How to send an offer for owner financing?

Question

Link to The Letter

I want to send an offer to a house that I've seen.

The Deal

Baltimore City townhouse

Asking $50K

15K down owner financing

10% (annual)

Fully amortized over 5 years

The Offer

$30K purchase price

$10K down

15% interest (annual)

Paid over 3 years fully amortized

I want the offer contingent on inspection. I also want to protect my interest in the property and I'm not sure how to do that. I've heard of something called "holding the title" which will offer me complete control of the property while the sellers hold the deed. How do I add this? Should I send a letter of intent? Would that count for anything? Please help! Thanks in advanced.

Gregg Gannett · Answer

@Khadijah Celestine I think this starts getting into how well a level of professionalism, trust, and ability to close is presented along with letting the buyer be apart of the negotiation. Know your ceiling offer before hand and don't ask for a pre-pay unless it is demanded or absolutely needed to close. If so, then try the old "3-2-1%" or $750/$500/$300 tier prepay fee structure based on the number of years left, again know the number spread. Listen to the owner, don't make it to complicated and remember to use "If I can...., would you be able..." it works in reverse too.

-G

Khadijah Celestine · Answer

@JACK SHEA

Wow. That's a great idea and something I've never heard of. Thanks for that advice!

@Jay Dewberry

Thanks! It's such an exciting time! The first offer!!! :-) So, I've run the numbers, and with the asking terms, the seller gets $9,000+ in interest. However, with terms I'm offering, the seller gets $3,000+ in interest. I thought the interest rate was a little high too.

@Gino Barbaro

Thanks for the reply! I'm not working with a broker.

@Gregg Gannett

Thanks for the reply! I'll get in contact with an attorney and since the LOI isn't binding, I'll . Great advice!

Also, the point about less amortization was GREAT! I figured they'd want the money back sooner. But a longer term gives them more interest so I'll definitely change the offer to reflect that.

Also, a quick question. I'd be willing to pay longer at a higher interest rate but I'd rather pay as quick as possible. If I were to offer a 5-year term, would it be interesting to the seller to include a prepayment penalty?

Thanks again everyone!!!

Gregg Gannett · Answer

Hi Khadijah,

Best to get with our attorney and title company from the onset. Not sure if you are using a broker. In general a Title can give certain rights to a property and the Deed can convey certain ownership per each state's statutes taking into consideration a debt structure and one's individual legal and tax status. Inspection, financing, due-diligence and the like are common contingencies normally included in standard P/S contracts. An attorney can advise on additional contingencies or Addendums per deal or property. A LOI is a non binding document at the end of the day.

As for the counter offer what is the leverage to be offering 40% less than asking price with 20% less down payment and 2 years less amortization for -50% interest profit that the owner would agree to such a hair cut? Yes it can't hurt to ask and if "no" then have option B and C ready. If the owner has a level of experience he/she is going to know "You can ask for price or terms, but not both."

Good luck,

G

Gino Barbaro · Answer

@khadijah celestine

Hi Khadijah

If you are working with a broker, have him draw up a letter of intent and send it over to the seller or his broker

Gino

Jay Dewberry · Answer

Hi @Khadijah Celestine. Congrats on the potential deal. Does the owner own the property outright or is there an existing mortgage? Have you run the numbers to see how the property will perform (assuming you're holding for cashflow)? I'm not an expert, but those terms (especially the high interest rate) seem to benefit the seller more-so than you. Also, you should be able to put what reasonable contingencies you choose in your contract. In fact, it seems to have that in the Due Diligence portion.  I will defer to other members more seasoned on the type of strategy though. Either way, good luck.

Jack Shea · Answer

Have the seller put the property into a trust. You choose the trustee. The seller is the hundred percent beneficiary. You have an option to pay him as agreed and you get the beneficial interest, which is signed and held in escrow. If you do not perform the seller does not need to do a foreclosure. It is a private transaction and everyone is well secured.