How To Do Creative Finance with CPA Ryan Bakke

Quick Summary

Ryan Bakke and Jeremy talks about the benefits and strategies of using seller financing for real estate transactions. It highlights seller financing as a creative tool for both buyers and sellers, especially in a high-interest rate environment. This includes structuring favorable terms, educating sellers on financial advantages, and navigating tax and inflation considerations to achieve mutually beneficial outcomes.

Key Points

• Seller financing can allow buyers to acquire properties without relying on traditional bank loans, which are subject to high interest rates and strict debt-to-income ratios.
• Transactions remain off credit reports, enabling buyers with limited borrowing capacity to expand their portfolios.
• Spreading capital gains taxes over the term of the seller-financed loan reduces immediate tax liabilities, providing financial relief.
• Seller financing can generate steady, monthly income at competitive interest rates, often exceeding returns from traditional investments like treasuries.
• Seller financing agreements can be tailored to the needs of both parties, offering flexibility absent in conventional loans.
• Presenting multiple offers (e.g., lower price conventional vs. higher price seller finance) empowers sellers to choose based on their priorities.
• Buyers benefit from lower rates compared to market conditions, while sellers retain the option to repossess the property in case of default, adding a layer of security.
• Buyers must educate sellers on the financial and tax advantages of seller financing, framing it as a win-win scenario to overcome resistance and close deals effectively.

Full Transcript

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Jeremy: What's up, guys? We are live with the Short-Term Rental Pros podcast, and today we've got a very important episode. I'm joined by my buddy Ryan — Ryan, "Learn Like a CPA" — and we're gonna demystify seller financing today.

You know, you guys know why seller financing is so important? Well, 8% interest rates — that's really why. And there's another option out there, one that Ryan himself has leveraged before. He's also been very, very, very smart and strategic about using the tax situation of sellers to get the desired deal he's looking for.

So, Ryan, for those of you guys who don't know who you are, tell us a little bit about yourself, and let's get into seller finance.

Ryan: Yeah, my name's Ryan. I am a CPA by trade. I studied accounting and finance. I'm not a total nerd — also an athletic junkie. I lift weights all the time, but I have a creative mind. And once I learned to not trade time for money, that's when I went all in on myself, my business, and real estate.

And I am pleased to announce that I'll never work for somebody else ever again in my life. I hope to encourage and inspire you to do the same thing.

Jeremy So Ryan, not only is he an accountant, he is a decent basketball player. We'll play at some point so I can tell you if he's good or bad, but right now, I'm just gonna say he's decent.

But what he's really good at is the tax code. He's had a couple of deals, including the house — if you guys are watching this on YouTube — the house that he is currently in. Actually, correct me if I'm wrong: is this house the duplex? Did you do seller finance for this one, or did this max out your DTI, so you had to do it for the next one?

Ryan: This one maxed out my DTI, so I bought the one down the street with seller financing.

Jeremy: Yeah, okay. So first of all, for those listening, what is seller finance?

Yeah, seller financing is essentially where the seller becomes the bank. Instead of the buyer or borrower getting a loan with the bank to buy the house, the seller and the buyer have a contract with each other. The new owner of the house — the buyer — is going to be paying the seller off over a period of time.

Jeremy: Is there a set amount of time that you could do seller financing for?

Ryan: It might be state-based, but most of the time, a seller finance note is going to be about 10 years long.

Jeremy: Got it. So really — and this is why I call seller finance and creative finance kind of two of the same — there aren't set rules on how you do it.

When you do conventional financing with a bank, if you do a primary home loan, you know the lowest you can go conventional primary is 5%. If you do an FHA, it's three and a half percent. Generally speaking, the longest payment amortization schedule is going to be 30 years. There might be different programs like 10-to-1 ARMs or 20-year loans, but with seller and creative finance, you make the rules. It's really just whatever agreement you can make with the seller.

There's no governing agency — you know, the Fannie Mae or Freddie Mac — I may have just butchered what they're called. They don't have a database of seller finance deals where they're going through and saying, "Oh my God, Ryan got this guy to give him a 3,000-year loan!" Like, "Oh my goodness, that's just cruelty." They don't do that.

Ryan, have you ever gotten someone to do a 3,000-year loan?

