Seller proposed their financing terms. Am I wrong?

Question

6 plex for sale.

Asked a property owner if they would consider seller financing. They sent the following terms:7.5% interest rate, 7 years, 25% up front.

I'm looking to lock in a cheap rate on an income producing property. Looks like he wants his money now.

Aside from the 5% cheaper down payment, I think I'd get better terms at the bank.

Am I missing something?

The only reason I ask is because this seemed so far out there that maybe I'm not where I thought I was.

Steve K. · Answer

@Michael Greer rate seems high. I hope it’s at least amortized over 30? Our last seller financed deal we did 25% down, 5% int., 5 yr balloon, 30 yr. am. Owner carries are usually 1-1.5% above prime, from what I’ve seen. I would offer whatever terms are ideal for you and go from there. You could do better than the terms they’re offering from a local bank or credit union.

Scott Wolf · Answer

@Michael Greer, doing seller financing isn't some magic bullet where every seller will give you 0% interest or something. It is the same as using a Private Lender, and you usually pay a premium for the. You have come across a savvy seller who would still consider holding paper, but won't give it away for free.

What terms were you expecting from him? Also, have you offered a counter?

What terms were you expecting from him?  Also, have you offered a counter?

Bruce Woodruff · Answer

I would give him your terms when you present the offer. Asking them to start off is usually going to end up with them coming in high. Then its hard to get them down.

Jonathan Greene · Answer

You can do better than that unless you will have trouble getting a conventional loan. But the big plus is that the owner knows seller financing and had the terms ready for you so there may be more to dig into. When did they buy it, how much do they owe? Do they really want to pay capital gains on 25 pct now plus monthly on those payments on a 7-year?

Christopher Reeder · Answer

@Michael Greer

Depending on your personal financial position, a bank would provide better rates. The down payment might be lower at 20% or you could find some banks asking for 30% for an investment property.

As a 6-plex, the property will be a commercial loan that will likely have a rate reset at 5 or 7 years.

The benefit of seller financing is you do not need to go through an underwriting process that a bank will require. This process will evaluate the property and your finances to determine if you qualify. If the property is producing less than 1.25x debt service coverage at time of takeover, the bank will require a higher down payment or not lend on the property. Your costs to close the acquisition will also be lower through seller financing (appraisal, survey, origination fees not required).

You mention a 7-year term. Is this the balloon term or full amortization term?  You can improve your cashflow by asking the seller to amortize the debt over 30 years.

Back to the quality of the property….if it needs rehab, improvements and repositioning in your market, seller financing can be a great option to acquire it. Perform your plan to improve the quality of the property and then in year 2 or later, approach several banks to cash out refi the debt. This could even provide you liquidity at closing that you can use on your next project.

Seller proposed their financing terms. Am I wrong?

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