Seller Financing Help!

11 Replies

When someone engages in a seller financing transaction, what are the standard stipulations? Loan term? Balloon payment? Interest? What about taxes? Does the owner continue to pay property taxes? I am looking at a property that is currently owned free and clear, in a great location, and has been well-maintained. The owners are older and the property has been sitting vacant. They have used it as a rental in the past. How should I go about approaching them for seller financing? And, how can I make seller financing sound appealing to them? I have a very high personal FICO score but I'd like to obtain my next property with very little money out-of-pocket. I'm looking for a buy and hold SFR. Unfortunately, the property is currently listed on the MLS so realtor fees will be involved. Any help would be great!

Thank you,

Lisa
 

Seller finance means you are buying the house, they are just financing it like a bank.  YOU will be the owner and YOU will be responsible for everything due on the property, including taxes.

I don't think there is any standard.  My last deal was 7.5 year loan, with a 5 year balloon at 5% interest.  Really whatever works depending on what you're intentions are.  Make sure there is no early repayment penalty, we paid this last one off in 2 months.

As far as approaching them, I usually make 2 offers, but make the cash offer significantly lower then the SF offer.  

Seller financing really has to work for the seller.  The big advantages are an income stream and deferring some taxes from capital gains.  It may appeal to them or it may not.

For financing I would shoot for something resembling an FHA loan - figure your down payment has to cover the commissions and closing costs. If you do a balloon or ARM you can lower your interest rate - but I would base it on some available product.

The cash(or bank financed) alternative is important because it gives them that option if they want it and it keeps either side from agreeing to a bad price.

How long has the property been on the market?

Having a listing agent involved, the Realtor may well discourage them, many see seller financed deals as a problem waiting to happen and they may try to "protect" their client. So, need to discuss it with the agent first, win them over. That may mean a full price offer and enough to cover costs. really your chance is much better with 10% down, most Realtors will buy that as skin in the game.

Sometimes you can back into the deal with payments at about 75% of what their rents were, rented at $600, take out taxes and insurance, say they netted $450, your payment could be $337.50.  

Older folks love interest earned, they probably know what CDs are paying, so if they sell for cash, where do they need to put that after tax money ? Say you offer 6%, they probably can't get that from any other investment. Use a 30 year amortization and solve for the present value using that payment, term and interest, you get $56, 292.17, call it $56,300.

If 56,300 is 90% of the sale price, divide 56,300 by .9 = 62,555.56, call it a sale price of $65,500.

Cash flow to you is  $112.50, less vacancy at 10%, less maintenance at 10% gives you 91.13, times 12 = 1,093.50. You put in $6,550, 10%, you're getting 17% cash on cash.

Consider your time to manage, but you have a tenant buying your house too.

Another point with older folks, they can end up in a hospital or nursing home, many end up receiving medicare/cade which the must qualify for. If the have cash in CDs from that sale, they must spend down those balances before they qualify. If the asset is a note, the only have to spend down the amount that is the fair market value of that note, that could be 40% less than the amount owing. After the MV of the note is determined, the note could be sold to heirs and pay down that lesser amount.

See when they bought the place, could well be 20 or more years ago, that means a big hit with capital gains from the sale, but not if they carry the note, the pay only on the principal of the gain as it is received, another big savings.

Balloon payments really aren't that good for a seller, but it gives them a repricing opportunity to continue a note, I shoot for 5 years, can go down to 3 years, but not sooner as you'll not be establishing enough equity to refinance from a 90% note, that is getting too close.

Get a loan servicer involved, that takes the seller's headaches away from the note holder's responsibilities, they or you or both of you can pay that expense. If the sale price is lower than the assessed tax value, apply to get them reduced with the sales data. Shop your insurance, you may save enough to take care of the servicing fees.

You need to know what the seller's position is to solve their problems.  Get with the listing agent.  Good luck :)   

Originally posted by @Bill Gulley :

Balloon payments really aren't that good for a seller, but it gives them a repricing opportunity to continue a note, I shoot for 5 years, can go down to 3 years, but not sooner as you'll not be establishing enough equity to refinance from a 90% note, that is getting too close.

 The balloon payment was what made it work for us.  The payments were going to be too high at 5 years for the rental rates so by bumping the amortization up to 7.5 we got what we wanted, and the seller still gets paid in full within 5 years.  So it solved our problem.  I wasn't saying we TRY to structure deals this way, it just worked for this one.

I bought my first owner financed property with 5K down a 5 year loan at 10% (25k house).  There are a bunch of BP podcasts that talk about approaching seller with SF.  

