Seller Carry Financing Downsides

19 Replies

Looking to purchase my second investment property.  I am likely $10-20k short in the necessary down payment for a deal that recently came to me.  The deal checks all the boxes for me (area I like, area I know I can find renters, small multi family-3 units, near my first purchase, cashflows with all 3 units rented, breaks even if just two are, etc.)  While I am saving quite a bit on a monthly basis, I do not want to wait months until I save the rest because I am worried the deal will sell elsewhere.  Pre-approval is in hand, pending the down payment.

I am considering asking seller to consider Seller Carry Financing as the agent believes it may be an option.  I have obviously never done this before, and I wonder what the draw backs for me as the buyer are?  What should be part of my negotiations tactics with respect to rate, balloon payment timeframe and date, etc.?  Am I able to simply refinance in a few years when the balloon payment is due?  Obviously some risk in rates rising over that time, but that risk seems small to me.  What am I missing?

Buy-and-Hold investor. Credit 780+. Able to save decent amount each month just from W2 job.

Hi @Alex Folchi , Ask the seller - doesn't hurt to ask and update the purchase and sale agreement. We typically make 2-3 offers for each deal, always trying to get seller financing if possible - less money out of our pocket. Just ensure that your lender allows for 2nd lien positions - the seller should ask for this as part of agreeing to do the seller financing.

@Alex Folchi You should be able to refinance out of the balloon, butnyou never know what rates will be on 2 years, but there is a good chance they will be lower than the balloon loan. Some lenders offer an extension if the balloon period ends and you dont redi, with a fee,sometimes hefty fee. Have you spoken with other lender that may be able to offer 30yr terms with an LLC? Lets connect I will be glad to help some more.

I hear seller carry back mentioned more in big commercial deals when dealing with larger capital contributions and the more creative financing structures but i haven't really heard it brought up much in the residential investment space since bank financing is fairly easy to come by.

I pitch a lot of owner finance to seller and I would imagine it is a long the same conversation lines as a seller carry back. The bigger hurtle is just getting people open to the idea. Most people don't have any patience and want their money now opposed to later. To make this attractive to someone, you would most likely offer a interest that is above market and have a fairly short payoff ( a year or so).

I hope this helps. Shoot me a message if you got any other questions. I would be glad to share my experience with the owner finance conversations.

-BA

@Blaine Alger thank you! Really appreciate the response. I did not mention above, but the seller is offering 4% interest at 15% down with a 5 year balloon. The more I look into and learn about this, the more this seems like a perfect fit for my scenario.

@Alex Folchi

Those are pretty decent terms.

Is that ok just the seller carry back or are you talking about seller finance of the whole property?

( I was under the impression you were talking about seller carry back where the owner carries some of the down payment for you but you still and go get bank financing)

I disagree with @Dennis Wayne about the balloon.

Ideally, you don’t want a balloon but if it’s the only way you are able to get into the property then I would go for it. It’s better than not buying the property and then you have 5 years to get your financing right and go get a bank loan on the property and pay off the owner finance. You will also build equity over the ballon period and might not even have to bring a down payment to the bank.

5 years is the lowest I would go, so try to push for a little longer just in case there is a crash. But if you feel good about the property, don’t let the ballon scare you off.

@Dennis Wayne

Congrats.... but i didn't think we were having a competition to see who has done the most owner finance deals. I was just stating my opinion and trying to provide a different perspective.

Like I said, balloons are not ideal but I wouldn't let it stop me from buying a property. But everyone has a different risk tolerance so i can see how one can be predisposed to the idea.

You didn't really provide any reasoning in your initial post as to why you don't like balloons. Come back with something other than one sentence to back up your claim and I would be happy to change my opinion. There could definitely be something I am overlooking, so educate me.

 

@Blaine Alger

That is the problem with bp . Folks have major life decisions with hundreds of thousands hanging in the balance that come on here looking for expert real estate advise to act on these decisions and you got newbies who post in theses forums that don’t even own one house offering their expert advice on subjects they’ve never even done before . A sad sign of the times .

@Dennis Wayne

So sorry you feel that way but I think you are missing the point. Bigger pockets is a community where investors from all levels of experience can come together to share what they know and grow together. If you want to have a discussion about who is more experienced, I think that is in a different forum, but i'll save you the hassle and give you that title if it makes you feel better. Good chance you are wise beyond my years but thanks to the education that I have received through this amazing community over the years, you can't discredit my knowledge.  

I am just providing my educated personal opinion on the subject to provide others the opportunity  to form their own. There is no right or wrong answer. 

If you are such an expert, give me some concrete details on why you don't like balloons, i have seen you give 0 support to your argument. I genuinely want to hear your opinion so I can educate myself and maybe  be worthy to be in your all mighty  presence one day.

Never have done a balloon but there could be advantages if you can accept the risk.   In my market Multis have gone up about 40% in about 2.5 years.  If that happened in your market you could refi in no time at all with the appreciation you made on the property.  You would also have time to save more money just in case appreciation did not occur as you said you have the means to save.  It is a risk.   If the balloon comes due and you dont have the money and cant finance out of it, you will loose the property. Just some considerations.

@hugh 

@Account Closed undefined

You are definitely making a valid point and it is very reasonable.

I would be lying if i said a balloon payment didn't stress me out and in a perfect scenario you would want the seller you carry the note for the full 30 yr. However, that's not entirely practical in your normal owner finance deal (from my experience) because sellers want to cash out eventually. For me personally, if it comes to 5 year balloon payment or not buying the property at all, I would pull the trigger and do it. 

And your reasons for looking at seller finance in the first place is spot on. My specific situation: recent college grad, currently "self employed" trying to see what I can do in the RE game before i have to go get a big boy job. So as you can see, I am not a banks most promising prospect but I do have a significant amount of cash saved up so that leaves owner finance as my only option to be able to scale without turning to someone for a cosign on a mortgage. 

I appreciate your input though, that is all very relevant information and I see where you are coming from.

QUESTION FOR YOU:

In your experience, how much rate are you willing to give up in return for a longer balloon?

@Alex Folchi ,

Hi Alex, I’ve purchase using seller financing and I I love it. It’s my preferred method because everything is negotiable. Interest rate, length of time, down payment, it’s all negotiable. As long as you run your numbers right and plan appropriately, you don’t need to fear the balloon. When you go to refinance, plan on only getting 70% of the the value of the property and subtract what you owe. You can sometimes get a higher percentage than 70% but plan on 70% to play it safe. Make sure those numbers are equal at the very least and you’ll be able to refinance and pay off the balloon. If these numbers already work when you buy it then you can refinance in as early as 6 months. If you’re buying it at market value with no down payment then you may need a few years. These are the things you have to consider in order to negotiate.

Example:

Purchase price 150k with no down payment

Appraises at 200k

70% of 200k is 140k

In this scenario you’re short 10k so you would need 10k cash to refinance. This doesn’t account for market appreciation or forced appreciation so it could be less, depending.

Hope this helps.

Good luck!

4% interest from seller financing seems like a good deal. I'm not worry in year 5 as appreciation will kick in at least 18% anyway. How do you find the deal ?