Is full asking price for seller finance too high?

29 Replies

I am looking at my first deal and wanting to ask for seller financing (I attempted an FHA Loan but my student loans are hurting my DTI). There is a single family home listed in a decent neighborhood with a basement area that has a private entrance. I originally want to seller finance and refi out later on after making minor improvements. The asking price is $75,000 but the comps that I pull are estimating $55,000. I’m new so I’m not sure if these numbers are correct but I’ve done generally searches on multiple sites and 55k is about where they all land. I’m wondering should I offer his full asking price to make seller financing more obtainable or should I shoot for closer to where my “unprofessional” comps are and try to save money? Looking for advice as this is my first purchase. THIS WOULD BE AN OWNER OCCUPIED HOUSE HACK SO IN MY OPINION THE PRICE ISNT A HUGE FACTOR. Anything cheaper than rent ($800 a month) would be a win in my opinion but at the same time I don’t want to be screwed into something I can’t refi out of. Please help!!!!!! Thanks in advance for sharing your thoughts, Shequila Hamilton

Assuming your comps are correct, I feel that $20K over for the benefit of seller finance is not acceptable. And your concern is quite valid and smart looking into the future of possible refi issues.

Are you being declined for regular home loans or is the rate just something higher than you hoped?

305-537-6252

Hi @Shequila Hamilton , I think the determining factors would also include the terms of the seller finance.

What is the interest rate?

What is the payback period in terms of years or months?

Is it fully amortized or is there a balloon payment at some future point?

@Nicole

@Nicole A. I have the 3.5% down as well as the credit score but am being declined due to high DTI. I've tried 2 different lenders and they will not count my full paycheck since most of it is overtime and I haven't worked for this company for at least 2 years to have that overtime factored in.

(I have been in the same field of work for 6 years but moved to a new state 10 months ago)

Its looking like I will have to wait at least another year to have my full income included in my DTI calculations.

@Jordan

@Jordan Decuir I haven't made an offer on the property just yet. I am nervous and unsure as to how to approach it being that not only is this my first deal venture, but I also am not 100% sure how the seller finance process works legally and through documentation as opposed to a traditional home loan. I'm trying to have all of my factors in order before I make an offer so that I present one that would benefit both myself and the seller without putting myself in a bad start position on my investing journey.

Originally posted by @Shequila Hamilton :

@Jordan

@Jordan Decuir I haven't made an offer on the property just yet. I am nervous and unsure as to how to approach it being that not only is this my first deal venture, but I also am not 100% sure how the seller finance process works legally and through documentation as opposed to a traditional home loan. I'm trying to have all of my factors in order before I make an offer so that I present one that would benefit both myself and the seller without putting myself in a bad start position on my investing journey.

 That's a hefty premium. The seller knows that no one can get a loan on that property at that price because it won't appraise, which is why s/he wants to do seller financing. This is often a way to either reclaim a property multiple times or get paid for a lemon. 35% I think is way too much premium. I can see 10%, meaning that if the property really is only worth $55k then maybe the seller's risk lets it out at $60-65k, max. 

One way around this is to have the seller agree to finance neutral appraised value + X%, or finance the median of appraised value +X%. So, for example, you pay two separate appraisers to come up with a reasonable market value. Appraiser A says $52k. Appraiser B says $60k. You pay $56k + let's say 10%, which would add another $5600 to the sale price. That's fair to you and only an unreasonable seller would insist you pay an amount that's far beyond fair market value. Down side is you are going to pay for the appraisers, but if you can get it in writing that's what you're going to do you get some protection there. 

Makes perfect sense. As far as the legal mechanisms that you will need to put in place, itis probably a terrific idea for you to call and talk with a real estate lawyer in your locale to get their advice, would be money well spent. Also, I know that some states’ association of realtors promulgated forms for purchase and sale of homes include seller financing sections/language as well as promulgated seller financing addenda that you could potential use.

On the subject, to me the terms are EXTREMELY important and could make or break a deal. As an example, if you could get 0% interest, fully amortized, on a 30-year note, then it could very well make your purchase at $75,000 (well above the comps) a very good deal for you.

@Jorge De Jesus actually no! I am currently sharing a sofa with my fiancé in a studio flat that has a hole in the roof. We have tolerated it while we were saving for a home only to be let down in the pre-approval process due to DTI. This is why I am strongly considering this full price offer. We have delayed planning and paying for our wedding until our living situation can improve. We thought paying rent would be a waste so we’ve tolerated this situation to help jumpstart our investments and try to start off on the best foot possible.

@Jorge De Jesus actually no! I am currently sharing a sofa with my fiancé in a studio flat that has a hole in the roof. We have tolerated it while we were saving for a home only to be let down in the pre-approval process due to DTI. This is why I am strongly considering this full price offer. We have delayed planning and paying for our wedding until our living situation can improve. We thought paying rent would be a waste so we’ve tolerated this situation to help jumpstart our investments and try to start off on the best foot possible.

