Am I crazy for asking this?

Question

I just signed a purchase agreement yesterday, $305k. The seller is financing the deal until I sell my other home. We are hashing out interest rate and terms. I am interested in an amortized 30 year term with a 5 year balloon. Seller has offered this at a 5% rate all the way down to 4.5% depending on how much cash we put down.

Here's the crazy  questions/statements......I want to pay LESS interest. I'm feeling under education in this arena and wondered if someone may have a great negotiating strategy.

My goal is to try to pay this loan in full within the 5-10 years, depending on what my current home sells for however, I need the protection of a 30 year term payment just in case. What can I present to the seller today to sway her to consider lower or zero interest? She is open to negotiations.

Jay Hinrichs · Answer

usually a seller carry deal your paying top of market or over market .. you don't usually get a great deal on price and get seller financing.. unless its a distress situation..

But I have financed many a rental properties to buyers with zero interest I just did one middle of sept.

I run PV and then come up with my return.. so for me 30 months divided by loan amount.. has a PV of a 15% interest rate.  so I start there.. and what I like about these that I do for investors who buy these rentals from me.. is that they NEVER default.. and it forces them to own an asset in 30 months free and clear and they are sending me Christmas wishs as opposed to minimum down maximum leverage and never get a property paid for..

so in my mind if you can hack it.. offer zero interest 10k a month payments.. and then run a PV value to the seller showing how his mortgage can be sold at a 15% yield to a an investor buying a note.

Wayne Brooks · Answer

Well, 4.5-5% is certainly reasonable.  You can certainly ask but it seems the seller is doing this just a favor to you, to sell your house....a 5 year balloon doesn’t really jive with “so we can sell our house” though.

Frank Chin · Answer

The seller would be stuck with imputed interest if you wildly successful in negotiating the rate down to zero percent. That means that if she collected nothing from you, she is stuck with paying taxes on interest income she never collected from you. See: Imputed interest

I don't know if she'll go for it if she checks with a CPA. At 3%, the current rate I believe, she would have to declare about $9,000 in interest income she never received. Would you go for a deal like that.

Kim Durst · Answer

we signed an agreement. 305k $5000 Down, 30 yr amortization with a 5 year balloon. We felt the safest with this option. And yes, they’re being “nice”. Better than fair price on this property. I think it worked very well for us all in this circumstance

Doug P. · Answer

@Kim Durst 4.5-5% is a good deal, how much are they asking down? Unmotivated sellers usually demand 10% interest with 10-20% down. Can you do better? Of course. But the seller has to be extremely motivated.

Kim Durst · Answer

planning to see house in the spring but want to take the full 5 years at a lower rate to pay off the new place in full with NO mortgage

Corby Goade · Answer

I love your ambition!

If you plan to pay it off quickly, and if I understand your strategy- it's to get a zero interest loan from the seller with a balloon, but pay it off completely before the balloon is due?

If that's the case, I'd offer a larger down payment and higher monthly payments. If they need/want the balloon, it's likely that they want an early payoff too, correct? They'd probably be pretty excited by higher payments, and you sound like you are in a position to do that. At a 30 year am, you are looking at payments around $1500? Offer them $3,000 per month with a balloon at 10 years.

If you like the comfort of the lower payment, but have the ability to make a higher payment, you could offer some sort of penalty to yourself if you don't make the higher payment. Let's say your payment with the 30 year am is $1500, but you plan to pay $3000 per month. You could make a $200 "penalty" payment for each month that you have to make a minimum payment.

Just spitballing here, but there are endless possibilities, this is the fun part. Good luck!

Kim Durst · Answer

I am aware of the imputed interest. I'd like to hear if anyone has a good negotiation strategy or a set of terms that are creative and good for all of us.

Am I crazy for asking this?

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