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Case Study Part 2 – Conclusion: Buying Your Primary Residence Off-Market with Seller Financing

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In this episode, Jeff shares the second and final part of a two-part series outlining a case study on exactly how he and his wife used the Y.E.S.S.E.S. Framework to buy their own primary residence using a variety of creative deal structuring tools and seller financing.

Episode Transcript

In the last episode, I told you the beginning part of a case study about how exactly my wife and I used all of the same approaches we use to buying investment real estate, but to buy our own primary residence, and in today’s episode, I’m going to conclude that case study tells you the second half of the story, tell you how it all wrapped up and how we ended up closing on the property that I am recording this podcast for you inside of right now. Let’s keep the theme song we’ll jump right in to the second part of the story.

Welcome to Racking Up Rentals, a show about how regular people those of us without huge war chest of capital or insider connections can build lasting wealth acquiring a portfolio of buy and hold real estate. But we don’t just go mainstream looking at what’s on the market and asking banks for loans. nor are we posting We Buy Houses signs are just looking for “motivated sellers” to make lowball offers to you see we are people-oriented deal makers. We sit down directly with sellers to work out win-win deals without agents or any other obstacles and buy properties nobody else even knows are for sale. I’m Jeff from the Thoughtful Real Estate Entrepreneur. If you’re the kind of real estate investor who wants long term wealth, not get rich quick gimmicks or pictures of yourself holding fat checks on social media. This show is for you. Join me and quietly become the wealthiest person on your block. Now let’s go rack up a rental portfolio.

Thank you for joining me for another episode of Racking Up Rentals. Show notes for this episode are at thoughtfulre.com/e64 for Episode 64. Please do us a big favor by hitting the subscribe button in your podcast app. It really truly helps other fellow thoughtful real estate entrepreneurs to find this show. Onward with today’s episode.

So suffice it to say, if you have not heard Episode 63, Episode 64 here is not going to make quite as much sense. So I would encourage you to go back and listen to the first half of this story because we’re going to pick up right now, where we left off in our story. So the big picture of our story is that my wife and I decided we wanted to move to a different town about three and a half hours away from where we were previously living. And we wanted to use the same techniques and approaches that we use to buying investment real estate to buy our own home, including seller financing. Well, why is that? Not just because I love seller financing. I do love seller financing, but also, because as a self-employed real estate entrepreneur, I don’t fit perfectly in the box of what banks and mortgage companies like to see when it comes to conventional 30 year fixed mortgages. So I knew that we needed to shop for a person who would be our banker as well as our seller. So we got our vision together, we clarified that we took the first three steps in the Y.E.S.S.E.S Framework.

Step number one is y which stands for YOU or in this case, it’s us. Secondly, then we engaged thoughtfully; that’s E in the Y.E.S.S.E.S Framework. And then once we got a call back from a great seller, Albert, we engaged him in that conversation and ultimately moved on towards the first s in the Y.E.S.S.E.S Framework which is solving the person. And that’s where we’re going to pick up today.

In this episode, I’m going to tell you about how we then finished out this negotiation using the rest the second half of the Y.E.S.S.E.S Framework, which is S-E-S. So we already did Y-E-S; now we’re doing S-E-S and that is solve the deal, empathetic proposal and sharpen and agree. So I want to recap for you, where we left off with what Albert had indicated. He wanted in terms of a sort of draft version of a deal that he would find acceptable. He told us that he wanted a purchase price of $625,000. He felt like this was very fair, because he knew the house would be worth more than that. But he just didn’t really want to have to do the work to repair it from the bad tenant who had been there. He also really wanted $150,000 down and it was very clear from the subtext of his comments that he wanted to make sure that the buyer had skin in the game, so $150,000 down, which is of course just a little bit shy of 25%. So it’s a significant amount. He wanted four and a half percent interest. And he wanted a 15-year amortization of that loan. And I knew at that moment that this wasn’t quite right. For me, I was going to have to fine tune this deal through my negotiations with him a little bit further, but I knew we were getting towards the right general strike zone of something that could be appropriate. So instead of countering “right away” and asking him if we could tweak those terms at all, I decided that it would be better to see if I could meet him in person, because we were three and a half hours apart.

But this conversation is now feeling, you know, more serious. And I knew it would actually, frankly seem weird to him, if I didn’t want to come see him and see this property. And I did want to see him. And I didn’t want to see this property before. I totally felt like I could put a bow on s solving the person. And so I scheduled a time to come over and meet him at his house, and sit down with him and talk a little bit get to know him. And then we would drive over to the house that I had written to him about his rental house together, and he would show it to me, and then we will go back to his house and continue our conversation. Because this was three and a half hours away. And it was during the middle of the week, I told him my wife was not going to be able to make it. So I wanted to be able to take photos and video if he was okay with that. And he absolutely was. So my goal with meeting him was of course, partly to see the property and making sure it was something we wanted. But more than anything, it was still about Albert, I really wanted to conclude my version of solving the person and truly understanding Albert so that this is an important point.

