Just got an offer and buyer wants me to do Seller Finance
I recently did a flip in Class D neighborhood, and listed it for sale. We haven't got much traction or interest from buyers in past 50 days. However today my realtor got a text from a buyer willing to make an offer asking for a seller carry back with 5-10% down, will pay full asking price with interest.
I'm not sure how to respond or who can help me structure this deal. I do have a RE attorney.
What is a fair interest rate, how do I calculate closing costs, how best to protect myself and structure this deal.
Thanks in advance for guiding me.. love learning something new everyday
There's no right answer. The higher the interest you charge the less they'll give you on your asking price. It's a balance. If you want a higher monthly payment they will pay you less if you don't need the money now then you can get a higher sales price(if that makes sense). I would see if you can do a conference call, get exact #'s from the buyer with different scenarios. The buyer should have contacts for the legal perspective(if they are legit), that is the most important part. Be careful though. "sub to" is the new fad so make sure buyer is legit.
Thanks @Caleb Brown, I've asked my realtor to get further information from buyer. Such as his current credit score and credit history and intended use.
Will try to gather as much information as possible and will update
Ps. I can definitely do a conference call
Quote from @Eliott Elias:Thanks Elliot
Selling owner finance is a powerful way to sell a property. I charge 10k down 10% interest.
any closing cost, how do I protect myself. Who could help me structure the deal.
Waiting to see his offer and then would consult a RE attorney.
Can I sell his loan to someone, like how mortgage companies sell the loans (sorry if it sounds ignorant)
I’d want at least 20% down. You’re probably going to walk with nothing at 10% down and pay to sell at 5% down. All this is before you pay to foreclose and sell again.
Yes you can sell his loan for 20-30% less than the loan amount, especially a brand new loan. You’re better off just dropping the price 20%.
@Shilpa Shankar Bhatia
You could sell it to a note investor but if you are selling it immediately expect a note investor to offer 70-90% based on a 9% interest rate to the borrower.
I would increase the price by $10k for the seller financing as it adds risk for you
Also make sure to do a complete full underwriting package as if they were applying to a bank and use an underwriter to confirm borrowers ability to repay
1. Put a defined Close date in their offer otherwise you will get strung along.
2. Out not subject to financing. They either have the $10,000 or $20,000 down or they don’t.
3. Tell them you will keep listed till closed.
4. Tell them the type and amount of insurance they must carry. You must be added as additional insured. If they fail to obtain you will get and charge them.
5. Tell them if they don’t pay property tax timely you will pay and charge them.
6. Some note in maintenance of property.
7. Access to view property.
8. Property cannot be refinanced without your consent.
9. 5 year balloon
Whatever else I missed.
Ask the folks above, they will have a canned contract with these points.
Assume you have no debt on this property. As mentioned above make sure the downpayment covers your sale costs. Legal, realtor, tax proportion, etc. You don’t want to have to put money into the deal.
Get with a lawyer, all these stop gap answers may not apply to your particular position.
Also understand if a balloon payment is necessary, and they can't put that much down then they are not going to able to re-finance in a short(er) time period due to not enough equity in the property(assuming valuations do not sky rocket but remain average). So these high singles, low doubles really should be out of question. You should ask for 20-25% down, minimum 15% if your balloon is later(7-10 years), skew the rate favorably. But again, get a lawyer to draft all this up.
I would be wary of a deal where they are wanting to put a small amount down and use seller financing. Ask yourself this question...why are the asking for seller financing and why do they only have a small amound down? Lenders aren't stupid. They aren't financing this person for a reason. It might be that they have a track record of not paying their bills. It might be because they lack the ability to prove that they can repay the loan. Perhaps they lack the assets and reserves to close. Their reason for coming to you might be completely legitimate, but it's likely that an experienced lender that has seen thousands of deals and knows what borrowers tend to default have declined the loan. Do I know that for a fact on this borrower? No, but with that small amount down I suspect they lack the financial strength the be someone you can count on. I've been a lender for more than 3 decades and I've underwritten thousands of deals and I've collected more loans than I care to count. Someone requesting seller financing with a very small down payment like this should throw up a red flag for you that is, at a minimum, worthy of much deeper investigation. No way would I carry back a mortgage without 25%+ down and a very healthy (high) interest rate to induce them to pay it off sooner rather than later to give you your capital back to do more deals. You might be better off putting a renter in the property and continue to market it rather than paint yourself into a corner. I wish you well.