How to Structure a Seller Financed Land Deal

Transcript of Module 5, lightly edited for readability. The video was recorded before we passed 250 notes; the figures on this page are current.

Welcome to module five. You've screened your buyer, you've checked their credit, and you know what down payment they need based on the credit matrix. Now it's time to structure the actual deal, the interest rate, term length, fees, and payment schedule. This is where you balance making the deal attractive enough for the buyer while ensuring it's profitable for you and valuable to note buyers.

Let's start with down payment. Your baseline is 20% down or $6,000 minimum, whichever is greater. Why 6,000 minimum? Because even on a $25,000 property, which is the minimum I recommend for seller financing, you need at least 6,000 down to make the deal worthwhile. Anything less and you're not adequately protected.

So if you're selling a $25,000 property, the buyer needs 6,000 down, which is 24%. If you're selling a $50,000 property, they need 10,000 down, which is 20%. Of course, if the credit requires a higher down payment based on the matrix we covered in module four, that takes precedence. A buyer with a 640 credit score needs 30% down.

regardless of the property price. Banks never approve vacant land loans with under 20% down. You shouldn't either. This is about recapturing as much of your investment at closing as possible and ensuring the buyer has substantial skin in the game. For interest rate, I recommend 10.9%. Why 10.9%? Because you're not a bank and you're not in the business of giving 30 year mortgage rates. Commercial banks charge around 9% for documented loans on land. You're providing a no-doc loan. You're not verifying income. You're not requiring extensive paperwork. So 10.9% is fair compensation for that additional risk and simplicity. Now you can exceed 10% but make sure you check your state's usury laws to ensure you're in compliance. Some states have caps on interest rates for private loans. Don't violate these laws. The penalties can be severe. If a buyer pushes back on the 10.9% interest rate, remind them there's no prepayment penalty. They can pay off the loan at any time to avoid paying interest. If they get a bank loan or save up money, they can refinance or pay it off without any penalty. This usually addresses their concern because they realize they have flexibility and aren't locked into paying 10.9% for the entire term if their situation improves. For the term length, I recommend 96 months maximum. That's eight years. Why? Because banks typically only offer five-year balloon terms on land loans.

We're already being more generous than banks by offering eight years. The longer the term, the higher the probability of default. Life changes, circumstances change. The longer someone is making payments, the more opportunity there is for something to go wrong. Shorter terms mean higher monthly payments, which means faster recapture of your investment. We want these loans paid off relatively quickly.

not dragging on for decades. Let's talk about balloon payments for a moment. In general, I'm not a fan of balloon loans. Why? Because they create refinancing risk for the buyer. When that balloon payment comes due in three or five years, the buyer may struggle to refinance or pay off the balance. This can lead to defaults. However, I do purchase balloon loans. If you structure a deal with a balloon payment, Just make sure the buyer understands the obligation. They need to know that in three or five years, they'll owe the remaining balance in full. Shorter balloons, three to five years, are more common in land financing than longer ones. If you use a balloon, keep it on the shorter end. Now let's talk about the fees you should charge. First, charge a $500 loan fee at closing.

This covers the costs of document preparation and compensates you for the work of setting up the loan. The buyer pays this at closing. Second, the first payment is due 30 days after the closing date. This is standard. You close on the 15th of the month, first payment is due on the 15th of the next month. Third, the buyer pays a $25 per month servicing fee to the loan servicer. This is an addition to their principal and interest payment. So if their P&I payment is $800, they're actually paying $825 per month total. Make these fees clear upfront. Include them in your initial discussion with the buyer so there are no surprises at closing. Here's an important principle. Don't be too rigid with your terms.

Be willing to work with buyers to find win-win solutions. Your recommended terms are a starting point, not set in stone. Your goal is to close deals while protecting yourself. Let me give you some common negotiation scenarios. If a buyer wants a longer term, you can offer it, but increase the interest rate. For examples, standard eight years at 10.9% versus 10 years at 11.9%.

The longer term compensates you for additional risk and time. If a buyer wants a shorter term, you can decrease the interest rate. For example, five years at 9.9 versus eight years at 10.9. The shorter term reduces your risk, so a lower rate is justified. If a buyer struggles with a monthly payment, adjust the down payment. A higher down payment means a lower loan balance.

which means lower monthly payments. For example, 30% down instead of 20% significantly reduces the monthly obligation. You could also extend the term slightly to lower the payment, though as I mentioned, I prefer shorter terms. You can also consider a balloon payment, though that's not my general recommendation. The key is balancing risk and return.

More risk for you, longer term, lower down payment, means higher return through interest rate. Less risk, shorter term, higher down payment, means you can offer a better rate. Work with the buyer to find terms that work for everyone. Be creative while protecting yourself.

Here's a critical point. When you negotiate a higher down payment, you're not just protecting yourself from default. You're also increasing the value of your note if and when you sell it. A note with 30% down is worth more to me as a note buyer than a note with 20% down. Why? Because there's more equity, which means less risk. If the buyer defaults, I have a bigger cushion.

When you sell me a note with a higher down payment, I can pay you closer to 90% of the loan balance instead of 80 to 85%. That's thousands of dollars more in your pocket at closing. So when you're negotiating with buyers, remember that getting them to put more down doesn't just reduce risk, it increases your profit when you sell the note. Finally, remember 20% down or $6,000 minimum, 10.9% interest rate, 96 months. Charge a $500 loan fee and $25 per month loan servicing fee paid by the buyer. The first payment is due 30 days after closing. Be flexible on terms to find win-win solutions, but remember that higher down payments mean higher note values when you sell.

In the next module, we'll talk about why you should use a note and mortgage instead of a land contract. And this is critical. Let's keep going.