How to structure a fair deal for seller financing

Question

Hi, I've recently became aware of a family member wanting to sell a property no longer being needed. I'm able to pull out equity from my home which would be around 20% of the value of the property being sold. I'm interested in buying it as an investment property but would not be able to be approved for another mortgage after I take out the down payment from my equity. So I would need to set up a payment program for seller financing if my relatives were even interested in doing this. Could you please let me know what would be the most fair way of doing this? Also, what is the best option/strategy for pulling out equity for this?

Thanks

Wale Lawal · Answer

@Eric Shin

An owner financing agreement between buyer and seller should always be memorialized in a written document that includes the specifics of the deal. However, there are a few different ways to accomplish this, and the best option will depend on your specific needs and circumstances. Here are three main ways to structure a seller-financed deal:

1. Use a Promissory Note and Mortgage or Deed of Trust
If you’re familiar with traditional mortgages, this model will sound familiar. The buyer and seller agree to the terms of a promissory note that details terms like the loan amount, interest rate and amortization schedule. The mortgage is secured—or collateralized—by the house, the buyer’s name goes on the title and the mortgage is recorded with the local government.

2. Draft a Contract for Deed
Also known as an installment sale or land contract, a contract for deed is when a buyer does not receive the deed to owner-financed property until he makes the final loan payment. Alternatively, the buyer receives title if he refinances the loan with another lender and pays the seller in full.

3. Create a Lease-purchase Agreement
This option, also referred to as rent-to-own or a lease option, involves a seller leasing a property to a buyer who has the option to buy it for a set price. The buyer pays rent and, at the end of the lease term, can purchase the property or give up his lease option. If he opts to buy the property, rent paid during the lease period is applied toward the purchase price.

Because owner financing can be complex, we recommend working with a licensed attorney who will consider your best interests when drafting the necessary documents.

All the best!

David Ramirez · Answer

Hey Eric,

Determine a fair interest rate with your relative and after you know that you can calculate how much money you can pay monthly. If you want to keep the property as a long-term rental I would calculate how much that property would rent for and then you can do the 50% rule which is that your monthly payment and interest should not be more than 50% of gross rent for you to be able to cash flow. To make the deal attractive to your relative I would recommend determining a loan duration of not more than 10 years with the last payment being a lump sum.

Good luck!

David

How to structure a fair deal for seller financing

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