Ryan: No, I don't think they exist. Japan, I think, has a 100-year loan though now.

Jeremy: Oh my goodness. They live long in Japan. In America, I don't think our lifetime expectancy is that high. So, tell us about that first seller finance deal you did and how you kind of, frankly, convinced the seller to do the deal.

Ryan: Yeah, at the time, you find out that the seller he bought the original property from had more properties to sell. I told him, "Well, you know, my debt-to-income, which is something we're going to be talking about, is going to be maxed out because I had already bought the one property using my W2."

Generally, with a bank, a bank is only going to lend you about 5x your W2 salary in the form of a loan amount. So if I'm making, let's say, 60 grand — which is what I was making at the time — I'm going to be able to borrow about $300,000 total.

Well, this property had pretty much capped my debt-to-income out, and so I wasn't able to qualify for another property or another loan conventionally or through a bank. The only way I was able to buy something else was to use a form of creative financing.

And that's when I tried to go the seller finance route. Now, on the seller's end, the problem you guys are going to have is a lot of sellers don't understand what creative finance is, and you're gonna have to convince them otherwise. Why should they loan? Why should they become the bank?

At this time, what was crazy is we were in a 4% interest rate environment. So for me to pull this off was insane. Right now, with sellers, they're starting to be a little bit more open to seller financing, but way back then, it was really hard to convince somebody to do seller financing.

Jeremy: Yeah, and on top of that, something that we're seeing now commonly — which, again, we're trying to compare creative finance and seller finance — is that a lot of sellers are offering 2-1 buy downs in order to entice a buyer to purchase their property.

What a 2-1 buy down is, essentially, is they're going to give you a credit in order to make it so — let's say you got a loan pre-approval at 8% — well, they're going to give you a credit for that first year's interest that would equate to 2% of that 8%. So it essentially brings you down to a 6% that first year, and then a 7% the next year.

So that is also, you know, you could call that seller finance or creative finance. But what we're really talking about today is a seller being the bank for the mortgage. We're going to talk about specific situations where it's actually beneficial for them.

What you need to do as a buyer is educate them on why it's beneficial. Just for context, I've made two offers today where I presented an offer conventional and I presented an offer seller finance.

The conventional offer I presented was very low — very low purchase price, probably below what the appraisal value would be, like, pretty significantly. Whereas the seller finance option, I said, "Hey, it's going to be a higher amount, but instead of getting paid upfront, you're going to get paid over time."

So why would it be beneficial? And that's okay, you know, if you're paying them over time, you need to make them be convinced that being paid over time is advantageous for them. Obviously, the higher price itself is one of those things.

But also — and this is where we're going to get into Ryan's specialty, taxes — you know, if somebody owns a vacation house and they bought it for, like, 200 grand and they sell it for half a million, they're going to owe taxes on that $300,000 gain.

So, Ryan, let's say this is a hypothetical situation. Let's just say that I own a vacation house in the Poconos. Why I just picked the Poconos, I have no freaking clue, but I did.

Let's say I bought it for a quarter million, and I want to sell it for half a million. You're coming in as the buyer. How are you educating me and telling me, and kind of making me scared, essentially, of that quarter million dollar gain I'm about to show?

Or maybe it's a $500,000 gain because I did cost segregation and depreciated it down to nothing. So I'll flip it on you: I'm the seller. I have this house. How do you approach the conversation with me?

Ryan: Yeah, and it would just be exactly that. I would love to get more context.

About why the seller is selling in the first place. So one of the things you could do, the first thing that I would do to check to see if I could get some sort of seller financing, would be to see how long the seller's owned the property for.

This should be relatively easy. A lot of times, in Zillow or Redfin, it'll tell you when it last sold or transacted, but you should be able to look up the property on the county assessor's website and determine how long the current owner has owned the property for.

If they've owned it for 10-plus years or 15 years, odds are the debt on it is paid down a lot, and that's going to be one of the important things we're going to talk about. Seller financing is typically where the seller is going to own the property outright or, if not the whole, you know, almost the whole thing.

Once you understand kind of what the seller's situation is — and this might take you having to ask the seller questions, like what are their goals, what do they want to get out of the transaction — you can start to figure out exactly how you want to present your offer.

