The First Seller Financed Deals I Considered

Three days a week I commute four- to five hours round trip. Most of my friends tell me in a loving way, they think I am crazy, but I love the small rural town I live in. (That is one of the reasons I am investing there.) But after listening to one of the podcasts on Bigger Pockets, (if you are interested in listening, here is the link: http://www.biggerpockets.com/renewsblog/2013/04/11/bp-podcast-013-seller-financing-leon-yang/) I decided to copy Leon’s strategy of searching for seller financed deals in the city I commute to.

I found two in an area I liked. The first was in an excellent part of town. When I used to rent a room in that area, I used to walk by it every day on the way to the light rail station, and see people eating on their shaded balconies wishing I could live there. So there was irrational emotional interest in purchasing. However, the monthly payment would have been over three times rent, so I did not waste my time, or the realtor’s time, pursing that property.

The second property was no where near as nice as the first, but it was in the same nicer area of town, and was priced at nearly one third the price of the first. It was not high end like the first, but solidly middle brow, with recent mid-grade updates, but nothing too profligate. Updates like new paint, new, but not stainless steel appliances, and new carpet, or floor, depending on the area. Hover, there were several hitches.

First it was not a multi-family, but a condo. Right now, I really like multi-family properties. I have kept my personal consumption level at, or near, the level of my personal consumption in college. So I would not need more than one room in a property to be happy, and could rent the other, or others, without hesitation. (In this case though, it was a two bedroom, two bath, so it was just the one other room.) I also recently reread Make Money with Condominiums and Townhouses by Gary Eldred, and I felt although condos were not my first choice, if things were structured right, it could be profitable. So I reached out to the agent for the property.

She was very professional. The seller had told her that he could do seller financing, and she had put that on the ad, but he had not received any offers yet. (The property was just put on the market that week.) This was the first time I had ever done anything like this, but I thought I can’t learn if I don’t start, so I just suggested the terms I preferred: the asking price, five percent down, fifteen year loan, and four percent interest. I also scheduled an appointment to look at the property the next time I was in the city for work.

Now these terms were not perfect, if I wanted to rent this out as a pure investment property, I would have lost money with these terms. I am sure some would not even consider it an investment in the purest sense. However, for me, it made sense, because I had a large cash-flow shift from four sources, the gas I spend each month, less regular car repairs, tax deductions, and renting one of the rooms. Of the roughly thirteen hundred I would paying in expenses, for instance mortgage, hoa, utilities, I would receive about eight hundred combined back form those four income sources. So, to use an analogy, buying this property would be like renting a property for five hundred dollars a month, while keeping four hundred dollars in equity each month.

I am not against owning negative cash-flow property. I read Buy and Hold Forever by David Schumacher, and he made investments where he had negative cash-flow that over the long term, ended profitable. I always want to push myself to think long term. Even though before I began this search, I never considered the idea of a seller financed property, I think as I worked through this process, and if I could have received the terms I wanted to, I think after researching the options, and gathering information on the numbers, I would have gone for it.

However, the agent called me and provided the seller’s terms: ten percent down, five and half percent interest rate, thirty year amortization, and a five year balloon payment. The cash-flow would have been better, my expenses would be about eleven hundred fifty dollars a month, but my equity would have been much less because of change in the term of the loan. This is especially challenging because by building equity slower I would not be able to refinance into an investment loan after five years without bringing a large amount of cash to the table. I would have less equity after five years with these terms, than if I had put five percent down, but payed the loan over fifteen years. I had read in another one of Gary Eldred’s books, Investing in Real Estate, that one of the advantages of providing seller financing was that under cretin terms, the seller could revive the property back, and the seller could keep the payments made.

I never want to be on the other side of that transaction. Also, even if I could obtain a refinancing, the reduced equity build up would lead to a much smaller net worth gain each month. Nor would it have worked as an investment property using either the 50 percent rule, or by breaking even counting expenses. The risk was beyond what I felt prudent, so I called the agent, and cancelled the appointment, and told her that I would not consider the property without different terms. The condo since sold to someone else.

But I also told her to contact me if she learns about any multi-family, or condos for sale with seller financing. I would not have done that, had I not gone through this exercise, and considering purchasing these properties. For that reason, I am very glad I did.

I know the temptation to do something is strong, especially just before Christmas. There is something about purchasing a property, that in a dark, primeval, and emotional way, is decisive, and makes someone feel more alive. I know the temptation…

However, I would recommend, for what it is worth, to resist that temptation, however rugged. (And yes, as a hiker, I already know rugged temptations, that make you feel more alive, are the hardest to resist.) For me waiting a year, until I can use owner occupancy financing again, and then getting more favorable terms, on a wider breadth of properties, is till I think the best course. Then, I would also then have a larger cash reserve.

Not emotions, but prudence, should be my compass. Part of being prudent is learning the terms that best achieve your goals. Self-mastery is converting those terms into action. But sometimes, action is not always purchasing the property. Sometimes the action is just learning, and instead serve as the first stepping stone, in a longer term action, or an eventual purchase.