So that when I started to try to adjust the terms from his initial verbal draft, when I tried to adjust those terms, I could frame my requests my ideas in language that would make sense to him that I knew would make sense to him because I knew him so well. At that point, I knew I had solved the person. In this conversation very, very interestingly, I find out that Albert is a little more financially well off and a little more experienced, then I realized, first of all the house I meet him at where he lives is a very nice home. But in conversation, just in conversation, it comes out that he has another home in Northern California. And he has motorcycles. And he had written to his motorcycle from our town in Oregon down to his place in California. And it was so hot. He didn’t feel like he could ride the motorcycle back. And so I said, “Well, Albert, that sounds like, you know, a little bit of a logistical challenge. So how do you handle that? Now you just need to catch a plane back down there to you know, get it at some point, or can you put it on a trailer and drive it back at some point?” And he said, “Oh, no, no, I I’ve got I’ve got lots of motorcycles. I’ve got six or seven here and six or seven down there.” And I thought Oh, wow. Okay, so we’re 1214 motorcycles. Okay, well, that’s a collection, I guess. And it’s like, Well, okay, so you just have to fly back some time and go, he’s like, yeah, I’ve got my own plane. It’s, it’s fine. It’s no big deal. Oh, really? you’ve got your own plane? He says, Yeah, actually, I’ve got I’ve got two of them. I’ve got one here. And then I’ve got one down there.

And I’m starting to think wow, okay. Wow, this person is more financially, you know, advanced than I then I thought. Then he mentioned that, you know, he had casually mentioned before that he’d had a couple rental properties over the years. And then in this conversation, he also casually mentioned that he has a partner in 1800 units in the Bay Area. And I just about spewed my coffee across the room at him and I leaned forward. And as Albert, did you just say you’re a partner in 1800 units in the Bay Area? And he’s Yeah, yeah, it gets me and you know, 12 other people. So it’s not as big of a deal as it sounds like, wow, okay. Well, so you are definitely more sophisticated than I am. And I realized, and that understanding of who I’m talking to, and his frame of reference and how selling this one $600,000 house fits in his life, I’m getting a much, much, much, much clearer picture now, of how this works. This is not the biggest deal that he’s ever done in his life. It doesn’t matter to him. But I can tell it’s more about the principle of handling his finances. Well, rather than that he really needs this money to accomplish anything in particular. So I feel like I’ve solved the person now. And I really think that if I had to name the one big thing, the number one thing most on Albert’s mind was that he wanted $150,000 down. I think he also was very fixated on the price because he felt like he was already conceding a good deal. But it was really that down payment that made the most difference to him. And also, as I move into now, s solving the deal. I’m looking at that going Hmm, that’s the part that’s kind of the worst part for me right now.

Now, I know that if I’ve got some time, I can do deals, I can move money around within my portfolio, I can refinance things in a way that will create $150,000 that I can put into this, but I can’t do that now. And I kind of want to, I want to buy this house now, and I want to be able to move in before too long. And so that was one problem. And the second problem was I was looking at the amortization schedule and, you know, $475,000 loan over 15 years and like, that’s pretty, that’s a pretty aggressive timeframe, it’s a pretty healthy payment, I’m not really sure I want my monthly payments to be that high either. So here’s what I did. I proceeded to do like what I like to call incremental negotiation. And that basically is a fancy, highbrow way of saying, I just try to tackle one thing at a time, instead of trying to give him all my thoughts at once I try to figure out the right order in which I can get him to make agreements with me, and just kind of tackle one at a time in a sequential and cumulative manner.

So the first thing I started with was actually not the down payment, I started with the payment structure itself. And I said, Albert, I think what you’re, what you’re suggesting here makes sense, I can see that what you’d like is to have this this promissory note be paid off to you in 15 years, you don’t want to drag on for 30 years. I’m concerned that that is a pretty high monthly payment. And I know what kind of rent you were collecting before. And I have an idea what if we were to amortize this loan over 30 years in a more standard way, but have a balloon payment due at 15 years. So we’ll go the whole 30 year term, but it will keep the payment more in a traditional zone for me. And when I’m able to make payments, that’s a good thing for you as the beneficiary. And yet you still will get your cash out in 15 years, instead of waiting 30 years, would that be okay? And he said, Yeah, I think that would be just fine. Because my payment to him now is even with a 30 year am is still as much if not more than his previous tenant was paying. So we got that checked off. And I said, Great.