So if I'm dealing with a seller that, in this case, let's say they have a $300,000 gain on their property, and I go to him, I say, "Well, you don't really want to sell this because you're gonna have to pay taxes on a $300,000 gain." Let's say his tax rate is 20%, so he's going to get his cash, but he's going to send $60,000 to the government — the $300k multiplied by 20%.

With seller financing, you're actually able to spread out the capital gain on the sale over the life of the loan. So let's say I convince him to seller finance it to me over 10 years. Well, instead of having to pay $60,000 of taxes in year one, he's going to pay $6,000 a year for 10 years.

Jeremy: And then also, one of the big aspects — I think, Ryan, you touched on this when we were... Ryan and I have been doing a program on how to buy for tax advantages, well, also how to successfully buy a short-term rental, but then also how to leverage a short-term loophole and offset your W2 or business income with, you know, with the short-term loophole.

And we were doing that, we were talking about seller finance, and Ryan said something that was interesting to me, which was like, "All right, let's say hypothetically, I'm, you know, an old guy. I've owned this house for 30 years. Then I sell it, and, you know, I make that $500,000."

I know I've just been changing the purchase price here in this hypothetical situation, so bear with me. But I show that half-million-dollar gain. Okay, so now I have to pay 20% of that in taxes, and beyond that, now I've got $400,000 post that $100,000 to Uncle Sam.

What the hell am I going to do with it? You know, what's... What am I... Am I going to put it in treasuries and just tie it up for, you know, 10-year treasuries? Like, that's what a lot of people do. They'll probably put it in 10-year or 5-year treasuries. Maybe they just put it in a high-yield savings account.

And what are you getting right now on a 10-year treasury? Like 4.95% or something? So you're locking up the money in treasuries. Is that your... If that's your best choice, perhaps it's better to say, "I'll loan it to you, the buyer, at a 6% interest rate."

So rather than getting 5% on my money, I'm gonna get 6%. Plus, it's coming in. It's coming in every month, and it's amortized. Because the thing with treasuries is you're just getting that interest monthly. Am I mistaken in that? Like, it's not... Treasuries aren't amortized, right?

You just get the interest from the T-bill, and then after that 10 years, it matures, and you can take it all back. Is that correct?

Ryan: Yeah, you get your principal back, yeah, after 10 years.

Jeremy: So essentially, you're locking the money up, getting 5%. At least if you sell a finance, it's amortized, so you're getting legit money. You're getting thousands of dollars every month.

So think about that. If you're 60, 70, 80 years old and you want to retire, what's better for you? Putting $400,000 into treasuries that get 5%, which is essentially getting paid $20,000 a year for locking up $400,000? Or do you want an amortized, you know, 10-, 20-, 30-year loan where you're getting thousands of dollars a month?

To me, it sounds like a no-brainer. I don't know, Ryan, what your opinion on that is, but if I'm that avatar, to me, yeah, I'm thinking about retirement. I want thousands of dollars a month, and I want the tax benefits. So if I can get both of them together, there isn't a better option for it.

Ryan: Yeah, and I explain this to a lot of my tax clients a lot. There's two ways you're going to get burned by selling a house or if you're sitting on a large gain.

Number one, obviously, is Uncle Sam. Because if I bought that property for $200,000, and now it's worth $500k, well, I'm going to pay a $300,000 capital gain. So I'm going to lose that $60k that we talked about.

But not only are you going to get killed with Uncle Sam, but you're also going to get killed with inflation.

Because if I just hold onto that money and it sits in my bank account, and I'm not doing anything with it, inflation — which is a silent tax, by the way — is going to eat away at that capital. So I am better off not hoarding the money but reinvesting the money.

Number one, I'm going to get away from Uncle Sam, and number two, the value of my dollar is not going to be lost to inflation. Those are the two main killers of wealth, in my opinion: taxes and inflation. If you could get around those by some sort of mechanism — if it is seller financing as a seller — you know, that's a creative way for you to take advantage of that.

Because, again, if you hold onto the cash, you're going to get taxed, and whatever you have left over is going to lose to inflation. You're going to lose out to inflation.

