I believe it is awful. I’m not going to knock those that do seller finance because I know some people, like Tracy Reilly for example, do a lot of seller financing. They are excellent at it. They have a great training program. They are great. If I put the model of who’s great at seller financing, I would put them up on the mount.

Banking System

As I talk on this episode, I’m going to bash seller financing, and I’ll tell you why and go through my reasoning. I’m talking on both sides of my cheek because there’s also opportunity in that space and some good opportunities. Here’s why I’m going to bash seller financing. Certain aspects for how people are using it. I’m seeing a lot of people being seller financing like, “That’s the next hot thing. I’m going to sell my house and I’m going to seller finance.”

The first question I ask people when they ask me about it is, “Is your house financeable from a bank?” I’m like, “Yes.” People think, “The banks finance properties all the time. I want to be the bank, which I am a bank. It’s full disclosure. We invest in notes.” People don’t understand the banking industry. The banks will give people loans at 3%, 4%, or 5%, because it’s other people’s money but it’s only 10% of other people’s money. It’s 90% of money made out of thin air.

Creating Wealth Simplified | Seller Financing

Seller Financing: Most people do not understand the banking industry. Banks will give people loans at 3%-5% because it is other people’s money, but it is only 10% of other people’s money and 90% of money made out of thin air.

 

What do I mean by that? Google fractional lending or the fractional banking system. Now, banks write loans and don’t have the money to write the loan. It’s what it boils down to. If somebody gave you $10,000 and you could write a $100,000 loan with that $10,000, I bet you would do it all day long because that’s what the banks do.

I’m going to give you $10,000 to write a $10,000 loan. Is it worthwhile? Let me give you an example of one. Let me start with my first example of why, if I had a $250,000 property. Let’s say I owned it free and clear. Why I would not seller finance it? The first simple analogy is you hit the lottery and hit $250,000 on a scratch ticket. Do you take the annuity payment over 30 years or do you take the cash, which might only be $175,000?

What does every financial advisor tell you to do? They tell you to take the cash. Why? It’s because you can invest that money most likely better or at a higher return than what you can lend it for. We’ll get to that in a second. Secondly, in 20 or 30 years, that payment of $10,000 per month is going to cost you more than your monthly cellphone.

Let’s add back to what I mentioned about investing it in arbitrage and getting a better return. People need to understand when you are lending money that you get knocked to a large ordinary interest rates. If you’re in a 27% tax bracket, and you lend somebody and get $1,000 of interest that year, that gets tacked on and you’re basically paying 27% on that $1,000. Whereas, if you bought a stock and made the same interest. You’re paying probably 15% on that, so the net versus gross factor.

Gross numbers look great, but when you net out the taxes, it doesn’t look that great. That’s one example. Now, I’m going to continue on this $250,000 seller finance because the house might only be worth $250,000. Let’s say they sold it for $270,000 and got $20,000 down. Great that they got the $20,000 down. Let me ask you this question. Is it 100% loan to value, essentially?

Let’s say they got 8% interest. How many people out there would invest in any type of fund syndication offering, you name it, where you’re giving somebody 100% loan to value at 8%. I went into a multifamily deal and they’re like, “We’ll give you 8%, but it’s 100% loan to value.” Do you think that’s a good deal? At 90% loan to value, do you think it’s a good deal or at 80% loan to value?

I can name fifteen funds off the top of my head. I can pay you more money to do zero work that I believe would be less risky or significantly less risky based on the asset. Not on our management, just the asset, and get a better return. People want to be in the game. They’re doing things that, to me, are stupid. I’m being flat out honest. A lot of these people who do this also don’t even know what they’re getting themselves into. By seller financing alone, they don’t live in the house. Do I know that, “I need to use a license servicer. I need to send the FPB compliance statements every month.

If I don’t, then technically I might not be able to charge interest on the loan or default interest on the loan?” If I know that for every time I do that, I could be subject to a penalty of $40 or $50 5 times or 12 times a month. Now, could I even use an attorney to write up the right documents or contracts? What happens if that borrower goes into fault? What happens if home prices drop by 15% and they don’t want that property anymore? Is all that risk worth getting 6%, 7%, or 8 % or better taken to cash investing it elsewhere? Now if you invested elsewhere, most likely you’re going to be passive. Put your ego aside and be what is the better situation.

No Money To Fix

That is my first rant. Let me talk about my second rant. I think I counted seven instances on BiggerPockets on Facebook over the past five days where this has been the case. I have bought an investment property, seller financed or subject to, take your pick, which is seller financed. I have a renter in there. It’s cash flowing, but X happened that I can’t fix. I don’t have the money to fix it. How do I get the money? One was the line collapse. Another is that the HVAC system broke. Another was the roof is in deplorable condition. It requires repairs. Another is the discoverer’s knob and tube wiring in the property.

Another was they got a lead paint notice, a plumbing system backup, and the refrigerator. They didn’t have a thousand dollars by a new refrigerator. It broke. Another was, again, the HVAC system. So, we’re starting to see people who were not qualified or have the cash to support maintenance on an asset. Even though it might be cash-flowing $100, $200, or $300 a month, they’re cash poor. They can’t fix it. If they can’t fix it, what’s the tenant going to do?

