Structuring a Seller Finance Deal
Good morning -
I have come across a property I am interested in. The PP is 263K. The seller is offering terms of 15 years , 6.5% and 30% down. This property is a condo on Fire Island and generates roughly $20k in Net Income per year.
With those terms - the cash flow is essentially 0.
I have a call with the broker tomorrow to try to understand the seller’s position and motivation for selling, among other things. With that said - I’m wondering if anyone has recommendations on ways to get creative with seller financing that could generate positive cash flow? Granted I understand that will be dependent on what the sellers goals are but curious what levers I could pull.
Thank you in advance !
#3 All Forums Contributor
- Investor
- Northern Virginia
@Joseph DiBernardo
Interest only for first 3 years (or pick a number) with a balloon payment.
Of course then you are playing with fire if market dips. But that is one way.
@Joseph DiBernardo to get positive cashflow you have to either increase income or decrease expenses. Can you put more down and decrease CoC or can you push more income out of the property. If you can't do either of those look at getting more creative on terms. Like @Chris Seveney mentioned interest only period can help, or drop the rate and increase the price. Extend the amortization and keep the balloon the same.
It is just math make it work for you or move on if you don't like it.
Present an offer to the broker which requires you to be present (or on Zoom) when they present the offer. You need to speak directly with the sellers.
Talk about what the property can afford, not you, the market, etc. Ask what they plan to do with the money. Develop a relationship and figure out how you can help.
I wouldn't offer a short-term balloon. Balloons tend to pop at the worst time. Perhaps a 30-year amortization and a 15-year ballon. That would give you a better payment.
Another approach is a master lease plus an option. Sellers would keep the depreciation. You'd capture cash flow and appreciation. If there's a mortgage you can also negotiate to receive the amortization (paydown of principal).
Thank you all for the responses !
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.
All the best!
Real Estate Agent Texas (#736740)
- (832) 776-9582
- https://bit.ly/3RVDHdE
- [email protected]
- Podcast Guest on Show #469
Does the property need rehab? Possible scenario for a novation.
Joseph.... first off... congrats on taking action and jumping all over this!!!!
I have done a few thousand seller finance and subject to deals in my career. In my experience the seller is not looking to sell to an investor and most likely does not care whether you will cashflow or not.
I would assume that this seller is not HIGHLY motivated and I would put them in the "follow up" category. 70% of our deals (we bought 15 this week) come from 13 follow ups or more. Our team does not try to create motivation... we try to wait for motivation through follow up.
If you are looking for a deal TODAY that will give ZERO dollars out of pocket... and yes they are abundant... I would go FOCUS on motivated sellers. In fact Im typing as I do a youtube LIVE and Ill talk about a few deals this week I purchased with zero down and between those 15 deals our average interest COMBINED is less than 3%.
Where are the motivated sellers?
A: ON MARKET.... Listed properties OVER 120 days on the market. I would never reach out to a broker/realtor and ask for creative terms with low down payment and less than 4% interest until they hit the 120 day mark.
B. OFF MARKET... my preferred strategy. Go for Low Equity. Expired listings. Add a filter for homes that were originated in 2018 through 2021 and you will get ZERO down and VERY low interest. Go watch my youtube and Ill give a few examples.
thank you for this insight. I am certainly going to check this out
Quote from @Pace Jordan Morby:
Joseph.... first off... congrats on taking action and jumping all over this!!!!
I have done a few thousand seller finance and subject to deals in my career. In my experience the seller is not looking to sell to an investor and most likely does not care whether you will cashflow or not.
I would assume that this seller is not HIGHLY motivated and I would put them in the "follow up" category. 70% of our deals (we bought 15 this week) come from 13 follow ups or more. Our team does not try to create motivation... we try to wait for motivation through follow up.
If you are looking for a deal TODAY that will give ZERO dollars out of pocket... and yes they are abundant... I would go FOCUS on motivated sellers. In fact Im typing as I do a youtube LIVE and Ill talk about a few deals this week I purchased with zero down and between those 15 deals our average interest COMBINED is less than 3%.
Where are the motivated sellers?
A: ON MARKET.... Listed properties OVER 120 days on the market. I would never reach out to a broker/realtor and ask for creative terms with low down payment and less than 4% interest until they hit the 120 day mark.
B. OFF MARKET... my preferred strategy. Go for Low Equity. Expired listings. Add a filter for homes that were originated in 2018 through 2021 and you will get ZERO down and VERY low interest. Go watch my youtube and Ill give a few examples.
Thank you all for your thoughtful insights ! We negotiated but couldn’t Come to an agreement. A “follow up” deal for sure. Thanks so much!