Jeremy: Exactly. So it's really, I mean, it's really the best of both worlds. But it's your job as the buyer to educate them on that, because frankly, they probably don't know. They're probably like... I mean, I've been having a lot of conversations with agents, with sellers, and one of the common things I get from a seller is:

"I worked hard to pay off this loan. I worked hard, you know, for years, and I paid it off. Why would I want to be involved in someone else's debt when I worked so hard to pay off mine?"

That's something that you seem to be getting. And again, we're not only saying seller finance partners are geriatrics — I feel like we're painting that picture right now — but I was like, "Yeah, no, totally get why you feel that way. I totally understand why you feel that way."

So it's like, you have to listen to them and get what they feel, and then kind of flip the script. "Okay, well, you don't like that? Well, you worked so hard to pay this off. Now, do you want to give 20% of it to Uncle Sam, tomorrow? Literally, if I buy this house tomorrow, you're gonna have to save that money and give it to them."

And then, you know, their wheels start turning, and they go, "No, we don't want to do that. Explain how we can get away from that."

So it's really listening. It's really... I mean, seller finance — you can call it sales finance. You know, with a bank, you don't really... I would say a DSCR loan, you kind of need to convince the bank of the property's potential sometimes, but really, other than that, like, you're never going to have to. You just show a bank your tax returns, and you can get conventional financing.

With seller finance, you're selling. You're selling them. It's not just seller finance from them, but you're selling them on it, which is funny, I guess. I don't mean to do all these play on words, but...

Okay, that being said, Ryan, I guess my question for you. So we've talked about kind of that old guy. Who else is someone where seller finance can be advantageous for them as a seller?

Ryan: Yeah, yeah. I mean, even people that are, let's say, mid-30s or 40s, that have a lot of rental properties. It could be that the seller finance note is the best investment that they have right now.

When I first got started in real estate, it seemed pretty apparent that if you're dealing with long-term rentals or multifamily, you're typically getting about, I would say, 9% to 10% cash-on-cash return on your money.

And short-term rentals were about 20% — 20–25%, give or take. Now, with high interest rates and overall, you could call it market saturation, you could call it whatever you want, but short-term rental gross revenue is down compared to how many active listings.

So that being said, I would say that a typical cash-on-cash return that you're seeing in the long-term rental space right now is about 7% — six to 7%. And hell, you're lucky right now if you could buy a short-term rental with regular financing and get higher than a 15% cash-on-cash return.

Jeremy: I mean, I would argue that you're hardly seeing a long-term rental that cash flows at all. Well, that too, yeah, unless you're like doing a $100,000 house in, like, Bumblecrap Midwest — which I'm from Bumblecrap, so no shots on that.

Ryan: But so it could be that seller financing is actually your best return on your money. Because, like, let's say I sell a property, and I have $100,000 that hits my bank account. Again, I'm going to be taxed on it. Boom, there's 20% gone. Now I only have $80,000, and that $80,000 is going to be eaten away by inflation.

When instead, I'm leaving that $100,000 in, right? It's not getting taxed. Well, it is getting taxed over the period of the loan — we're not saying it's not going to get taxed — but I'm letting that money work for me. And maybe that 6% interest rate that I get as a seller is better than me going to bootstrap another short-term rental just to get 12% or 13%.

Because that 6% difference between what I'm getting on the note and what I could get operating a short-term rental, you know, that may not be worth my time to do it when I could just sit back and collect a check from the new owner.

And what we haven't mentioned before is the whole safety blanket of seller financing. The seller can come and take the property back.

So your safeguard in seller financing — and you see this a lot with older people, like the example we used earlier — is if the new buyer, the new borrower (buyer and borrower being the same thing), comes in and they don't pay you back, you have the right to come and take the property back.

Jeremy: Which, I mean, hopefully, you're not going into the deal with the intention of not paying them back. Let's definitely enter deals knowing that we're going to pay the monthly mortgage, so to speak.

But, I mean, there's a reason that banks do this. You know, people say, "Oh, why would I ever do seller finance?" Well, why do banks? Why do banks give you loans? Obviously, they've been doing it for a long time. There's definitely something in it for them.

And it's the same for you. I mean, you get paid monthly. And then, if the borrower goes into default or, how am I blanking on this word right now... what's it called?

