Structuring a Seller Financed Deal that's too good to pass up

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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

3y

Hello BP Community,

I am a newbie investor that is looking to jump into the market with a 4-Plex deal in a college town. I have had analysis paralysis and am ready to get this journey started. I have not had any conversations the with seller as of this moment, but am am only interested in the deal as a seller carryback or sub-to; depending upon the situation with their funding.

182k List Price

On MLS for 259 days (as of today)

1 - 3bed/1bth (rented)

3 - 1bed/1bth (all 3 rented)

The rents total about 2,000

The local realtor was unable to tell me anything about the seller's intentions when we spoke, so that makes it difficult to structure the deal taking that into consideration. The only think that I can gleam is that they should be pretty motivated with the number of days that it's been on the market. In any event, if all checks out with the foundation, roof and individual units when I go view the property, then I would like to hopefully get the seller to agree to the following terms:

2500 EMD

6 months of the mortgage up front - interest free

Then between months 7-24 month begin paying interest at a rate of 6% with a balloon at the end of this term.

If I have not obtained funding to cover the balloon as of this time, I would like to insert a balloon extension with a penalty of 1% in interest for the following 12 months until the end of the 3rd year where the balloon would be due.

What type of loan product should I look to pursue at the end of the terms? Hopefully loan rates will be more favorable at that time.

My motivations for wanting a seller carryback is that I am looking to purchase a primary home in the next couple of months and do not want to obtain conventional funding that will skew things with my credit and lendability. I'd like to use the 6-months of interest free time to make the exterior look more inviting and if any of the leases aren't renewed in the time frame, fix up the vacant apt to get higher rents.

Would you say that this is a deal worth pursuing? I just don't want to fall flat on my face right out of the gate.

Any comments/suggestions for structuring the deal will be most appreciated and welcomed.

Thanks,

Corinne

Seller financing with a servicer would go on your credit report, but more importantly when you go to buy a home, you have to list the home and seller financed mortgage on the loan application (I assume you do not want to commit mortgage fraud).

Having it at a servicer who reports to credit would actually be better in this scenario to build additional credit.

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2 Reply

Corinne UlloaPro Member

OP

Member since 2023 · 25 posts · 5 votes

3y

Hi @Chris Seveney! Thanks for taking that time to address my questions. I did not realize that it would go on my credit report or that it would be a factor in the process if the seller was financing it. I did a couple of google searches and they all stated that it wouldn't. Thanks for the information! I definitely do not want to commit mortgage fraud. As for the loan servicer, I agree on that, but for clarification of all factors, my credit is excellent so there's no need to build further. I have received preapproval for my primary home loan already and am in the process of looking for a home that has an additional dwelling on the property so that I can cash flow with a MTR.

Thanks again!

Corinne

0 Reply

Hamp Lee IIIPro Member

Real Estate Agent · San Antonio, TX · Member since 2019 · 1k+ posts · 832 votes

3y

Congrats to you for taking action!

As you're currently looking for a primary residence, many (if not all) lenders will tell you not to make any major purchases at this time. Large purchases where you open lines of credit or obtain a new loan may reduce your credit score and increase your debt-to-income ratio, leaving you with less "house" to purchase for yourself.

I recommend completing the purchase of your primary residence, then speaking with the owner of the 4-Plex.

I wish you all the best.

0 Reply

Corinne UlloaPro Member

OP

Member since 2023 · 25 posts · 5 votes

3y

Quote from @Hamp Lee III:

Congrats to you for taking action!

As you're currently looking for a primary residence, many (if not all) lenders will tell you not to make any major purchases at this time. Large purchases where you open lines of credit or obtain a new loan may reduce your credit score and increase your debt-to-income ratio, leaving you with less "house" to purchase for yourself.

I recommend completing the purchase of your primary residence, then speaking with the owner of the 4-Plex.

I wish you all the best.

Thanks, @Hamp Lee III, for taking the time to reply. Sound advice!

