Owner financing .... interest rates ?

11 Replies

Hi guys, I'm pretty new to BP and relatively new to Real estate investing, so if you guys have any suggestions and better ideas feel free to say it I'm pretty open minded to anyone's ideas as I am trying to learn along the way ...so here is my situation, I am currently sticking with multi family homes .. I'm looking at a couple multi-family properties where the owners are willing to do owner financing. These properties are in Central Connecticut. I am still in the process of negotiating a price and interest rate. I like to stick to the 5/5/5 offer rule .. so I offered 5% down, 5% interest, rate and 5 year balloon out. The owner looks like he is willing to negotiate ... he is selling his property for 240k @ 8% interest rate and 5 year Balloon out ... he owns the property free and clear. My question is, what do interest rates go for if one is willing to owner finance me preferably in (Connecticut) ?

Thank you guys in advance and also feel free to give me your opinions because this is my first time doing owner financing.

@Igor Gajic awesome plan. I do have a concern about the price you are paying? Have you done your due diligence with expenses and income? Have you gotten a professional opinion of value? If you are working with a real estate broker, I assume that all of this has been done with the property already. I like your 5/5/5 offer. Keeps it simple and is extremely reasonable. However, most owners are not motivated enough to hold the note on a "new investor" with hardly any "skin in the game." $5K on $240k represents about 2%, which doesn't leave any equity for him to pull out if he has to foreclose. PM if you want to chat. Always willing to help..

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I would say 8% is reasonable. What is he amortizing at? 

Please make sure you are doing all necessary due diligence with the property. That includes a full title search, title insurance, inspections, appraisal. if these have been done by the seller, do them again with someone you hire. 

Also hire a good attorney to look over any contracts or better yet write your own investor contracts and promissory note.

I may be forgetting a few things and the items are not listed in order.

I've run numbers playing with how I would do owner financing if I were to do it. 

Here is an example based on your property:  starting price:  240k

you agree to 10% down based on that number  24k

then discount the price of the property 40k so your PURCHASE PRICE is 200

the remaining balance to be financed = 176k

Do an interest only loan, but offer him different rates, maybe 5%, 6%, 7%  whatever rate you and he can agree on.  

Agree to the same 5yr balloon.  

This will probably net the seller MORE than the current price (win for the seller).  But it will also potentially save him a bit in cap gains if he's made some money (though it will cost him some in taxes on the interest income).  The interest expense also helps you on your taxes.  

But it lowers  your actual purchase price to a point where you *may* be able to refinance some money back out of the property in 5yrs. 

Depending on the interest rate  you can agree on, it may be cheaper than a normal 25% down w/ 20yr or even 30yr amortization too.  You'll need to balance how much to put down vs the interest rate or longer balloon terms.  

Hopefully this helps. 

Please don't take this the wrong way, but I view your approach no different than someone who goes and buys a car based on the monthly payment amount, not taking into consideration anything else.

Does the house cash flow at the owner's asking price? Does it cash flow with your 5/5/5 rule? What kind of repairs does the house need, Do you have point of sale inspection items you have to address before it can be occupied? Etc. etc

I like to offer a fixed amount down (say 10-30k) and look at what your desired P&I payment is so that the numbers might work out long term without having to refinance.  I would try and negotiate no balloon and fixed interest (preferably below 6%) over 10, 15, 20, 25, 30 year, or longer term. Some sellers might be willing to finance at no interest for a short term given a sizable down payment, especially if there are not any other better offers.

Both the buyer and seller will likely need an attorney or agent -- perhaps both -- or some other qualified professional experienced in seller financing and home transactions to write up the contract for the sale of the property, the promissory note, and any other necessary paperwork.

In addition, reporting and paying taxes on a seller-financed deal can be complicated. The seller may need a financial or tax expert to provide advice and assistance. -- check for daily and weekly rates in the area of the property, not national rates. Be prepared to offer a competitive interest rate, low initial payments, and other concessions to lure buyers.

Because sellers typically don't charge buyers points (each point is 1% of the loan amount), commissions, yield spread premiums, or other mortgage costs, they often can afford to give a buyer a better financing deal than the bank. They can also offer less stringent qualifying criteria and down payment allowances.

That doesn't mean the seller must or should bow to a buyer's every whim. The seller also has a right to decent return. A favorable mortgage that comes with few costs and lower monthly payments should translate into a fair market value for the home.

Keep it simple.

You don't need a financial expert or a tax advisor. The seller will have his accountant when he does his tax returns.  He should issue you a 1098 for the interest.  

I would be sure to have an attorney close it and get owners title insurance.

Show the seller on paper exactly how much interest he will be getting and how owner financing will net him more than an outright cash sale. It is easy to show him how much interest he will get in 5 years and added to the purchase price might help with the sale.

Also show him how much closing costs he will be saving by selling to you.

Many seller that agree to seller financing will be happy to renew the note at the balloon period as they like the monthly income.  Others have a change in their life and will welcome an early payoff which might result in a discount for the buyer.

I sold one last year and financed it and it was a piece of cake.

No matter how you structure it the numbers have to work for you and you need to know that you have an exit plan.

    

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