Ryan: Delinquent.

Jeremy: Yeah, delinquency. Foreclosure.

Then you get it back. You get the house back. Obviously, you shouldn't anticipate that, but it does happen. And going into this uncertain climate — like, you know, we haven't really seen delinquencies pick up yet. A lot of people have a lot of equity in their house. People are sitting on huge gains.

So that being said, we're not seeing delinquencies across the board. But tying it back — so there are advantages for sellers. What are the advantages for a buyer?

Ryan: Yeah, I would say the first one that stands out the most as an advantage for the buyer is I'm taking advantage of inflation right now. Because if I could borrow money in a seller finance deal and get a 5% note when interest rates are 9% and inflation is running rampant, I'm literally making money just off owning the debt.

And that's what I explain to a lot of clients now — you're buying properties just because of the underlying debt. Like, if I can assume a loan or if I can get a loan for 5% when the average loan right now is 8% or 8.5%, you're making a spread on that inflation and that difference.

So that, I would say, is the number one thing for buyers — just getting into real estate at super low rates.

Because the appreciation — that's another important part about real estate — is the property is going to appreciate in value whether you put 10% down, 100% down, or 5% down. The property doesn't care what your loan balance is either. Nobody cares about that.

The property is going to appreciate based on the market conditions surrounding it. So if I can get in for a low entry cost using seller financing, and my debt service is also small, I'm winning that way.

I would say another advantage is it doesn’t show up on my credit because seller financing is a transaction between the borrower and the seller. If I’m doing seller financing, you know, that doesn’t show up there.

So I can buy a house with a low W2. We just coached somebody in our program, right? Who, you know, is probably not going to qualify using conventional financing. So what is her best option to get into real estate?

Besides maybe doing arbitrage or co-hosting, if she wants to own, it's got to be through seller finance.

Jeremy: Seller finance.

Ryan: Yeah, so I would say those are two big things there: I could just buy debt for super cheap.

Like this one deal — we’re going to assume a $3 million SBA loan that’s at 4.5%, which we’ll get into in the next podcast. Maybe that'll be done then.

Jeremy: Yeah, we're gonna save some gems for the next one, guys, because there’s so, so much we can talk about here that we thought it would be better to have it over two episodes versus trying to squeeze everything into one. Uh, you haven’t told me about that deal, so I’m personally excited to learn about that one.

But yeah, so for some people, it might be the only option. You might not have the debt-to-income to buy. For other people, it might just be a simple equation. If I can get debt at 5% versus debt at 8%, that’s a 3% spread right there.

Ryan: Yep.

Jeremy: Like, the thing is, it’s different for everybody. I mean, I know right now, like, I’m presenting multiple — and this is actually something Ryan suggested when we were talking on our group call — but present multiple offers to people.

And just tell them, honestly, it’s a good time. You can just tell the agent, tell the seller, "Because of this, because of interest rates, I have to present it this way. I can either give you..." Like, I literally did this two hours ago. I said, "We will give you $450k conventional or we’ll do $500k seller finance. Which do you prefer?"

And we have to do this in order to make the numbers work. Just left it at that, and they get it. You know, everybody gets it. Real estate agents get it. Mortgage officers definitely get it — they’re probably crying about it, but they get it.

Sellers who have had their property on the market for three months, when a year ago they would have put their property on the market and it would have been sold in three minutes, they get it.

They want to sell their house. They’ve got to move. They don’t want to sell their house for less than what they bought it for, which is the case in some parts of the country.

We're seeing that, and we're going to get into subject two. That's one of the specific strategies that's really big now for folks who took on mortgages at 3%, and you can assume their loan. But we're not going to get into that today. Again, we're going to save some of these gems for the next episode.

But for those listening who want to make a deal, they want to buy property, and maybe they're having a little bit of a tough time making the numbers perfectly work at 8%, how would you go about finding folks, Ryan? How would you find folks who would be interested in selling their house and seller financing the acquisition?

Ryan: Yeah, so I think we had thrown out there before — maybe not on the podcast — but like a PropStream or a PropWire service that could tell you the type of loan or the balance that somebody has on their property.

Jeremy: And the phone number of the seller.