Since you said the owners are older they probably wont be reinvesting the money from the sale into other RE.  You can bring up that if they take a full purchase price they will have a large tax bill from the sale, but with SF they will get steady monthly checks to supplement their SS and/or pensions.  

Originally posted by @Bill Gulley :

Having a listing agent involved, the Realtor may well discourage them, many see seller financed deals as a problem waiting to happen and they may try to "protect" their client. So, need to discuss it with the agent first, win them over. That may mean a full price offer and enough to cover costs. really your chance is much better with 10% down, most Realtors will buy that as skin in the game.

Sometimes you can back into the deal with payments at about 75% of what their rents were, rented at $600, take out taxes and insurance, say they netted $450, your payment could be $337.50.  

Older folks love interest earned, they probably know what CDs are paying, so if they sell for cash, where do they need to put that after tax money ? Say you offer 6%, they probably can't get that from any other investment. Use a 30 year amortization and solve for the present value using that payment, term and interest, you get $56, 292.17, call it $56,300.

If 56,300 is 90% of the sale price, divide 56,300 by .9 = 62,555.56, call it a sale price of $65,500.

Cash flow to you is  $112.50, less vacancy at 10%, less maintenance at 10% gives you 91.13, times 12 = 1,093.50. You put in $6,550, 10%, you're getting 17% cash on cash.

Consider your time to manage, but you have a tenant buying your house too.

Another point with older folks, they can end up in a hospital or nursing home, many end up receiving medicare/cade which the must qualify for. If the have cash in CDs from that sale, they must spend down those balances before they qualify. If the asset is a note, the only have to spend down the amount that is the fair market value of that note, that could be 40% less than the amount owing. After the MV of the note is determined, the note could be sold to heirs and pay down that lesser amount.

See when they bought the place, could well be 20 or more years ago, that means a big hit with capital gains from the sale, but not if they carry the note, the pay only on the principal of the gain as it is received, another big savings.

Balloon payments really aren't that good for a seller, but it gives them a repricing opportunity to continue a note, I shoot for 5 years, can go down to 3 years, but not sooner as you'll not be establishing enough equity to refinance from a 90% note, that is getting too close.

Get a loan servicer involved, that takes the seller's headaches away from the note holder's responsibilities, they or you or both of you can pay that expense. If the sale price is lower than the assessed tax value, apply to get them reduced with the sales data. Shop your insurance, you may save enough to take care of the servicing fees.

You need to know what the seller's position is to solve their problems.  Get with the listing agent.  Good luck :)   

 Folks if you follow me, please vote for Bill's post!  POTD Post Of The Day!

I just closed another 0% owner financed deal last week.  The key is getting in front of the seller's not the agent and discussing your offers with them.  I laid a pile of cash on the table and let them know this is what I can do for a cash offer but lady said for tax purposes she would rather take payments.  ALL GOOD!  Now to find out what I'm going to do with it but this gives me several different exit strategies.

Thank you to everyone who provided a reply.  I am trying to soak this stuff up like a sponge.  I contacted someone today about a possible seller finance deal.  I'm excited to close my first transaction without carrying the loan myself!

Originally posted by @Lisa Henrich :

Thank you to everyone who provided a reply.  I am trying to soak this stuff up like a sponge.  I contacted someone today about a possible seller finance deal.  I'm excited to close my first transaction without carrying the loan myself!

To make sure you explain it and communicate it correctly:  The seller "carries the loan", not you.  You are the borrower.  You owe on the loan and must pay just as if you borrowed the money from the bank.  The difference is that usually (often?) you don't go through the same qualifying and loan application process.  Sometimes you can negotiate better terms or a lower down payment.  But you are the borrower and the seller is carrying the loan.

Originally posted by @Bill Gulley :

Having a listing agent involved, the Realtor may well discourage them, many see seller financed deals as a problem waiting to happen and they may try to "protect" their client. So, need to discuss it with the agent first, win them over. That may mean a full price offer and enough to cover costs. really your chance is much better with 10% down, most Realtors will buy that as skin in the game.

   

Listing agents can be seller financing deal breakers, no question about it.  However,  I find that if the down payment covers their commission and closing costs, they'll present the offer. In other words, if the seller doesn't have to bring cash to closing and the agent will get paid.  I've read lots of ideas over the years about getting agent to accept a promissory note, etc. which I've never seen work. But enough cash at closing to get the deal closed and the agent paid will usually get your offer presented.

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