What are "normal" terms for seller financing?

Question

Just recently started researching getting into rei. There is a duplex near me in an excellent location that has dropped in price like 35% in the last 4 months after slow drops for a year. Looks like the seller is getting desperate. Gross rents of 1000 and if the price drops again next month it'll be down to around 46k. Im thinking of possibly offering around 41-43 after the next drop but would probably need seller financing right now. What is a normal down payment and interest rates in a situation like this? Or are there just too many variables to know without asking the seller?

Any advice would be appreciated.

Marc Faulkner · Answer

When looking for seller financing it is best to look for the longest terms, lower down payments and lower rates.  You can always pay it off early if you have a windfall.  Cash is king right now.  Find out what the problems are and solve them.

If seller financing is already being offered there is usually a reason why.  You will find that a lot of deals like this are being offered by investors that bought the property to make money and are now offering seller financing.  This is not the type of situation you are looking for as an investor.  Another investor has already marked the deal up.

You want to find motivated sellers, find their pain and solve the problem to create a win win situation. If you can;t create a win-win, walk away.  Find the hot buttons and trade price for terms.  Everything is negotiable...

Account Closed · Answer

yep, it's best to find out what the seller wants/needs...does he like the monthly income from rents but doesn't like the hassle of landlording?? if so, that's a perfect situation to offer financing...try to find out what he owes on the property, or what he needs to move on...this is easiest if the property isn't on the MLS as realtors have a way of messing these discussions up....creative real estate confuses most of them!

Jeff S. · Answer

"There are too many variables to know without asking the seller."

Think win/win with a seller that is willing to do a deep discount for cash and you have cash, or a seller that wants income long term and doen't need much down and you don't have much down.

If you can meet his needs chances are better he can meet yours. Depending on your financial statement and ability to be flexible, the seller will be more willing to be flexible too. From a sellers point of view a healthy down, 20% or so is desirable. From a buyers point of view that might be desirable or it may not.

Talk to the seller, ask questions then go away and think things over. Report back and people here will help you from there.

Bill Gulley · Answer

Glad to see the great comments. As to the down payment, I have done deals with nothing down and to over 20%. The motivation of the seller and their finacial needs will have alot to do with that, but also your position will be an influence as well. Someone selling investment properties has probably been around the block a couple times and will look  to your ability to pay to consider the down payment and terms.

If you are a strong buyer, you can get by with the nothing down or 2K deals more often (not saying it's impossible if you're not).  If you are new (especially when Realtors are involved) you may be pushed for more skin in the game.
The more you sell your ability to do the deal as agreed the better off you'll be, but don't scare them with hype.

As to terms, balloons are usually 3 to 5 years, but can be longer. Rates can be all over the place, a couple points above the going bank rate should be the limit. No prepayment penalties are customary, and may well be reuired in your state. If there is little down, escrows for taxes and insurance to a thrid party loan servicer may be required (it may be required on the underlying note). Default provisions may be designed by state law, but many times, providing a deed-in-lieu-of-foreclosure (quit claim deed) held in escrow to be filed after thirty consecutive days of default in payment can be something that makes it more attractive to a seller and can be a trade-off for a lower rate or less in the down payment.

And, in the pre-payment realm, having a penalty equal to the tax liability (especially in the even of default) can be an issue. If there is a default and the seller takes the property, for tax purposes, the note is treated as if it has been fully paid and the lender will have taxes due. So, if you see this, don't baluk as it may only apply in a default situation.

As mentioned, read the sub-2 forums here and follow my advice there! LOL Good luck...

Bryan Hancock · Answer

Well I suspect there won't be a whole lot of equity for him to finance with then.  I generally do an equity presentation and subtract out the normal selling costs, subtract the debt he tells you he owes, and arrive at an "equity" number which is what he will take home at closing.

From that point you can make several offers to buy the equity at a discount while taking the property subject-to.  I would suggest you study subject-to threads on the forums if you are not familiar with the technique and the paperwork involved.

Bryan Hancock · Answer

Sounds like a noble goal save the moving back in with the folks thing.  Best of luck to you!

George P. · Answer

Double check - maybe it's a short sale in which case the price is lowered just to get the offer on the table.

Jeff S. · Answer

With a phone call to customer service to your title co. you can get the recorded mortgage information. Sometimes just a phone call like this can save a lot of time not bothering with over-mortgaged properties.

Bob Coleman · Answer

I have bought properties with as little as 2K down and at most 5K down.  I've been taught to either offer the price they want with the terms I want or ask for the price I want with the terms they want...

I personally start the ball rolling by making an offer where I ask for seller financing.  If it's 40K+, offer 2K down and ask for 6% or less for financing...that's typical for an investment property (2% higher than O/O home).

Bryan Hancock · Answer

Is there debt already on the project?  If so, it may drive how you make offers for seller financing.  You may end up purchasing subject-to.

What are "normal" terms for seller financing?

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