Seller Financing Question

13 Replies

Seller financing question....

I'm thinking about proposing this to a seller.  Purchase price 600k, I give him 60k for a down payment, then 5k per month for 1 year (60K). 

After 1 year I owe him the rest of the price for the complex $480,000. 

Question 1- when I got to refi out of the seller financing deal into a conventional does the 120K I have in the property (60k down payment and 60K from 1 year of payments) count for the down payment? Do I now own 20% equity in the property? how does this work? I would purchase the property with a conventional loan but I do not have the 120K for the 20%. 

Question 2- During this 1st year term how does one handle the payment system? I've read that an escrow company would help with this. 

Thanks for your help!!! 

Originally posted by @Neil Robertson :

Seller financing question....

I'm thinking about proposing this to a seller.  Purchase price 600k, I give him 60k for a down payment, then 5k per month for 1 year (60K). 

After 1 year I owe him the rest of the price for the complex $480,000. 

Question 1- when I got to refi out of the seller financing deal into a conventional does the 120K I have in the property (60k down payment and 60K from 1 year of payments) count for the down payment? Do I now own 20% equity in the property? how does this work? I would purchase the property with a conventional loan but I do not have the 120K for the 20%. 

Question 2- During this 1st year term how does one handle the payment system? I've read that an escrow company would help with this. 

Thanks for your help!!! 

 Regarding your first question: It doesn't really work the way you describe. 

The $60k down counts, but the payments are mostly interest in the first five years of a loan so it is unlikely the payments will have much effect towards refinancing. However, when you go to refinance they will do an appraisal (which will cost you $1000 - $1500 or more if multi family) and base the loan on the appraised value compared to what you owe. If the value goes up in the year, that can help. If the value doesn't go up or in fact decreases, then you have to put more money in to meet the loan requirements. There are no guarantees either way. 

The way that financing works is you decide on a price, down payment and interest rate and term. For instance $600,000 with 10% down is $60,000 down. You take the remaining amount, $540,000 and at 5% for 20 years the payment is $3,564 a month not including property taxes and insurance. After 1 year of payments you still owe $523,869 since most of the payment goes to interest not principal. This is just a sample, the term, interest rate, amount down can all be different depending on the agreement.



Originally posted by @Account Closed :
Originally posted by @Neil Robertson:

Seller financing question....

I'm thinking about proposing this to a seller.  Purchase price 600k, I give him 60k for a down payment, then 5k per month for 1 year (60K). 

After 1 year I owe him the rest of the price for the complex $480,000. 

Question 1- when I got to refi out of the seller financing deal into a conventional does the 120K I have in the property (60k down payment and 60K from 1 year of payments) count for the down payment? Do I now own 20% equity in the property? how does this work? I would purchase the property with a conventional loan but I do not have the 120K for the 20%. 

Question 2- During this 1st year term how does one handle the payment system? I've read that an escrow company would help with this. 

Thanks for your help!!! 

 Regarding your first question: It doesn't really work the way you describe. 

The $60k down counts, but the payments are mostly interest in the first five years of a loan so it is unlikely the payments will have much effect towards refinancing. However, when you go to refinance they will do an appraisal (which will cost you $1000 - $1500 or more if multi family) and base the loan on the appraised value compared to what you owe. If the value goes up in the year, that can help. If the value doesn't go up or in fact decreases, then you have to put more money in to meet the loan requirements. There are no guarantees either way. 

The way that financing works is you decide on a price, down payment and interest rate and term. For instance $600,000 with 10% down is $60,000 down. You take the remaining amount, $540,000 and at 5% for 20 years the payment is $3,564 a month not including property taxes and insurance. After 1 year of payments you still owe $523,869 since most of the payment goes to interest not principal. This is just a sample, the term, interest rate, amount down can all be different depending on the agreement.