“I’m paying rent. You need to do this. You need to take care of this or I’m going to move out.” What happens? A default on the loan, and the person who sold it to them is now going to have to go back and take that back. Now in this whole craziness world of subject to, they’re defaulting on a loan that’s not even in their name. That’s the original borrower’s name. That’s just a whole another rant that I could go down. I feel bad for people who sold houses subject-to because in the next 24 to 36 months, I should pin this, but you’re probably going to start to see a lot of issues on those properties, unfortunately.

Creating Wealth Simplified | Seller Financing

Seller Financing: People who sell houses subject in the next 24 to 36 months will probably start to see a lot of issues on those properties.

 

Not Understanding The Exit

As we continue on my rant on this seller financing world, people are getting in over their heads. Another avenue that I’ve seen people start to look at is not understanding when they do seller finance, the exit. We have an individual, an investor, or in my fund who I’ve joint ventured with, hold loans to, and he’s bought loans from me. A great guy. He does brokering and seller financing. He does very well at it.

Sometimes, he’ll send us loans that people originated at 4% or 5%, and don’t realize the amount of discount they’re going to need to take for that. Here’s an example, we bought a loan from him that had, I want to say, about a $650,000 or $700,000 loan balance, but it was written at 5%, investment property backed by three properties worth probably roughly a million dollars. We paid about $450,000 for that loan, which was a $200,000 discount.

First, the seller didn’t want to sell it because they didn’t want to take that discount. They thought they’d get par for that loan. Again, if I can go put money in a bank and get 5%, why would I put zero risk and probably some instances, maybe even preferred tax treatments? Why would I want to do that, versus dealing with a borrower who at any point in time could lose their job and stop paying? The reality was they had to sell. We were the only ones that would buy that home because they needed that cash. People got too cash-strapped.

We bought it. It’s been paying and has a balloon at the end of 2025. I’ll probably pencil out, knock on wood, to a very good return for us. Looking back at it, with those borrowers, would they have been better off selling the properties for $150,000 less, taking a $200,000 haircut on the loan? $50,000 more. That’s where I know there are a lot of people out there talking about seller finance and wanting to do seller finance because it is the next sexy thing that I see after the short-term rentals and the subject-tos and all this stuff that’s going on.

I sit here and rant, and I tell people to be cautious and again think big picture and understand the risk because everyone forgets, in my mind, the risks they’re taking. I’ll go back to what I said earlier. A lot of these loans are being written that I’m seeing. Again, let me step back. When I look at the stats that Fred and Tracy put out, people are putting 25% down on properties. That is the norm. That is the average that’s out there. I do have to be like that.

What I’m bashing on this episode is not that. It’s not people doing the proper underwriting. It’s not people getting the decent down payments and things along those lines. It’s people using it and not thinking about the risk that’s involved and increasing the price of homes and thinking, “Now you’re increasing your risk.”

There’s a gentleman in BiggerPockets. He posts that, “I am overpaying for homes and proud of it.” This person’s going and offering $10,000 or $20,000 more per property and getting it on seller finance, then turning it in, trying to put rentals in there or whatnot and trying to make the numbers work. That’s great that the numbers work, but overpaying for real and overpaying for anything is never a wise decision and typically does not end well.

This individual is most likely, as they’re in a market that is starting to soften is probably, unfortunately going to get crushed. I look back at my buying career of the early 2000s, when I bought my first house in 2001. At that point in time, houses, I want to say we’re praising like 3% to 5% per year, which was like a $200,000 house. Let’s say appreciated 5% per year. For a few years, it went from like $200,000 to like $230,000 to $240,000, which is where I sold it.

When you also look at when I bought it, I had to pay closing costs and title insurance and everything. They probably paid $7,000 to $10,000 in closing costs. When you sell it, you pay another 10%. Let’s say, I paid 5% up front, which is $10,000, then another 7% of back end, $24,000, so of that $240,000, I probably spent $25,000. Did I make any money on it? I made very little. I still made. Maybe I made $10,000. Great, but the price went up by $40,000. It’s not that I made $40,000.

This is where people are relying too much on appreciation, not on management and realizing that if you buy a $200,000 property and you go to sell it, you’re going to net 185. All of a sudden, if the market drops by 10%, you’re at 180 but you also paid $220 for it because you thought you were being smart, then you have an issue with it. It moves out and you can’t afford it. This happens to all your property. You’re just in a negative liquidity situation, which increases your risk. It gives you no exit unless you’re going to sell or file bankruptcy.

People are relying too much on property appreciation and less on management. Click To Tweet

People need to be careful on that front and understand what they’re doing in seller finance, and the hash why I stayed from the beginning. If you want to learn seller finance, I recommend you look at people like Fred and Tracy, who I have no affiliation with, by the way. I’m not getting paid to say their name. I don’t get any kickbacks for recommending them, but they are somebody who teaches it well.

Episode Wrap-up

Make sure you get the down payment. Make sure you do it right, is what they do. Unfortunately, I’m bashing it because there’s a lot of people out there teaching and teaching the wrong way to do it. There are more people out there doing it wrong than right, and only the problem is online. Only my opinion. I’d love to hear other people’s feedback. Feel free to reach out to us and tell me what you think. Thank you for reading this episode. As always, make sure to leave us a review, like on your favorite channel. Take care. Thank you.

 

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