Whats the worst-case scenario when buying a seller-finance unit?

Member since 2022 · 46 posts · 7 votes

I have been incredibly interested in buying a seller financed property, mostly now looking at the interest rates.
Im also incredibly worried, as this is my first time not doing an FHA loan. What is the worst that could happen? How can I protect myself? Im worried if something goes wrong Ill have to sell all my assets and be in eternal debt, but I think I may just not be too educated with the entire process.

Thanks all

0 Reply

28 views

3 Replies

Jump to latestLatest

Sort by

Victor SteffenBusiness Member
Investor · Austin, TX · Member since 2017 · 352 posts · 374 votes
4y
Typically a seller financed deal will have a balloon payment which will require you to refinance or sell the property to pay back the notes within a 18-36 month period. Imagine buying a seller financed deal 2 years ago at 4.5% interest and needing to refi at the current rates. Your cashflow will be erased. Curious to hear what other pitfalls we can look out for when putting together seller financed deals?
Podcast Guest on Show #790
0 Reply
Tyler J.
OP
Member since 2022 · 46 posts · 7 votes
4y
Quote from @Victor Steffen:

Typically a seller financed deal will have a balloon payment which will require you to refinance or sell the property to pay back the notes within a 18-36 month period. Imagine buying a seller financed deal 2 years ago at 4.5% interest and needing to refi at the current rates. Your cashflow will be erased. Curious to hear what other pitfalls we can look out for when putting together seller financed deals?

So in that scenario would now possibly be a good time to get these deals, as refi in a couple years will (most likely) be lower?
0 Reply
Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
4y
Quote from @Tyler J.:

Quote from @Victor Steffen:

Typically a seller financed deal will have a balloon payment which will require you to refinance or sell the property to pay back the notes within a 18-36 month period. Imagine buying a seller financed deal 2 years ago at 4.5% interest and needing to refi at the current rates. Your cashflow will be erased. Curious to hear what other pitfalls we can look out for when putting together seller financed deals?

So in that scenario would now possibly be a good time to get these deals, as refi in a couple years will (most likely) be lower?
This is the risk you run. You don't know if rates will be lower or higher when the balloon payment comes due. You don't know if the property will be worth more than when you bought it, or if you'll lose 15% equity because the real estate market tanked. Hopefully, the property will at least maintain it's value and you'll have some equity because you've been paying it down every month.

You'll need to have at least 20% equity in the property so you can refinance 80% with a bank and pay the balloon payment.
The DIY Landlord Book4.7247 Reviews
Website View Page
0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.