Question 2 for you; how would you move forward if you were in my position? We do not have to move, rather I was hoping to get my foot in the rental game by renting out our current primary, all the while taking advantage of lower list prices due to the higher interest rates. According to Google, the median home price in my county in 725k and will definitely appreciate quickly. This route would mean we'd hold 2 properties with high appreciation, improving our long game holdings and overall portfolio. Below are what I have defined as my RE plays in the next 0-6 month time frame.

OPT A

Renting out our current primary would fetch approx $1000 p/m cash flow. The new property with ADU for mid-term rentals has a potential to fetch around $1500-$2000 per month, partially offsetting our new mortgage.

OPT B

Staying in our current home and purchasing the 4-plex that is projected to bring in approx 1000 p/mnth and waiting the period required for the loan to be considered as serviced before looking for a primary?

Of course with either option the plan is to continue investing until our goal of taking over the World is met (Jk! I'm corny), with the next opportunity pursued being the STR in a college beach town in Florida.

A better question is probably, is there a way to accomplish it all today (I guess that I had more than 1 question😁 )

Thanks again!

Corinne

0 Reply

Hamp Lee IIIPro Member

Real Estate Agent · San Antonio, TX · Member since 2019 · 1k+ posts · 832 votes

3y

If you don’t mind moving again, I would go with Option A. You have an opportunity to generate from your current and future home. That sounds like a win!

Either way, you have a good “problem.” 😉

Congrats!

0 Reply

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

3y

Quote from @Corinne Ulloa:

Hello BP Community,

I am a newbie investor that is looking to jump into the market with a 4-Plex deal in a college town. I have had analysis paralysis and am ready to get this journey started. I have not had any conversations the with seller as of this moment, but am am only interested in the deal as a seller carryback or sub-to; depending upon the situation with their funding.

182k List Price

On MLS for 259 days (as of today)

1 - 3bed/1bth (rented)

3 - 1bed/1bth (all 3 rented)

The rents total about 2,000

The local realtor was unable to tell me anything about the seller's intentions when we spoke, so that makes it difficult to structure the deal taking that into consideration. The only think that I can gleam is that they should be pretty motivated with the number of days that it's been on the market. In any event, if all checks out with the foundation, roof and individual units when I go view the property, then I would like to hopefully get the seller to agree to the following terms:

2500 EMD

6 months of the mortgage up front - interest free

Then between months 7-24 month begin paying interest at a rate of 6% with a balloon at the end of this term.

If I have not obtained funding to cover the balloon as of this time, I would like to insert a balloon extension with a penalty of 1% in interest for the following 12 months until the end of the 3rd year where the balloon would be due.

What type of loan product should I look to pursue at the end of the terms? Hopefully loan rates will be more favorable at that time.

My motivations for wanting a seller carryback is that I am looking to purchase a primary home in the next couple of months and do not want to obtain conventional funding that will skew things with my credit and lendability. I'd like to use the 6-months of interest free time to make the exterior look more inviting and if any of the leases aren't renewed in the time frame, fix up the vacant apt to get higher rents.

Would you say that this is a deal worth pursuing? I just don't want to fall flat on my face right out of the gate.

Any comments/suggestions for structuring the deal will be most appreciated and welcomed.

Thanks,

Corinne

>The rents total about 2,000

If the rents total $2K for the 4 units, I would run from this deal even if the interest rate was 3% with $0 down. Why? Because the expenses will consume all the rent. 1% rule does not come close to being profitable on this property. 50% rule would significantly underestimate the expenses for this property.

Find a different investment. You will be better off investing in virtually anything else.

BTW residential RE is not passive. The return for residential RE has to exceed more passive investment options to justify the effort.

Good luck

2 Reply

Corinne UlloaPro Member

OP

Member since 2023 · 25 posts · 5 votes

3y

Quote from @Hamp Lee III:

If you don’t mind moving again, I would go with Option A. You have an opportunity to generate from your current and future home. That sounds like a win!

Either way, you have a good “problem.” 😉

Congrats!

When you put it that way, it sounds REALLY good!

Thanks again!

