How do you structure seller financing?
How do you structure an offer to a seller for owner financing? How do you ameturize the loan and payment and balloon payments? I've seen some properties I would like to make an offer with seller financing but I don't know where to start and how to structure it. Any suggestions would be greatly appreciated. For easy numbers and an ex. how would you structure an offer for a property asking $500,000 that you want to offer a 15 yr seller finance on? how would you run the ameturizion and figure out the monthly payment and any suggestions on balloon payments?
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#3 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
- Investor
- Austin, TX
This is what I shoot for
6% down
6% interest rate
5 year balloon
40 year amortization
I just have one thought to add. Don't structure deals with balloon payments if you're the buyer. Why put yourself into a precarious position like? None of us have a crystal ball and know what rates will do in 1, 3, or 5 years.
I had a loan I was refinancing in March of 2020. I was literally ready to drive to the closing and the lender pulled the financing (we were clear to close) due to COVID concerns. Luckily this wasn't a balloon payment, just a rate and term refi - but had it been a balloon I may have been sweating it.
Just saying, use extreme caution when using balloon payments when you're the one that has to come up with the payment. Many sellers won't even bring it up if you don't...
I explain the benefits to the seller, especially the tax benefits of receiving income over time and deferring any capital gains taxes. I provide a lump sum as they would get selling and pay 6% interest only, for a period of 5 years. The interest only part means I have some room for lower payments, and I am not amortizing the loan. The interest is deductible to me, and income to the seller. So, they get a lump sum and they get monthly payments, which is great for tired landlords.
@Kerry Baird
Hi Kerry. I have been looking into seller financing and subject to. With what you said above, are you saying lump sum= your down payment? How do you determine how much there, just a negotiation? And then you only do the interest for the 5 years and then you start paying the regular loan and interest payment... for the life of the loan or do you payoff early? Just trying to make sure I understand everything all the way when I am trying to converse with seller and explain the benefit to them. Have you ever refinanced out of seller financing to a bank to cash out?
My husband and I have 2 rentals that we bought conventionally, but now looking to get creative. Thank you for your time!
@Meghan Freckleton-Hopkins, Good questions. The amounts were based upon my conversation with the seller. I knew he had sold another house (that he tried to sell me initially, but sold to someone else) so I knew he was having to pay capital gains on that property. It was the mental leverage I needed to offer him the owner financing, with me paying him over time. I made a big deal over his taxes.
I sold a house earlier in the year, so I had $100k that I wanted to deploy. I did the interest-only for 5 years, because it worked for each of us. I can choose to pay off early, as we don't have a prepayment penalty, and we will do a cash out refinance.
I liked this deal so much, I made the same offer to a seller around the corner, who was also an older tired landlord. She also liked getting her income over time for tax purposes.
An owner financing agreement between buyer and seller should always be memorialized in a written document that includes the specifics of the deal. However, there are a few different ways to accomplish this, and the best option will depend on your specific needs and circumstances. Here are three main ways to structure a seller-financed deal:
1. Use a Promissory Note and Mortgage or Deed of Trust
If you’re familiar with traditional mortgages, this model will sound familiar. The buyer and seller agree to the terms of a promissory note that details terms like the loan amount, interest rate and amortization schedule. The mortgage is secured—or collateralized—by the house, the buyer’s name goes on the title and the mortgage is recorded with the local government.
2. Draft a Contract for Deed
Also known as an installment sale or land contract, a contract for deed is when a buyer does not receive the deed to owner-financed property until he makes the final loan payment. Alternatively, the buyer receives title if he refinances the loan with another lender and pays the seller in full.
3. Create a Lease-purchase Agreement
This option, also referred to as rent-to-own or a lease option, involves a seller leasing a property to a buyer who has the option to buy it for a set price. The buyer pays rent and, at the end of the lease term, can purchase the property or give up his lease option. If he opts to buy the property, rent paid during the lease period is applied toward the purchase price.
Because owner financing can be complex, we recommend working with a licensed attorney who will consider your best interests when drafting the necessary documents.
Read this article for more information https://www.forbes.com/advisor...
All the best!
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@Kerry Baird Thank you. That makes sense. Both of your sellers have 100% equity in the properties, so they are the bank for you. Have you done a deal with subject too as well. I understand the difference of taking over the mortgage in the sub to and the seller being the bank in seller financing. I am a little hesitant with the sub to because of the bank being able to call the note due at change of names.
How did you find the tired landlords? I have been looking at the MLS and multis that are expired or been sitting on the market for a long time. Also going to start reaching out to for rent by owners on Craigs.
Thank you!
To all who are suggesting an interest rate sub 7%, has that deal closed?
I am curious about investors' appetites for a fixed interest rate in this environment.
Has anyone structured a deal with a floating rate?
@Meghan Freckleton-Hopkins, for my sub2 deals, I was handwriting letters to motivated sellers. They called me and I went to their house to negotiate a deal and buy their house. Several of them wanted the fastest closing so they could move on, which happened to be lease option or subject to the existing mortgage. One of those tired landlords I bought from had a FSBO sign in the yard, and I called on it. The other seller's house was on the MLS, and I wrote a letter to submit with our offer saying I'd like owner financing.
I agree with @Eliott Elias regarding the down payment (or less if possible) as well as the 40 year amortization to help decrease the monthly amount. I personally wouldn't include a 5 year balloon to keep my options open, as mentioned above by @Andrew Kiel. I would include not having a pre-payment penalty if I decided to refinance and pay it off in a balloon style payment sometime down the line.
@Kerry Baird have you ever come across the bank calling the note due when it changed from the seller to you?
@Meghan Freckleton-Hopkins, No. But I have only done a handful of sub2s. Insurance changes are what notifies the bank that the deed has changed. We were also renovating and then pulling our money out with a refi or selling a house.