Originally posted by @Shequila Hamilton :

@Jordan

@Jordan Decuir I haven't made an offer on the property just yet. I am nervous and unsure as to how to approach it being that not only is this my first deal venture, but I also am not 100% sure how the seller finance process works legally and through documentation as opposed to a traditional home loan. I'm trying to have all of my factors in order before I make an offer so that I present one that would benefit both myself and the seller without putting myself in a bad start position on my investing journey.

The loan documentation should be much the same as if you were using a normal Lender, but in this case, the Lender is also the Seller. [Anyone can use an amortization website (eg. usmortgagecalculator dot org) to work out acceptable terms].

I agree with those suggesting don't offer asking price, but you maybe ok to offer a bit over your provable sold comps (before or instead of bothering with independent appraisals)?

This could be a good test for your negotiating skills. Good luck...

So renting both doors is out of the question? If you cannot negotiate lower:

Don’t chase a nondeal

OR

Live in the smaller unit rent the other, get the pay down, refi the owner out in 5-7years

Don't jump into buying a property out of desperation or emotion. I agree if you're sharing a couch in a place with a leaky roof (that I assume the landlord won't fix?), you could use a nicer place. I agree with Jorge's idea... why not rent another place for now--perhaps to split with another roommate--and continue getting your financial house in order? 

Don't over pay for property and especially don't over pay due to your emotions. I hope you strongly consider this instead of strongly consider offering on something that might not help you in the long run. You said so yourself that it could cause you issues in the future if it doesn't appraise for what you need to refinance out of the seller-financing.

305-537-6252

Consider the purchase, after knocking down about 10-15k. Rent both sides. MAYBE cashflow helps pay for a better rental for YOU for a while. Yes, the wedding might get pushed back if this is your ONLY investment. I don’t know your financials but I would always consider going as wide as possible, responsibly.

Or don’t chase a nondeal

You mentioned your fiancé, can you also use his credit/income to qualify?

Seems obvious, but figured I’d ask.

@Shequila Hamilton I wouldn't pay that much above market price for owner financing. I could see a 5% premium over retail for seller financing, assuming they give you a decent interest rate. 

Two questions:

1. It seems between you and your husband-to-be that you should make enough income to afford a $55K mortgage. Do one or both of you have some expensive cars or bad credit? 

2. According to you the seller is asking $75,000 for a property worth $55,000. That is 30% over retail value. Somethings seems very strange here. Are you sure the comps are only worth $55K? It seems the seller will have real trouble getting $20K over retail, so I would be patient and given time they are more likely to negotiate. Is a realtor helping you?

@Aaron Hunt Originally we were trying to purchase an FHA duplex in my name and then reset our savings and purchase another in his name so that we could maximize our portfolio growth. Now we are rethinking this plan being that my student loans are hurting my DTI. The only issue is that he doesn't have the credit score which was why I was going to put the first property in my name while we work on building his. I'm concerned that adding him the loan would pull down my score in terms of getting approved for the loan.

It is very possible that my comps are not correct. I am not working with an agent at the moment as I was trying to get pre-approved first. Now that we are interested in seller financing I'm not sure if an agent would be interested in working with us as I don't know how to go about compensating them for their time without a traditional bank mortgage.

I suggest you make 3 offers. 1. cash @ 70% of appraised value 2. 3.5% down with pp of 10% over market value. NO INTEREST 3. Nothing down. Give him 75k. no interest. no balloon. make the payment something that you want. I do this all the time. the important thing to remember is to make sure that all three offers are deals that you want. another important thing to remember is that with option one or two you need to be able to pay down the mortgage to below 80% of market value before you have to refinance.

@Adam Stacey Thanks so much Adam! I will definitely try and see what works. How exactly do I go about presenting the offers? Should I simply email them or is there an official template that I should follow?

That's quite a premium unless you get really amazing terms. 

You might want to explore doing a lease option. You could at least buy yourself some time to figure out if it's worth buying once you get your things in order and have traditional financing at your disposal.

Totally agre with @Grant Rothenburger and @Ryan Evans here. I think that the terms that you are able to get on the seller finance will probably be a major driver in the decision here.

Also, @Shequila Hamilton have you considered continuing to rent while also buying a separate property as an investment and building a portfolio while also continuing to rent? I believe that this could be a way to go as well. I am not convinced that one needs to own his/her own home prior to investing in real estate.

I reached out to a realtor and these are the comps she provided:

The home that I am interested in last sold for $24,640 back in 1978.

A similar property sold Oct 2017 for $72,000 while another sold for $50,000 in July 2017.

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