Corinne

0 Reply

Corinne UlloaPro Member

OP

Member since 2023 · 25 posts · 5 votes

3y

Quote from @Dan H.:

Quote from @Corinne Ulloa:

Hello BP Community,

I am a newbie investor that is looking to jump into the market with a 4-Plex deal in a college town. I have had analysis paralysis and am ready to get this journey started. I have not had any conversations the with seller as of this moment, but am am only interested in the deal as a seller carryback or sub-to; depending upon the situation with their funding.

182k List Price

On MLS for 259 days (as of today)

1 - 3bed/1bth (rented)

3 - 1bed/1bth (all 3 rented)

The rents total about 2,000

The local realtor was unable to tell me anything about the seller's intentions when we spoke, so that makes it difficult to structure the deal taking that into consideration. The only think that I can gleam is that they should be pretty motivated with the number of days that it's been on the market. In any event, if all checks out with the foundation, roof and individual units when I go view the property, then I would like to hopefully get the seller to agree to the following terms:

2500 EMD

6 months of the mortgage up front - interest free

Then between months 7-24 month begin paying interest at a rate of 6% with a balloon at the end of this term.

If I have not obtained funding to cover the balloon as of this time, I would like to insert a balloon extension with a penalty of 1% in interest for the following 12 months until the end of the 3rd year where the balloon would be due.

What type of loan product should I look to pursue at the end of the terms? Hopefully loan rates will be more favorable at that time.

My motivations for wanting a seller carryback is that I am looking to purchase a primary home in the next couple of months and do not want to obtain conventional funding that will skew things with my credit and lendability. I'd like to use the 6-months of interest free time to make the exterior look more inviting and if any of the leases aren't renewed in the time frame, fix up the vacant apt to get higher rents.

Would you say that this is a deal worth pursuing? I just don't want to fall flat on my face right out of the gate.

Any comments/suggestions for structuring the deal will be most appreciated and welcomed.

Thanks,

Corinne

>The rents total about 2,000

If the rents total $2K for the 4 units, I would run from this deal even if the interest rate was 3% with $0 down. Why? Because the expenses will consume all the rent. 1% rule does not come close to being profitable on this property. 50% rule would significantly underestimate the expenses for this property.

Find a different investment. You will be better off investing in virtually anything else.

BTW residential RE is not passive. The return for residential RE has to exceed more passive investment options to justify the effort.

Good luck

Good evening @Dan H.,

Thanks for weighing in on this! Not sure if some on my lines of comm were crossed from the original message but, I performed the 1% Rule and 50% rule and it appears that the property passed. See below:

1%: 2000 x 100 = 200,000 - The property is currently listed for 182k

50%: 2000 / 2 = 1000, which should cover the mortgage payment (if I change my original terms to put 5% down and get them to agree to a interest rate of 4% or less)

Thanks for the tidbits on how to quickly analyze a deal!

Have a fantastic remainder of your evening!

Corinne

@Dan H.undefined

0 Reply

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

3y

Quote from @Corinne Ulloa:

Quote from @Dan H.:

Quote from @Corinne Ulloa:

Hello BP Community,

I am a newbie investor that is looking to jump into the market with a 4-Plex deal in a college town. I have had analysis paralysis and am ready to get this journey started. I have not had any conversations the with seller as of this moment, but am am only interested in the deal as a seller carryback or sub-to; depending upon the situation with their funding.

182k List Price

On MLS for 259 days (as of today)

1 - 3bed/1bth (rented)

3 - 1bed/1bth (all 3 rented)

The rents total about 2,000

The local realtor was unable to tell me anything about the seller's intentions when we spoke, so that makes it difficult to structure the deal taking that into consideration. The only think that I can gleam is that they should be pretty motivated with the number of days that it's been on the market. In any event, if all checks out with the foundation, roof and individual units when I go view the property, then I would like to hopefully get the seller to agree to the following terms:

2500 EMD

6 months of the mortgage up front - interest free

Then between months 7-24 month begin paying interest at a rate of 6% with a balloon at the end of this term.

