Structuring Seller Financing

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My partner and I are considering a property that we would like to use seller financing to complete the deal. I was wondering how other people structure their seller financing deals. The property has been on and off the market since 2010 and has been owned by the same person since 2005 so we assume they have decent equity. We were thinking of the following terms:

-Minimal down payment.

-Amortized over 30 years.

-Option for balloon payment after 5 years.

-Interest only payments for the first 2 months to help us with renovations and placing tenants.

Looking for advice from others more experienced in this area!

Hey @Michael Fitts ,

We've done three seller financed deals:

1. 460k for an 11 unit. Bank loan of 368k. Seller carry of 92k at 6% on a 5/25 note. We paid no money down, which was nice. But our cashflow is tight because of this.

2. 1.25M for an 18 unit. Down payment of 250k, seller loan of 1M at 5.5% on a 5/25 note.  We asked for interest only for the 1st year, but the seller did not agree to that. He wanted to make sure we had skin in the game. 

3. 730k for a 27 unit mobile home park. Bank loan for 530k. Seller carry of 200k. Again, no downpayment, which makes cashflow tight.  

In all of these cases, we pitched the idea of seller financing as a way for the seller to earn more money by being the bank.  Case in point: the 18 unit seller wanted a price of 1.6M.  We settled on 1.25M, but the seller will get close to 1.55M after 5 years of interest payments from us.  



@AJ Leman I appreciate the advice from your past experience. So in those scenarios you get the bank to finance most of it and use the seller financing as the gap funding?

I was looking to do the whole thing as owner financing so I hope I'm not going too far outside the box.

Some seller will finance the whole thing, just depends.  We did all seller finance on our 18 unit.  The only drawback of all seller finance is the seller may want a full down payment to protect their interests.  So, on the 18 unit, we had to come up with a 250k DP.  Then the seller carried a 1M loan for us.  In the other deals, we did no money down becasue the bank holding the majority of the note - not the seller.

Basically my thought process is you need to get a couple terms in your favor and the seller gets a couple. Downpayment amount, interest rate, loan length and/or purchase price. I bought a full duplex with seller financing. Seller wanted 280k. I was able to purchase for 250k, 10% down, 5% interest on a 30 year fixed note with the option to pay it off or refinance at anytime. I get a lower price and less downpayment than a bank wants. He gets interest on a loan for 30 yrs. 

Just make sure you vet the seller as an upstanding person. And either escrow the payments or have a solid paperwork trail. Also, write up a mortgage with the title company and transfer the deed.

As others have said it's a great deal for buyers but good for the sellers too. The option to make the interest that would otherwise go to the bank. Plus as far as I understand they wouldn't have to pay large capital gain taxes since they're taking payments over time. 

My exit strategy someday after I get some rentals paid off is to seller finance them to other investors and/or homeowners. And do the deals form the other side. Then I get monthly payments without tenants. Hope that helps.

I totally agree with Brendon... You get a few terms in your favor and the seller gets some terms in their favor.  The first thing to consider is what's most important to you.  Do you want a small down payment?  Do you want to avoid financing due to credit issues?  Depending on what you want focus on that.  Second, consider what you're willing to give up.  Are you willing to pay a slightly higher rate?  Are you willing to pay a higher purchase amount?  Are you willing to be flexible on your timeline for payoff?

Additionally, for me most of the time I only use Seller Financing if the property is free and clear.  If they have a loan in their name/company, seller financing is quite challenging.  As you cannot transfer it to your name/company until the title is clear or if you can assume their loan.  

I did do a fun seller finance BRRR deal once. I purchased a property with $5k down and a 90 day balloon for the final payment. It transferred into my company name. I then leased the property, and started the re-finance process with a small local bank that didn't require seasoning. The refi amount paid of the balloon in less than 90days and no additional out of pocket money.

To structure seller financing, it is always best to begin with a conversation to uncover the seller's goals.  

You already know your goals, so you can work in the terms that make sense for you as you craft the deal. Sellers will sometimes offer terms that are aligned with their goals, and sometimes they are just throwing something out there. If you take the time to truly understand what they are seeking to accomplish through the sale of the property, you should be able to craft terms of a note that will create a win-win for both parties.

I find it odd that buyers and sellers typically end up in a competition with each other.  If you were structuring a deal with your parents, (assuming you love your parents) how would you approach it?  Consider approaching it like that.  When the seller truly appreciates that you want to understand what they are trying to accomplish, you will find them to lower their gloves and open the door to a conversation of mutual benefit.  Then there is no competition.  It simply becomes a conversation over terms that will allow both parties to achieve their goals.