Seller financing, deal analysis.

8 Replies

Hi,

My neighbor is, unfortunately, getting too old to maintain his property, and has decided to move 5 miles away to a new house that requires less maintenance (no trees on the new property). Here is what I know about the situation:

  • He somewhat got in his mind that his house was worth $280k.
  • Comps show that similar houses which were remodeled sold for ~$240k a few months back.
  • The house he's moving to cost him $260k, so that's what he's looking at getting out of the one he's selling.
  • The house needs about $15k of renovations.

It's not currently listed, and the market has been fairly hot in this area, so I am trying to figure out a way to make this work, throughout conversations, education, and some reasoning.

I'm thinking about ways to:

  1. pay less than what the house is worth.
  2. make sure he gets the amount of money he needs out of this deal.
  3. close on it before they put in on the market (saturated with California cash buyers)

I am thinking about telling them that I am willing to pay "$260,000", which is what I know he wants, by offering him seller's financing. 5% interest rate over 5 years with a balloon payment.

If I reverse the $260000 after 5 years, it looks like this:

Seller finances $200000 over 5 years at 5%:

Downpayment: $12,000

Seller interest over 5 years: $48,076.10

Principal paid over 5 years: $15,268.85

Balloon payment after 5 years : $184,731.15

Total:  12,000 + 48,076 + 15,268 + 184,731.15 = $260075.15

That would help him get to his $260k price.

Now for my side of the deal:

Down payment: 12000

Seller financed loan: 200000

Repairs: 15000

Total = $227,000

That house will appraise at about $250-260k after repairs.

Am I headed into the right direction with this proposal? What would you do differently? Anything I should be aware of?

Feel free to ask me any questions!

Assuming there is no lien on this property? Sometimes showing the actual end figure works...it's a matter of meeting his number...it's worth a try. My first thought is that the down payment is low, but again, not sure how this guy will respond. And remember the interest is taxable income...so you're just $75 over his bottom line...his taxes will eat more than that from $48k in interest. 

Who's paying for what?...at closing...you'll have several thousand in transaction costs to close this...

We make a lot of seller financing offers and it IS a great way to get closer to a sellers asking price, particularly when their sales price may not be realistic.   I interpret your summary that your end goal is to sell it with seller financing and not payoff the note to your seller for the 5years?

I like how you are thinking - refocusing the seller on the total payments over the period of the loan rather than just the sales price.

Does the seller need the cash to buy the next home?  If so, Seller Financing may be a tough sell.   Also, the gap between the sellers mental sales price and your sales price may be too big.

If he is open to seller financing, we like to make 3 offers and "steer" the seller towards seller financing with small downpayments.   Assuming your 5yr balloon structure with 5% interest, Maybe something like:

- $230K - Cash Price. (Cash + Conventional Mortgage)

Total Paid:  $230,000

- $240K - Seller Financing ($230K financed, $10K down payment)

        Total Paid: $295,287  (Downpayment, all P&I payments, balloon payment)

- $260K - Seller Financing ($260K financed, $0K down payment)

Total Paid $322,499 ((Downpayment, all P&I payments, balloon payment)

If you can get him all the way down to your example of a $200K sales price ($260K total paid) all the better but it feels like a bit of a stretch.

I don't have all the info so this may not track completely to your example but your basic idea of refocusing the seller on the sum of total payments, vs. the sale price, is a great strategy...

@Jeff Groudan , thank you very much for your thoughts! This is very insightful, I like the idea of offering options to them. They already bought their new house and are super frugal, what I am trying to identify is whether or not they financed it or paid cash for it.

They seem to be in the mindset of "This is what we want, and we don't mind waiting years in order to get it".

I think that once they put their house on the market they will realize how high they are. I am hoping that my numbers will then make sense to them!

@Alejandro Calixto , I've decided to wait for them to put the house on the market at the price they want, so that they can get a feel for it. What they are asking for is way above, and they are convinced that someone will come grab it right away at that price.

Instead, I've been visiting comps in the neighborhood and am getting really familiar with what's available and at what price, so that I can put together an offer that makes sense when the time comes.

I will absolutely let you know what ends up happening!

@Jeff Groudan

I was about to start a new thread about this but probably better to consolidate more info in here.

Been interested in buying a beach front condo in a complex my fiance and I have stayed in many times over the years.

Decided to reach out to the owners (old coworkers of my fiance) for some rental stream/logistics info as I've always just owned residential props.  I know these units are more work but part of this purchase is actually enjoying an investment as we visit this beach often.  

I mention a unit in his building and he says why don't you buy mine...then says he'll carry the note.  Couple is in their 70s and looking to get out; property is owned free and clear.  

I don't need seller financing as I've got well over the 20% for a traditional loan.

Regarding some of the points you mentioned, specifically the total earnings for the seller when carrying the note; right off the bat I told him I'd want some leeway/consideration on the sales price since I'll be paying him @$600 a month in interest.  He nodded and said he would take that into consideration on the sales price.  Just making sure I'm not crazy thinking this way.

Side note that makes has me more interested is that his wife was the property manager for the last 9yrs and will give us their guest book with repeat customers and get us up and running.

Interest rates:  Is it wrong to ask for a lower than market interest rate or is the standard just the current industry mortgage rate?

As far as actually facilitating the deal, is there somewhere I could find some steps or guidance? Do you essentially just do a FSBO transaction and the lending portion can be drafted by an attorney??

They are the bank so they hold the deed?

How do property taxes work when they are still the deeded owner?  

Hope that wasn't too much.

Thanks in advance.

my thoughts:

JH:  right off the bat I told him I'd want some leeway/consideration on the sales price since I'll be paying him @$600 a month in interest. He nodded and said he would take that into consideration on the sales price. Just making sure I'm not crazy thinking this way.

JG: There are two kinds of seller finance sellers (in my experience). Those that Seller Finance to get their price and those that Seller Finance to get long term income and maximize their ROI. It sounds like your seller is the latter so yes, it is reasonable to ask for a lower price in exchange for higher monthly income or long term income.

JH:  Interest rates: Is it wrong to ask for a lower than market interest rate or is the standard just the current industry mortgage rate?

   JG:  The Interest rate is in many ways a measure of the risk of a particular investment.   Seller Financing (from a Seller's perspective) is generally perceived as more risky than selling to someone with a bank loan so in my experience the interest rate needs to be higher than market.   If I am the seller, I am probably not going to want to discount both sales price and interest rates  below market.  That said, it really comes down to whatever you can negotiate. 

JH:  As far as actually facilitating the deal, is there somewhere I could find some steps or guidance? Do you essentially just do a FSBO transaction and the lending portion can be drafted by an attorney?

     JG:  I recommend using a title company or real estate attorney to execute seller financing transactions.  They can ensure title is insured and the deed, deed of trust, promissory notes, etc... are all drafted and filed correctly.   This protects both you and the seller.

 JH:  They are the bank so they hold the deed?

     JG:   You should be on title (on the Deed) after the sale.   There is a different document (Deed of Trust) that gives the seller the same rights as a bank in that the home becomes collateral for the seller financed note.

JH:   How do property taxes work when they are still the deeded owner? 

    JG:   You are the new owner so you are financially responsible for the property taxes.    You and the seller may choose to escrow the property taxes so you pay a portion of the taxes each month.  You, the seller or a 3rd party loan servicing company can make the actual payment of the taxes to the local tax authority.   I always recommend a loan servicing company to play the role as a neutral fiduciary to make sure all the payments are property processed.