If I have not obtained funding to cover the balloon as of this time, I would like to insert a balloon extension with a penalty of 1% in interest for the following 12 months until the end of the 3rd year where the balloon would be due.

What type of loan product should I look to pursue at the end of the terms? Hopefully loan rates will be more favorable at that time.

My motivations for wanting a seller carryback is that I am looking to purchase a primary home in the next couple of months and do not want to obtain conventional funding that will skew things with my credit and lendability. I'd like to use the 6-months of interest free time to make the exterior look more inviting and if any of the leases aren't renewed in the time frame, fix up the vacant apt to get higher rents.

Would you say that this is a deal worth pursuing? I just don't want to fall flat on my face right out of the gate.

Any comments/suggestions for structuring the deal will be most appreciated and welcomed.

Thanks,

Corinne

>The rents total about 2,000

If the rents total $2K for the 4 units, I would run from this deal even if the interest rate was 3% with $0 down. Why? Because the expenses will consume all the rent. 1% rule does not come close to being profitable on this property. 50% rule would significantly underestimate the expenses for this property.

Find a different investment. You will be better off investing in virtually anything else.

BTW residential RE is not passive. The return for residential RE has to exceed more passive investment options to justify the effort.

Good luck

Good evening @Dan H.,

Thanks for weighing in on this! Not sure if some on my lines of comm were crossed from the original message but, I performed the 1% Rule and 50% rule and it appears that the property passed. See below:

1%: 2000 x 100 = 200,000 - The property is currently listed for 182k

50%: 2000 / 2 = 1000, which should cover the mortgage payment (if I change my original terms to put 5% down and get them to agree to a interest rate of 4% or less)

Thanks for the tidbits on how to quickly analyze a deal!

Have a fantastic remainder of your evening!

Corinne

@Dan H.undefined

At that rent point, 1% will not produce a profit. At that rent point, expenses will exceed 50%. These rules can work in many markets (at least prior to the rate hikes), but not a market with rents that are $500/unit on average.

Do a thorough underwriting. My guess is the maintenance/cap ex estimate should be $900/month in a low-cost market. Remember there will be 4 kitchens, at least 4 bathrooms, etc. Add vacancy, insurance, property tax, P&I, etc. It will surpass the $2k rent if financed at a high LTV. This property will bleed cash unless you finance at a low LTV. If you finance at a low LTV 1) your return will be $hit 2) you have enough money for much better investment options.

Good luck

0 Reply

Michael L.Pro Member

Investor · Member since 2022 · 293 posts · 58 votes

3y

Great rising Corrine Ulloa, I think what @Dan Heuschele mean is that if your mortgage is $1,000, after adding the expenses would you be cash flowing? I get having the appreciating area but having room for any type of downturn that will have an affect on your asset is important. What if rents in the area go in reverse and you're hardly cash flowing. An if cash flow isn't the near term goal (which I'd overstand, make sure you have a reserve on standby. Have a wonderful day and I wish you well in your endeavors🫡.

0 Reply

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

3y

Quote from @Corinne Ulloa:

4-plex. 182k List Price. On MLS for 259 days. The rents total about 2,000

I would like to hopefully get the seller to agree to the following terms:

2500 EMD. 6 months of the mortgage up front - interest free

Then between months 7-24 month begin paying interest at a rate of 6% with a balloon at the end of this term.

I'll just speak to the SF offer itself although I do have my reservations about $500 rents. Tough territory. And as @Dan H. mentioned, %s of thumb stop working.

Of my 16 or so SF purchases, only 1 was listed but it was a plex so that is good.

My normal 10% down payment had to be 22% because of commissions. Most sellers will want to net 10% at closing and the realtors get paid first.

I can see asking for interest only for a time but not interest free. Could be a tax headache for them and money market accounts are paying over 4%. People will usually say no to complexity.

I'd submit a letter of intent to the LA like I always do. Outline 3 broad stroke scenarios that would work for you and see what they say. Don't bury them in detailed specifics yet.

I don't think my SF contracts as a buyer or seller have shown up on my credit report but I don't check it much.