The next thing I decided to chat with Albert about was the down payment. And I knew I needed a solution here. And I didn’t have that $150,000 at that exact moment. But I knew I could if I just had a little time to kind of get my ducks in a row. So I thought to myself, what, what if I could somehow give him $20,000 down now, in order to be able to sort of take control of the property to be able to move in, and then buy myself several months that I could use to put the money together for the other $130,000 that he wanted. And so I said, Okay, I mean, that seems reasonable, but it’s a matter of what exactly is that structure? And how do I explain it to Albert. So here’s what I did.

Now we’re moving on to E in the Y.E.S.S.E.S Framework. This is the second e empathetic proposal. So I called Albert back and I said, Albert, I have an idea. And I want to see how this sounds to you. I know how important it is to you that you’d have $150,000 down because you want to make sure I’ve got plenty of skin in the game. And I agree, if I were you, I would want the same thing. As you know, Albert, I’m a real estate entrepreneur. And so I’m constantly refinancing things, I’ve got properties that are for sale, things I’m buying, and I’m finishing up projects right now. And if I can tell you at this exact moment, I can’t write you that check for $150,000 but I have an idea. I said, What if we took this in two phases, what if the first phase of our relationship was a lease with the option to buy so here’s how that would look out, I would give you $20,000 down right away. And this would be an option fee, it’s me buying my right to purchase the property in the future at $625,000 It would also grant me a lease so that Jessica and I could move in to your house. And each month, we would pay you 20 $500 a month rent 500 of that 20 $500 you would count and add up and accumulate on top of the $20,000 that I gave you towards my option fee consideration. And I would have at the most 18 months to exercise my option come up with that other 130-ish $1,000 at this point and actually buy the property and then at that moment, Albert, when I exercise my option, I will close on the property and you will become the beneficiary of a promissory note. So effectively at that moment, you will get the other 130 or so $1,000 that I owe you. title will transfer to me. We will record a deed of trust secured by this property with the county. So you are now the beneficiary of a promissory note and it will be exactly what we’ve discussed. It’ll be a 30-year amortization of this $475,000. Note, it’ll be a 15-year balloon payment. So I’ll just make a regular amortized payments for the first 15 years. And then I’ll owe you the balance at 15 years or sooner. How does that sound, Albert, because now we have kind of two phases, the first phase where I’m leasing with the option to buy which allows us to get on with this show, but in a way that I can give you $20,000 now, and then ultimately, we’ll just basically change the paperwork, when I give you $130,000 more, I will become the owner, you will become the beneficiary of the promissory note. So we instead of going straight to the point where I’m the owner, and you’re the beneficiary of the promissory note, we add this step in the middle of the lease with the option to buy. Oh, and by the way, Albert, if I change my mind, if we don’t like living in the house that $20,000 is yours. It’s non-refundable, because it’s lease option consideration. And he said, Okay, I think I’m amenable to that idea. And as he pondered it a little bit further.

Then we moved on to the S, the last s in the Y.E.S.S.E.S Framework. This is sharpened and agreed because I just now, empathetically delivered a proposal to Albert. And now Albert starts to provide me feedback. And he says, Okay, well, the only thing that concerns me is 18 months is a long time. And I feel like I’m giving you a good deal at 625 right now. But if you exercise this option, at 625 18 months from now, I’m really going to be feeling like I gave you too low of a price because I am seeing that price or prop properties are appreciating in value prices are on the incline, I believe that’s going to continue. So I can’t give you today’s price for 18 months, he said so here’s what we can do, though. If you exercise your option in the first six months, it’ll be locked in at $625,000. If you exercise your option, after six months, say in month seven through 18, the price is going to escalate by a small percentage each time. And that will make me feel a little bit better. And that gives you Jeff some incentive to really hurry to the best of your ability to put together the rest of that money and exercise your option as soon as possible. And I spoke to Jessica about that. And we agreed. So at that point, we had empathetically proposed an idea. He was amenable to that he provided a little bit of feedback that we sharpened the deal up, and we agreed to it. So that concluded our negotiation. So here’s how it ended up playing out after that. We signed that agreement in October of 2019. And it took Albert a little bit of time to get his current tenant out of the property. And while he and I had agreed he wasn’t going to really do anything too substantial to the property before we moved in, he was going to at least make sure it was livable and clean and just fixing a few basic things so that we could have a dated but moving ready type of a home. And so we moved in, in February of 2020. And in order to do that, we went to the title company with Albert we sat down, we gave our to $20,000 check that he was that was his option consideration. We had an option document that was recorded with the county with the help of the title company. And ultimately also, we had pre written our purchase agreement, our promissory note our deed of trust, and we had all approved of all those documents in advance. In other words, so that when I I ultimately went back to Albert, I said I’m ready to exercise my option. There was no debating what the purchase agreement was going to look like or to say what the promissory note was going to look like or to say we the trust deed it none of that all of it had been pre-approved in writing. So I just had to go to Albert and I said, Okay, I’ve got the rest of the money together. I’m now going to exercise my option. We’ve got an appointment at the title company on Wednesday. Please meet me there, we’re going to go ahead and proceed with this, I will become the owner and you Albert will become the beneficiary of this promissory note.

