Seller finance deal

[Jonathan Quesadilla]

Hello biggerpockets members,

I am a newbie investor looking to start my journey in the real estate world! I have yet to get my first property and am eager to get my first. I am in the NY market and as you already know, its quite expensive and the tenant laws are in their favor. I came across a house in the MLS in Pittsburgh Pa, Multifamily 4 room 2 bath. The price is only 160k and they are willing to seller finance!! I would perfer to seller finance since its easier than getting approved for a loan. How can i approach this deal!

[Hunter Reed]

Jonathan, seller finance is a beautiful way to finance a deal. If the seller is willing to seller finance I would begin to reach out and build a relationship with them. This will ensure trust and possibly even better terms. Tell the seller your WHY and future goals for investing in real estate, chances are they would love to offer you advice. As far as the deal goes you want to make sure 85%-100% of the property is paid off. You do not want to carry over their existing mortgage payments. Once that is finalized you can then discuss a down payment and interest rate. You'll need to show them proof of funds. Ask the seller about a ballon payment, because you may want to do a cash refi in the future. The cash refi is how you're going to own the entire property. Wait for the rates to come down. Other than that the asking price seems attractive enough to cash flow from the rent. All in all make sure that your monthly rent from tenants will cover the sellers finance agreement. Good luck!

[Jonathan Quesadilla]

Quote from @Hunter Reed:

Jonathan, seller finance is a beautiful way to finance a deal. If the seller is willing to seller finance I would begin to reach out and build a relationship with them. This will ensure trust and possibly even better terms. Tell the seller your WHY and future goals for investing in real estate, chances are they would love to offer you advice. As far as the deal goes you want to make sure 85%-100% of the property is paid off. You do not want to carry over their existing mortgage payments. Once that is finalized you can then discuss a down payment and interest rate. You'll need to show them proof of funds. Ask the seller about a ballon payment, because you may want to do a cash refi in the future. The cash refi is how you're going to own the entire property. Wait for the rates to come down. Other than that the asking price seems attractive enough to cash flow from the rent. All in all make sure that your monthly rent from tenants will cover the sellers finance agreement. Good luck!

 I appreciate your response. I contacted a real estate agent from Pittsburg's and got the terms from the seller. They are as follows:

20% down 30 year term 30 year balloon 11% interest rate and no pre payment penalty. Thoughts? 

[Hamp Lee III]

That seems like a lot. You can buy a house with a conventional loan with better terms. 

[Eliott Elias]

Owner finance is a great option, but only if you negotiate it right. You want either of the two, a low down payment or a low interest-rate. Ideally both.

[Hunter Reed]

Quote from @Jonathan Quesadilla:

Quote from @Hunter Reed:

Jonathan, seller finance is a beautiful way to finance a deal. If the seller is willing to seller finance I would begin to reach out and build a relationship with them. This will ensure trust and possibly even better terms. Tell the seller your WHY and future goals for investing in real estate, chances are they would love to offer you advice. As far as the deal goes you want to make sure 85%-100% of the property is paid off. You do not want to carry over their existing mortgage payments. Once that is finalized you can then discuss a down payment and interest rate. You'll need to show them proof of funds. Ask the seller about a ballon payment, because you may want to do a cash refi in the future. The cash refi is how you're going to own the entire property. Wait for the rates to come down. Other than that the asking price seems attractive enough to cash flow from the rent. All in all make sure that your monthly rent from tenants will cover the sellers finance agreement. Good luck!

 I appreciate your response. I contacted a real estate agent from Pittsburg's and got the terms from the seller. They are as follows:

20% down 30 year term 30 year balloon 11% interest rate and no pre payment penalty. Thoughts? 

 You'll need $32,000 for a down payment. You're looking at monthly rounded payment close to $2,800. If you can rent out each unit for $1,500 you have a chance. Now, I don't know how much taxes are in the Pittsburgh area or if you could get $1,500 rent from each unit. If your total monthly payment exceeds $3,000 then this a bad deal and you should keep searching. My mentor has always told me that there is always a better deal out there. 

[Marcus Geiser]

The questions I have always had in regard to these owner financed deals is how to convey title. Seems to me there always exists the possibility that something, anything goes wrong. Judgements, Liens, etc. I don’t really know so it somewhat based on the unknown. 

What are the ways these deals can be structured?

what protections do you have as a buyer? 

what can go wrong with land contracts, contract for deed, or other methods? 

[Jordan Alexander]

I've done a lot of research on seller financing as that is the #1 strategy I am looking to incorporate in my investing career. Seller financing is all about the seller, not about the property! You need to understand their goals are ultimately create a win-win situation for everyone. You need to ask yourself, "How do I buy it? How do I never lose it?" Buying a property comes down to deal, debt, and equity (the deal always comes first). Never losing a property comes down to long term, fixed-rate debt with positive cashflow. The purchase price is the least important term when it comes to seller financing. Do you have the 20% down payment? If you do, great! If not, see if you can negotiate and bring down the down payment. The term length is perfect as it long term debt. As far as interest rate, I personally think that is very high since you can get a lower rate with banks, but does the property cashflow? And is it a cashflowing number you like and that you can grow from? Then, go for it! Ultimately, it's all about creating a win-win situation as I mentioned earlier and if the terms they gave you does not allow you to win, then you should show them why and negotiate.

[Jordan Alexander]

Quote from @Marcus Geiser:

The questions I have always had in regard to these owner financed deals is how to convey title. Seems to me there always exists the possibility that something, anything goes wrong. Judgements, Liens, etc. I don’t really know so it somewhat based on the unknown. 

What are the ways these deals can be structured?

what protections do you have as a buyer? 

what can go wrong with land contracts, contract for deed, or other methods? 

 Marcus there are two main ways seller financed deals can be structured. The first (and I think the better of the two) is just doing a simple of ownership from the seller to the buy. The title company will conduct a title search to make sure the title is clean and that the seller can actually finance the deal. The main documents you will need are a warranty deed, promissory note, and then a mortgage or deed of trust (depending on what your state uses. You now own the property, you are on the title, the seller is off the title, and the mortgage or deed of trust represents they have a lien on the property. In a land contract or contract for deed, the seller remains on the title and they are not taken off of the title until the property is paid off or when you refinance and cash them out. The buyer does get equitable title and they do build equity in the property. In a land contract, you as the buyer do not receive the deed until you make the final loan payment. I hope this helps!

[Suzanne Player]

How do you know if the proposed seller finance terms are your best option?  By getting a preapproval with a Pittsburgh area bank or mortgage broker, and shopping terms with at least 3.  

Be sure to thoroughly research market rents as well, look at the market as if you were a renter yourself.  A good real estate agent can run comps specific to the type of units in this property.  They will also know how to define the market (what areas are comparable for your property).  

Can you look up the taxes for the property yourself online in Pittsburgh?  You might also want to call the tax assessor to see what increases are planned.

[Alex Deacon]

@Jonathan Quesadilla you can get much better terms with a conventional loan. There are even lenders out there at 10 or 15% down. Seller financing is awesome as long as the terms are right.  The downside of seller financing is you lose some leverage.  Also, its hard to find a good seller financed deal in a strong sellers' market. Make sure you are doing a good job at researching the property and the income potential, upside and the downside.