Ryan: And the phone number of the seller, yes. Although, I will say, from personal experience, it is not always 100% accurate. But that's one of the ways…

Jeremy: You might end up calling and getting Ron John on the line, who's not too happy with you. But, uh, 20–50% chance you get the right person.

Ryan: Yeah, and going back to the county records thing, I can see how long somebody's owned the property for, and I can make assumptions. You know, I may not be right because they might have refinanced their loan or something like that, but I at least will know how long somebody's owned it. Then I can kind of tell what their equity stake looks like.

And in that example, like, also you're starting to see in a lot of listings that people are just putting in the listing now: "Open to Seller Financing." And I believe MLS even allows you to search based on that now, if I'm not mistaken.

Jeremy: Yeah, I think when I showed it, I just literally searched—like I put it in Zillow and I just set the search as "seller finance." It's funny, in different places, it's more and more prevalent. Like, we were looking at Austin, Texas.

Essentially, a lot of places where home values were higher two years ago than they are now are prime places for seller finance for a different reason.

Ryan: Why is that? Property taxes.

Jeremy: Yeah, so it's property taxes, but also if you think about it, like, maybe someone bought a home with an FHA loan for a million-dollar house, and they put 35 grand down. Now, you know, they still owe that debt. They owe the debt, so they need to pay back their loan.

If they sell the house for less than what they bought it for, how are they going to pay it back? You know? Whereas if you do a 6% loan versus the 3% loan that you got before — you know, you got a house at 3%, now you're charging the buyer 6% — you're going to have enough money coming in to not only pay back the loan that you have, but you're also going to be profiting every month.

So, I don't know. We're in an interesting world, guys. There's a lot going on. And right now, this is the prime opportunity for seller finance. There has never been more tailwinds in its favor.

And because of that, Ryan and I are gonna hop on, not just this time, but we're gonna hop on next time as well. We're going to talk about more specific examples and how you can really go out and attack the market to get this ideal outcome and deals to grow your portfolio.

Ryan, any takeaways or just things you think folks who are curious about seller finance but not sure where to start should be doing?

Ryan: Yeah, I would say, when I first learned about seller financing, it was normally from a buyer's position of, like, "How can I invest in these properties as cheaply as possible, keep it off my credit, etc.?" But when you really understand why a seller should actually sell to you creatively, it opens up a whole other portal and another tool in your toolbox to be able to get a deal done.

Because, like you said, you presented multiple offers. If somebody presents you with three offers, they're more likely to sell that property to you, picking one of those options, than they are to go somewhere else. It's just principle. It's like, "This guy has it figured out."

You know, he's offering me conventional, he's offering me seller financing, he's got this option.

And so I think a lot of people see seller financing in terms of being a buyer — like, "How quickly can I get into a property?" But taking the time to understand and convince a seller why this is their actual best option to get rid of this property, because of two things primarily — again, we said taxes and inflation — two major reasons why a seller should sell using seller financing.

Jeremy: Exactly. So essentially, don't think about things in your shoes, but think about things in their shoes.

And I mean, this just goes for sales in general. So if you're a sales professional, this should become second nature. If you're not, this is going to be an opportunity for you to upgrade your sales skills.

And people do make a lot of money finding seller finance deals. Like, people right now — I mean, you could call it "whaling," that's technically what it is — but there are folks out there who are just targeting people and essentially finding these opportunities. They're finding investors, and they're getting a finder's fee of, you know, sometimes $5,000 or $10,000 for locating these opportunities.

So, another interesting thing to think about. But yeah, Ryan, what are some things we can also expect on our next call from you?

Ryan: Yeah, we're gonna really dive into both a little bit more from the buyer's side—why you should buy using seller financing and what are some of the tactics and conversations you can present to a seller to actually get them to sell the property to you using seller financing.

And then we're going to get into the world of subject two later down the road. We're also going to talk a little bit about the tax implications of both selling using seller financing and buying with seller financing as well.

Jeremy: Beautiful. Guys, stay tuned until next week. As always, Ryan, thank you so much for joining. Come on, guys, next week's gonna be a lot of fun, so save this pod, give it five stars, give it a follow. We're going to run it back. Ryan, catch you later, brother.

Ryan: See you, guys.