Six months after we had moved in and paid our option consideration, I was getting very, very close to being able to come up with the other $130,000 I still needed a little bit more time. And so after one more month, so seven months total, I was able to exercise the option so our purchase price on the House did increase just a wee bit to $628,000. And it was a small price to pay for having this level of flexibility. So we exercise our option at about 628,000 dollars. And now as of today, and as of August of 2020, we are the owners of that property. This property, I should say, because I’m sitting in it right now, Albert is our beneficiary, our monthly payment to Albert right now is as a mortgage payment is almost exactly the same within $100 of the lease option payment that we paid him for those first seven months. So every month now, he continues to get approximately the same payment. But now we have principal and interest with us amortized note, and we send him the check on an automated basis, I create a monthly statement for him, and I email it to him. And I say, Albert, here’s your you’ve already received your payment, here is your monthly statement. And on down the road, we go for as much as 15 more years. So what did it take really to get this deal done? Well, I think it took a few things.

One is it took some vision. And none of this would have really happened without Jessica and I spending some time gradually, frankly, over the course of years, figuring out really what we wanted, but ultimately sitting down and getting really precise about what do we want in a property because that created a list. And it created a very short list. So we could go out and really hunt for this property in a in a very targeted kind of way. It took a lot of intentionality. Remember, I told you that we almost through just the universe being good to us got a property with views of the mountains, even though we knew we couldn’t really guarantee that by just putting that intention out into the universe that actually manifested itself, as well as we engaged in this whole process. The conversation with Albert it took some creativity, right? It took some thinking about how can we structure this deal in a way that gives Albert what he wants, which is a price but more importantly this down payment because it represents peace of mind to Albert, but how can we take control the property and start our life here, before we have all the money that he needs to feel good about the down payment. And ultimately, overall, it simply took the yeses framework, we had to follow this process that started with us, it focused on shopping for a person focusing on that person and understanding them, then putting a deal together that met what that person needed, proposing it, and then tweaking the agreement as necessary. And I’m happy to say we are loving living in this new home in this new town, can’t wait to get started with more renovations to really make it everything that we want it to be.

That is it for today’s episode of Racking Up Rentals and concludes this case study on how to use the Y.E.S.S.E.S Framework and the thoughtful approach to buying properties off market with seller financing for your own primary residence. Again, show notes are going to be found at thoughtfulre.com/e64. Please do us a big huge favor by hitting the subscribe button in the podcast app right now. And rating and reviewing the show doesn’t have to be Shakespeare, doesn’t have to be long. Just give us the rating and a review that you feel is right. And we would so appreciate that. Did you know that we have a group on Facebook for thoughtful real estate entrepreneurs to we do and you should be a part of it. It’s called a Rental Portfolio Wealth Builders. I’d love to have you over there. through the magic of the internet. You can just type in group.thoughtfulre.com, it’ll take you right to that page where you can just hit the Join button. And if you liked this episode, please take a screenshot of it on your phone post that to Instagram and tag us. We are @thoughtfulrealestate all spelled out there. I will see you in the next episode.

And until then, this is Jeff from a Thoughtful Real Estate Entrepreneur signing off. Thanks for listening to Racking Up Rentals where we build long term wealth by being win-win dealmakers. Remember solve the person to unlock the deal and solve the financing to unlock the profits.

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4 Responses to “Case Study Part 2 – Conclusion: Buying Your Primary Residence Off-Market with Seller Financing

  • I thought these were two great episodes Jeff! My wife and I are currently in the same situation where we are looking to buy a primary residence.

    Did it take multiple letters before the individual you bought the house from reached out to you? How long was it before they contacted you?

    • Thanks Nate! I appreciate the feedback and am glad to hear you enjoyed the episodes! In this case, no, it just took one letter! If we hadn’t gotten enough response on the first letter, we definitely would have sent a second round to the same people probably 2 months later…but we just didn’t need to! They contacted us within a week of our mailing.

      • That is awesome for you and your wife! We have an appointment with a title company tomorrow morning and should be getting contact info from a realtor friend for another title rep on Friday. We wrote out letter tonight and are getting prepared to start sending letters!

        • Fantastic! Keep us posted on how it goes, and how we can help!

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