Mike 

First of all thanks for the advice! The seller is motivated so he may accept principal only payments, allowing me to acquire the property easier and faster since I don't have the total downpayment now! 

and I agree with you the appraisal may be lower when I go to refinance ! man that's kind of scary to think of 

A lot of lenders will require 12 months seasoning before they will lend on appraised value. It also takes 45ish days to fund.

Get the balloon longer than 12 months, at least 18. All of mine have been at least 5 years, but my goal was more long term than just avoiding a 20% DP. 

Get a note and mortgage, not a Land Contract. Have ownership day 1.

@Steve Vaughan

Steve 

thanks so much for the reply, If I can get longer terms I would def do that. The seller may want to dump the property before 5 years though. 

I just spoke with a loan officer and she told me if I do not have a note, and ownership they will not give the payments I make towards equity!! wow I didn't know that. Things like a lease option wont work 

Originally posted by @Neil Robertson :

@Steve Vaughan

Steve 

thanks so much for the reply, If I can get longer terms I would def do that. The seller may want to dump the property before 5 years though. 

I just spoke with a loan officer and she told me if I do not have a note, and ownership they will not give the payments I make towards equity!! wow I didn't know that. Things like a lease option wont work 

 Yes, no LO and no LC.  Get a note and mortgage.

I run my note servicing through a local bank. They hold all original docs, maintain the  amort schedule and do the annual interest reporting.  Ask local banks if they offer 'contract servicing'. May be noted in the yellow pages under banks. Remember those?

  The fees for mine are $150 establish and $7-10 per month. Payments are electronic from me to them and them to the seller. Sellers like that and having a trusted bank handle things.  Without the bank 75% of my SF deals wouldn't have happened I'm sure.

Originally posted by @Steve Vaughan :
Originally posted by @Neil Robertson:

@Steve Vaughan

I run my note servicing through a local bank. They hold all original docs, maintain the  amort schedule and do the annual interest reporting.  Ask local banks if they offer 'contract servicing'. May be noted in the yellow pages under banks. Remember those?

  The fees for mine are $150 establish and $7-10 per month. Payments are electronic from me to them and them to the seller. Sellers like that and having a trusted bank handle things.  Without the bank 75% of my SF deals wouldn't have happened I'm sure.

 To piggy back on what Steve is suggesting it is also helpful to be sure the bank or servicing company also reports to the credit reporting agencies as that helps "formally" establish timely payments.  

Also if the seller does not own the property free and clear then there is the issue of the existing or underlying lien.  If you decide to buy and wrap that lien then you will want your servicing agent to deduct and pay that lien from your monthly payment sending just the net amount to the seller.  There are pros and cons to that scenario with some good commentary on Bigger Pockets regarding the "Subject to" type of situation.

Yes, anything over 4 units will require commercial financing.  I haven't looked into commercial financing terms in a while, but 25% down seems right.  I think amortization is more like 10 years, but you might be able to find longer amortization.

Also, in my area I don't think there are any "banks" that will do loan servicing for a loan that isn't theirs, or at least not that I'm aware of.  Licensed LOs that do hard money lending oftentimes do loan servicing or at least know of companies that do loan servicing like this.

Originally posted by @Neil Robertson :

@Max Gradowitz

How easy is it normally to refinance once the balloon is due? I suppose you have to have all your ducks in a row before that time comes 

It completely depends on your income, debts, credit, etc as it does with any loan.   I'm not a loan officer so I have no idea how easy or hard it'll be for you to refi later, you need to speak with one to have a better idea on that.

Originally posted by @Neil Robertson :

@Tracy Z. Rewey

Tracy this unit is a 10 Plex, would I have to refi out of the seller financing with a commercial loan? 

im guessing the loan term for commercial are 25% down payment and 20 year amortization 

Yes, that would be a commercial with down payment/equity requirements and terms varying by lender.  If the seller is agreeable you could look at a longer term or writing in a clause for extending (or even removing) the balloon at terms agreeable to the two of you in the event there are challenges with a commercial refinance.