I'm considering a seller-financed offer for a 6-unit apartment building in NH. I know the landlord and I believe he owns the property outright. Because I cannot (easily) come up with the necessary down-payment I am considering various seller-financing offers as follows: The owner has listed the property for 365k.
1) 275k over 10 years at 5.0%: 10.5k down; total interest=73k; total cash to buyer=353k;
2) 325k over 15 years at 4.0%: 10.5k down; total interest=104k; cash to buyer after interest=429k;
3) 350k over 20 years at 3.0%: 10.5k down; total interest=112k; cash to buyer after interest=462k;
This is a naive offer by default because it's my first seller-financed offer. Therefore, I'm sure there's something I'm missing or, more likely, the interest rates I'm offering are not appropriate (?). I'm keen to hear any feedback from others here at BP regarding the merits and/or faults of this offer.
Have you looked at the financials and calculated the current NOI? Can the current NOI support any or all of those financing scenarios?
yes, the NOI does support all of the scenarios. Cash flow is ~ 29/month, 500/month, and 900/month for 1,2, and 3 respectively.
Have you done deals with seller-financing in your area?
First, regardless of your willingness to pay thousands for financing that is not necessary, know that financing DOES NOT add value to a property, any property.
Next, even if your seller agrees to carry the loan long term, things happen that require a mortgage to be paid off by selling or refinancing, if you don't have equity based on the property value, you're screwed.
Come to the value of the property first, then finance it.
Such deals usually take 10% down, if the property is difficult to finance otherwise you might get a deal with less down or if you are perceived to be a strong buyer with experience.
Sell your offer from the benefits to the seller, a higher interest than they may otherwise earn on similar investments, an annuity income as they had with rents, tax advantages of deferring gains on the sale, add professional management of the loan with a loan servicer to make it hassle free and it will be more attractive, much safer for you too.
Read up on seller financing topics in the forums, not podcasts or youtube or comic books.
Much better to go in at a lower price and higher interest, sellers rather have interest income than taxable gains, it also gives you equity and the ability to refinance if necessary or leverage another deal with that equity. Good luck :)
Most of my deals are done as land contract purchases with no or low money down. As Bill said I can get away with putting nothing down due to a fair amount of experience and a strong track record.
Here is a link describing what I do.
Deal I just did this month on a 12 unit.
I agree with Bill that youre unlikely to get long term seller financing but you could always discuss the deal before you even make your offer with the seller. I often negotiate most of the terms before writing my LOI.
Come up with a monthly payment that meets your desired cash flow on the property and work it backwards from the value of the property to come up with the amortization period and interest rate.
ok, thank you very much for your detailed response and for the links. I will go read through them shortly.
Thank you very much for your detailed response. I will take your advice to heart.
@David Bennett : There is no need to speculate as to whether the seller owns the property outright. Instead, you can search the New Hampshire Registry of Deeds here: http://www.nhdeeds.com/ to see if there is an outstanding mortgage on the property. If he took out a mortgage to buy the place it will be registered there. If he paid the mortgage off then the mortgage discharge will also be registered there. If he didn't pay it off you can often work backwards from the info given in the registered mortgage to figure out approximately how much he still owes on the property, assuming a reasonable interest rate for that year and also assuming that he didn't make any extra payments of principal in the intervening years.
You might also want to access the tax collector's website in that town to see if he's behind in his property tax payments. Any bit of intelligence might be useful in your negotiations.
For a lender, the longer the term on a fixed rate loan, the more the risk, and so the higher the interest rate. But you are offering to pay him lower interest rates on the longer term loans, which is backwards of what I would expect. But then you are offering him a higher sales price if he agrees to the longer term loan.
Instead, I would figure out how much you want to pay for the property and keep that amount fixed for all 3 offers. You can make that offer contingent on seller financing and give him 2 or 3 options for the seller financing, all with the same loan amount but with different loan maturities, where the longer term loans have higher interest rates to compensate him for the higher risk. This is a more straightforward approach.
Remove the "total cash to buyer after interest" and "total interest" figures from your offer. To anyone who understands the time value of money that is just irrelevant chaff. It's the interest rates and the terms that matter.
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