What interest rate's to high

Question

I'm talking to an experienced investor in the Fort Wayne Indiana market who's starting to sell off his properties, all of which are paid off in full. He's willing to do seller financing, and my question is how do I know what is a good interest rate when it comes to seller financing before it's too high to where I'm not getting a good deal in the long run?

Peter Fennig · Answer

Awesome stuff everybody, I hugely appreciate the imput! That blog post on the "variables" to consider was a huge help matt devincenzo, thanks

Roy N. · Answer

@Peter Fennig

We have only had two Vendor carry financing arrangements close {we've made six proposals}, so are by no means experts.   We set a limit to pay no more than 1.5 - 2.0 points above the conventional bank rate we could obtain on the property.

At the moment, our bank rate on a commercial mortgage is 4.00 - 5.00% depending on the size of the down payment.   We are working a Vendor carry offer at 6% with a 20% down payment, but we would pay as high as 7% if the vendor elects to carry 100% of the property value.    Last year we did a residential Vendor carry at prime + 1.5 and refinanced it this past summer.

Model your deal at the highest interest rate to see if it still makes sense.

You also need a defined exist strategy: i.e. if the vendor interest rate is good and the vendor is open to a longer term carry, then perhaps you stick with that arrangement.  In both our cases we had/have a plan to refinance conventionally:  the first was within 12-months; the current one has a five-year term to enable the vendor to defer capital gains over that period.

Mehran K. · Answer

The article Matt suggested is great, those four major negotiation points all need to be considered. Also, run the numbers with whatever financing is proposed(or different options to see what you want to propose to the seller) and see if you are satisfied with the cash flow.

This video may help with that:

Matt Devincenzo · Answer

Honestly the answer to that question is going to be very subjective. If you're an experienced investor that can't get bank financing anymore you may see 10% as very reasonable and normal and be willing to pay that. Or maybe he discounted the purchase price to 75% of FMV but the interest was 15%, is it still a deal? It just will depend on if it will still cash flow.

Here's a good blog post from earlier this week on the "variables" to consider. http://www.biggerpockets.com/renewsblog/2013/10/05/real-estate-investor/

It is also going to depend on possible exit strategies at your disposal. If the seller financing allows you to get control of a property but it is at way too high of an int rate, but you can refi with no money into the deal within 6 months then maybe you're willing to take the hit for a couple months to not have any cash in the deal.

Elizabeth Colegrove · Answer

The interest rate where the deal doesn't work (without trying to sound smart). Personally I use conventional as much as possible because it is so low.