Fishy Seller Finaincing

16 Replies

I am in the middle of acquiring a property for $25k here in Indianapolis. I originally offered $5k down, $500/month, and 5.55% interest (alliteration not intended). The seller's broker countered with $10k down with paying off the rest of the balance ($15k)  at the end of 1 year. The property is currently under a 2 year lease with 1 year still remaining. (rented at $600/mo)

-I have not seen the inside of the property, but have been told it has many updates and is turnkey

I will pay zero interest

-I will make no monthly payment

-I will collect all the rent

The lack of an interest payment is a red flag to me. Should it? I am ready to make this happen but want to cover all of bases. Let's hear from you devils' advocates.

Not sure about the red flag with the interest payment, but the 25k purchase price may be scary, I'm guessing it needs a ton of rehab? Or maybe not being that it's leased? What neighborhood is this property in.

@Ben G.  

The property is on the near-east side of Indianapolis. My partner and I purchased our first property in this area for $25k and it has done wonders for us.

Interesting.  If there is no interest charged, the IRS will assume implied interest on the seller's side.  They are better off charging some, but that is their problem I guess.  As long as it's not a land contract/contract for deed where you don't get title, you are positive you can come up with the $15k balloon at EOY1 and you have viewed the executed fulfillment deed to your satisfaction at closing, I'd say go for it! I would never do some land contract where I have to wait for and hope for proper conveyance after I give them my $15k.

As @Steve Vaughan  mentioned the IRS will assume interest, but that's not really your problem.  

As long as the property checks out, meets all your requirements & you have done your due diligence, it sounds like it has potential as a deal for you.  My big things would be disposition of the title at closing, property condition & lease.

I don't think the lack of interest is a red flag.  We're really not talking about that much interest anyway.  Less than $1k realistically.  Just make sure you're getting clean title in a year.

@Dana Whicker  @Jesse Waters  @Steve Vaughan  Just to be clear, what type of title resolution would you ask for at closing if you were in my shoes? Would the seller have any disagreement with giving up title, and if so, is that concerning?

The seller needs to provide a General Warranty Deed and you execute a mortgage/deed of trust for the balance owed.

0 interest is the seller's problem, the agent isn't that sharp probably, but it's not your problem.

I suggest you ask for at least 15 months for your balloon payment. If you can get financing, a lender will appraise it at a market value after you are in title for one year, at 12 months you'll be applying within 1 year and they will then use the sale price. Now, with 10K down and at 15K, granted, this isn't that much of an issue, but it is to the fact that you may be able to pull more cash out if you do repairs and increase the value. More to technique of lining up future financing as that gives you time to actually get a loan and close it without being in default of a balloon payment.

Now, past that, this has another issue, too cheap, bank financing might be very hard to obtain with minimum loan amounts (like 50K).

Where is the 15K going to come from?

You could also counter to $7,500 in 12 months and again in 24 months. Even if the amounts are small you need to cough it up when due.

This is not a consumer loan and I don't see any issue.

Sounds like the Realtor could be carrying back some commissions here too, commonly done, but this isn't big bucks, LOL. :) 

@Evan Manship   Here a proper deed involving seller financing is called a Fulfillment Warranty Deed.  Same as General Warranty Deed, but states you have paid off the seller or other private party. The seller actually notarizes it at the time you close the purchase, then it is held by the title co and recorded at time of payoff.

@Evan Manship
I have done one of these in the Indy area and you'll need to record it downtown along with SD form 46021 to get title in your name. But please please either have a clause in mortgage/land contract stating if you can't obtain financing you get an additional year with a fee ($500 penalty) or extend balloon payment out to 3 years. 25k isn't much today, but who knows what your situation is in 12 months. Real estate is a very expensive hobby when there are so many good deals.

Thanks @Josh C.  

I have an investor whom will gladly contribute the $10k to the project, so I am not as concerned about that.

However, I have not heard back from the seller after these terms. I have not received a lease, contract, or any supporting docs. I am starting to think that there is more to this than originally anticipated. Something about this stinks to me.

@Evan Manship  you know that I don't like anything that rents for less than $700, even it's a deal...

If it's near east side, it's probably about 100 years old too?

That's a big balloon to come up with in a year as well.

IMHO - I would take the $10k and put down on a nicer $50k property that rents for $750+...

IF, you do move forward - it will defiantly be worth a few hundred dollars for a good RE attorney to review the docs first.  PM if you don't have one.

@Evan Manship  

  I sold many of my OERO with zero interest... I understand I have some imputed but why do that... for me because I had ZERO default... and zero interest paid in one year as opposed to 5.5 % for many years is better when you compute PVM  ( present value of Money)  I first started doing these back in the 80's when my first Saudi client said he could not pay interest for religious reasons.. I was selling land I personally owned... so I was carrying contracts and that was I the day of 15% interest... So I ran a PV calc... guess what 30 months zero interest Calcs out to 15% over 7....

so no worries take it.

PS I have a duplex in Kokomo ( my last Indy rental Left) I will sell it to you with 5k down and zero interest ... let me know if your interested

@Jay Hinrichs is that property in Kokomo still available? I live in Chicago and thinking of starting in Kokomo or Rockford IL

@Jose Barrios   yes I have one more that I will sell with zero interest

@Jay Hinrichs can you pm the details on the property? I'm taking a road trip this weekend to look at some properties.

Hey guys, I'm an out of country Investor that has property investments in Indianapolis and Kokomo. I am looking to connect with people that have done the same. Most of my 40+ properties are in the 30-70k and generate good returns but have quite some turnover or deferred maintenance as the houses are usually 90 years old. Would be interested to share experience and learn from investors with similar experience.

After more than 40 houses I am now looking more at apartment complexes and eager to get to the next level. Contact me if you want to exchange ideas...

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