1 Reply

Corinne UlloaPro Member

OP

Member since 2023 · 25 posts · 5 votes

3y

Quote from @Dan H.:

Quote from @Corinne Ulloa:

Quote from @Dan H.:

Quote from @Corinne Ulloa:

Hello BP Community,

I am a newbie investor that is looking to jump into the market with a 4-Plex deal in a college town. I have had analysis paralysis and am ready to get this journey started. I have not had any conversations the with seller as of this moment, but am am only interested in the deal as a seller carryback or sub-to; depending upon the situation with their funding.

182k List Price

On MLS for 259 days (as of today)

1 - 3bed/1bth (rented)

3 - 1bed/1bth (all 3 rented)

The rents total about 2,000

The local realtor was unable to tell me anything about the seller's intentions when we spoke, so that makes it difficult to structure the deal taking that into consideration. The only think that I can gleam is that they should be pretty motivated with the number of days that it's been on the market. In any event, if all checks out with the foundation, roof and individual units when I go view the property, then I would like to hopefully get the seller to agree to the following terms:

2500 EMD

6 months of the mortgage up front - interest free

Then between months 7-24 month begin paying interest at a rate of 6% with a balloon at the end of this term.

If I have not obtained funding to cover the balloon as of this time, I would like to insert a balloon extension with a penalty of 1% in interest for the following 12 months until the end of the 3rd year where the balloon would be due.

What type of loan product should I look to pursue at the end of the terms? Hopefully loan rates will be more favorable at that time.

My motivations for wanting a seller carryback is that I am looking to purchase a primary home in the next couple of months and do not want to obtain conventional funding that will skew things with my credit and lendability. I'd like to use the 6-months of interest free time to make the exterior look more inviting and if any of the leases aren't renewed in the time frame, fix up the vacant apt to get higher rents.

Would you say that this is a deal worth pursuing? I just don't want to fall flat on my face right out of the gate.

Any comments/suggestions for structuring the deal will be most appreciated and welcomed.

Thanks,

Corinne

>The rents total about 2,000

If the rents total $2K for the 4 units, I would run from this deal even if the interest rate was 3% with $0 down. Why? Because the expenses will consume all the rent. 1% rule does not come close to being profitable on this property. 50% rule would significantly underestimate the expenses for this property.

Find a different investment. You will be better off investing in virtually anything else.

BTW residential RE is not passive. The return for residential RE has to exceed more passive investment options to justify the effort.

Good luck

Good evening @Dan H.,

Thanks for weighing in on this! Not sure if some on my lines of comm were crossed from the original message but, I performed the 1% Rule and 50% rule and it appears that the property passed. See below:

1%: 2000 x 100 = 200,000 - The property is currently listed for 182k

50%: 2000 / 2 = 1000, which should cover the mortgage payment (if I change my original terms to put 5% down and get them to agree to a interest rate of 4% or less)

Thanks for the tidbits on how to quickly analyze a deal!

Have a fantastic remainder of your evening!

Corinne

@Dan H.undefined

At that rent point, 1% will not produce a profit. At that rent point, expenses will exceed 50%. These rules can work in many markets (at least prior to the rate hikes), but not a market with rents that are $500/unit on average.

Do a thorough underwriting. My guess is the maintenance/cap ex estimate should be $900/month in a low-cost market. Remember there will be 4 kitchens, at least 4 bathrooms, etc. Add vacancy, insurance, property tax, P&I, etc. It will surpass the $2k rent if financed at a high LTV. This property will bleed cash unless you finance at a low LTV. If you finance at a low LTV 1) your return will be $hit 2) you have enough money for much better investment options.

Good luck

@Dan H. Noted! Ok. Thanks for defining that. I am looking to cash flow on this property, so if it's not going to do that as well as I had once projected, no harm no foul. I'll just keep looking. If anything, this is all a great learning experience and I am smarter more sound investor because of it :).

0 Reply

Corinne UlloaPro Member

OP

Member since 2023 · 25 posts · 5 votes

3y

Quote from @Steve Vaughan: