HELP! I have offer to buy, need to know appropriate rates/terms to charge

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HELP! I have offer to buy, need to know appropriate rates/terms to charge

Real Estate Investor, Flipper, PM, vacation rental, Wholesaler · Athens, GA · Member since 2013 · 260 posts · 210 votes

I'm selling a turnkey duplex and the buyer wants to know what kind of terms if I do an owner finance. I own it free and clear and was trying to raise money for a separate 1031 purchase.

PLEASE HELP ME BE COMPETITIVE BUT NOT STUPID!

turn key duplex in Athens GA sale price $89,900.

$1070 rents 12% cap rate. Property pro forma attached.

Out of state investor.

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Will BarnardPro Member

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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

12y

Most private money lenders will want 9%-12% or more. Keep in mind your state usury laws and if the buyer is going to live in the property, I would suggest you avoid such an owner carry to avoid the new DF (Dodd Frank) laws and pitfalls that come with it.

The question really is, what king of return can you get in another passive investment? Then get something equal to or greater than that for this one.

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Residential Landlord · San Mateo, CA · Member since 2013 · 49 posts · 12 votes
12y
@Jack Tucker

Since I have/had less than no idea on this question, I just Googled real estate private money lenders and at privatemoneygoldmine.com it seems the lenders are at 6% to 10%, but I have no ideas on specifics as to length of term and initial down required.

I know all the deals I have seen in the Portland, OR area with Owner financing have been 20% down and 6% for 5 years, with a balloon.

Also aren't the terms are what you are comfortable with and how you structure the deal? At some level are you just trading one income vehicle for another with the added bonus that you get the asset back (albeit there is a risk if the property gets trashed due to bad management) if the lender flakes out (and of course the hassle of calling the note).

Hopefully some of the experienced private money lenders will jump in on this one, as it is a fantastic question.
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Will BarnardPro Member
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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
12y
Most private money lenders will want 9%-12% or more. Keep in mind your state usury laws and if the buyer is going to live in the property, I would suggest you avoid such an owner carry to avoid the new DF (Dodd Frank) laws and pitfalls that come with it.

The question really is, what king of return can you get in another passive investment? Then get something equal to or greater than that for this one.
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Jack Tucker
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Real Estate Investor, Flipper, PM, vacation rental, Wholesaler · Athens, GA · Member since 2013 · 260 posts · 210 votes
12y
Is anyone familiar with the usury laws in the state of Georgia? Is there anybody local to Atlanta or Athens that is an expert on this subject?

Thanks.
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Jason Eyerly
Real Estate Agent · Charleston, SC · Member since 2013 · 424 posts · 99 votes
12y
@JScott Would be your go to guy for Atlanta as far as I know. That area is/was his specialty. I think you could find the same/better returns with another investment or approach as opposed to seller financing however. Also saving you the LC/PM hassle. Just my two cents.
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Kevin Brown
Rental Property Investor · Dallas, TX · Member since 2013 · 114 posts · 38 votes
12y
Based on the numbers you provided, I don't see why you couldn't find a buyer not needing owner finance. If your trying to move that money via 1031 exchange (Im no expert on this) wouldn't the owner finance just add an extra step/ hoop to jump through?
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Ellis San Jose
Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
12y
@Jack Tucker

This is a very complex question especially without more information.

For me it boils down to opportunity cost of the money & personal preference.

Here is what you may want to consider:

What would you get with a cash offer?

What net income are you getting by keeping it?

Is it a personal hassle to keep it?

What return can you make on your money if you could invest in something else?

What monthly payment can the property comfortably support? If the payments are too high it may cause your buyer to default.
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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
12y
The Seller Carry Back Financing/Note will complicate your 1031 Exchange. There are a number of issues that need to be addressed. Are you going to include the note inside the 1031 Exchange, which sounds like you want to so that you can defer all of your taxes, or are you going to exclude the note from your 1031 Exchange, in which case it would be taxable under the installment sale rules.
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Jerry W.Pro Member
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Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
12y
@Jack Tucker , If you have a 12% cap rate, why would you take less than 12% interest? I am not very good at cap rates, but if you are getting a 12% return on your money you would lose money if you financed it for less than 13% interest. You would probably not get anyone to pay 13% interest with banks at 5 or 6 % interest. My advice is to say I cannot finance that property, it has to be full amount due at closing. Unless you really want to get rid of the property why would you lower your rate of return by selling it?

The 1031 exchange will become a much bigger problem as well, which I understand is your motivation to sale. You build your business by making money, not losing it.
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Robert Leonard
Investor · Lafayette/Baton Rouge, LA · Member since 2013 · 1k+ posts · 915 votes
12y
@Jack Tucker A couple questions: How's your credit? If you have good credit, you can get 80% out of the property in a cash out refinance. That's also not a taxable event, so you avoid the taxes like you were trying to do with a 1031 exchange. Talk to commercial lenders at small banks and you can probably get a 20year loan at 5-6% interest. With this option, you get to keep the property and the income and the loan gets paid back by your renters. That's just an idea!

Why are you giving so much away with this deal? A year of PM and LC seems overly generous to me. If you are going to continue to manage the property, that lends even more merit to my first idea IMO. Just some food for thought!
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Jack Tucker
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Real Estate Investor, Flipper, PM, vacation rental, Wholesaler · Athens, GA · Member since 2013 · 260 posts · 210 votes
12y
Excellent feedback on each post here, and I appreciate it all. Two points in particular that resonate with me are @Ellis San Jose "opportunity cost" and @Jerry W. logic of the 12% existing cap rate versus losing money at anything below 13%. Keen questions and it makes me think twice about owner financing.

The buyer has already exceeded 4 mortgages, so they are looking to pay full price if I'm willing to pick up some financing. I like the idea of making the turnkey sale which is at a retail price level for the property. Cash flow is strong, but the appreciation is limited in this working class neighborhood. If I made a cash offer on this exact property as a buyer, using the 50% rule and 10% cap rate, which is standard in our location, it would be $1070*50% * 12mon / 10%cap = $65k. But the property "hardening" with 100% tile floors, and $20k of capital improvements of new HVACs, new plumbing and new wiring, would push me to $75-80k cash offer.

What would a HML loan or private money lender down payment look like? @Will Barnard stated 9-12%. What kind of down payment do they usually seek?
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Will BarnardPro Member
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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
12y
Jack, the usury in Georgia is really up to debate. Currently, it states that loans over $3000 can have an interest rate of up to 5% per month! but that would be 60% annually which is why it is a debate. Loans under $3000 are set at a max of 18%. GA has some pretty loose but debatable usury limits.

As far as downs required, that depends on each lender, the experience level of the borrower, and the loan to value. If I were you and selling on an owner carried note, I would want at least 20% down for a number of reasons. One is so I had a decent amount of skin in the game from the borrower, and also to make my note more valuable if I ever needed to sell it. With 20% down! and once seasoned (borrower has paid on time for at least 12 months), it could command a price much closer to par rather than having to discount it a lot.
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