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Creative Real Estate Financing

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Jack Berg
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Currently Renting - Landlord wants to sell - SELLER FINANCE?

Jack Berg
Posted Feb 6 2024, 10:54

Hi everyone, this is my first post on BiggerPockets. If I should move this thread elsewhere, please let me know.

Background: My girlfriend and I currently (Late 20s) rent a Condo from a guy in Denver. We both have steady incomes, enjoy the area, etc. etc. We started this lease in Dec-2023. Upon signing, the LL stated that he'd be looking to sell at the termination of the lease (Apr-2025).


Seeing as I work in real estate development and investment, I saw an opportunity here. The possibility to structure a seller financed deal. LL is original owner - bought/built in 2003, he's an older man, probably looking for the cleanest, easiest exit possible. 

I'm really just looking to connect with someone that has experience with a similar scenario. The outcome remains to be seen - this area (and condo complex) commands top of market rents - maybe a rental property? Maybe a refi at the end of the seller finance period and flip? Maybe live in, remodel, and flip. The list goes on.

Anyway, would love to connect with someone that has experience in this area. Additionally, if anyone has just general tips and things to avoid, that's great too. I'm starting this research, and number crunching early so I can capitalize on this opportunity. Thanks guys!

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Charles Carillo
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  • Rental Property Investor
  • North Palm Beach, FL
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Charles Carillo
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  • Rental Property Investor
  • North Palm Beach, FL
Replied Feb 6 2024, 11:09

@Jack Berg

There are 3 main parts to a seller financing deal: down payment, interest rate, and price (4th would be the term). When speaking to the owner (building rapport), your main goal is to figure out which of these main 3 is most important to them. Once you learn this, you can tailor the offer to meet their needs. For example, if they really want $500k for a property, offer a purchase price of $500k but a lower down payment and interest rate (and a longer-term). They are getting what they really want, and you are crafting the deal to where it will still make sense for you.

One potential issue is if what is most important to them is most important to you as well. For example, if they want a large down payment, and you only have enough for a 5% down payment, that is an issue. Or if they want a high-interest rate, and your numbers will not work at that interest rate, or if they really want a crazy high price where it will be difficult to cash flow and refinance in the future. This is where you need to really start working the numbers, but hopefully, you can craft a deal around what they want.

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Bill Brandt#3 1031 Exchanges Contributor
  • Investor
  • Las Vegas, NV
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Bill Brandt#3 1031 Exchanges Contributor
  • Investor
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Replied Feb 6 2024, 11:22

Another problem I see with seller financing rentals is your payment h to be high enough above what they already get in rent to make sense. 

A $500k place renting for $3,500 but $500k at 6% is $3,000, add $100 for insurance and $300 for property taxes and you’re offering to buy the place they are renting to you for $3500 for a $100 less than the rent. 

You can talk about how they get out of repairs but only if you can afford the new $7,500 ac unit. They can talk about how much harder it is to evict you than to just non-renew your lease. If they can get 6% in the bank they probably shouldn’t finance the deal for less than 8%? High enough to justify the risk. They probably need 10% down just to have a chance of breaking even if they have to foreclose on you. 

Start simple. Ask them if they are interested at all. They might say nope, I’m doing a 1031 to a beach condo in Florida. Or I’m buying a place for my grandkids near their college. Then you know before you waste an hour on options. If they say yes just ask them what they’re thinking. It might already be a win for you. If it’s close remind them they’ll save 4-5% in realtor commissions, could you have 2-3% of that?

Lastly, the sooner the better. Try to buy not instead of flushing further rent down the drain, that’s all money saved. But a smart landlord would say no, because that’s all lost money. UNLESS they have a use for the money now. (But that might make them want a very large downpayment.)

Good luck.

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Jack Berg
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Jack Berg
Replied Feb 6 2024, 11:24

@Charles Carillo Thanks for the reply. This is what I am learning is that sellers have different motivations which result in different structures to these deals.

Sounds like I need to establish my preferences, create a rough plan, and also get a handle on the sellers preferences. 

Truthfully I'm hoping that their preference is the scenario you describe - Low down payment. I'm also toying with the idea of a large balloon pmt at the end of a short term. 

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Jack Berg
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Jack Berg
Replied Feb 6 2024, 11:27

@Bill Brandt Great insight. Thank you. I think step one is throw the option on the table and get a temperature reading if it's even a possibility.

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Jack Matthias
  • Lender
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Jack Matthias
  • Lender
  • Chicago
Replied Feb 6 2024, 11:57

Hi Jack,

Seller financing can be a win win for both of you guys if your goals align. It truly depends on what he is looking to do. On the bright side even if you can't do seller financing and you guys agree on a price you should be able to get a better deal because your saving him 5%+ on realtor commission's. My team and I have done many Colorado deals, so if the seller financing doesn't work out and there's a way for us to help. Reach out and we'd be happy to help.

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David M.
  • Morris County, NJ
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David M.
  • Morris County, NJ
Replied Feb 6 2024, 12:11

@Jack Berg

You also need to figure out if its a possibility... Remember, you aren't "offering seller finance." Maybe the need the capital for something else. Maybe they aren't comfortable extending you that much credit.. Remember, there is a reason why 20% down is the "norm" before you need PMI...

That's the really the first thing to figure out, if conditions even warrant or allow this strategy.  Figure out the conditions/situation FIRST, then figure out the strategy, if at all.

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Bill Brandt#3 1031 Exchanges Contributor
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Bill Brandt#3 1031 Exchanges Contributor
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Replied Feb 6 2024, 12:39

@David M. good point on the PMI. I wonder if there's anyway for a seller to have a buyer pay for PMI to cover the balance? I doubt it/never heard of such a thing, but it's the only thing that would make me accept less than 25% down and 8-10% interest with a 5 year balloon.

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Steve K.
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Steve K.
  • Realtor
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Replied Feb 6 2024, 15:43

I've done seller-financed deals in Denver before and can speak to that, but unless you can negotiate a lower down payment and better terms than conventional (can be difficult to impossible), you may be better off using conventional financing in this case. I say this because you can probably qualify for 3-5% down on an owner occ loan amortized over 30 years with a conventional lender, while most sellers willing to hold the note are typically going to want a higher down payment and shorter terms. For example what I typically see sellers agree to here if they're going to offer seller financing is 20-50% down, 5-7 year balloon (but usually still ammed over 20-30) and they usually want at least a point (or more) over the conventional interest rate (otherwise they don't have any incentive over selling outright, typically). Why are you thinking that seller finance is the way to go here? Happy to chat if you'd like! 

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David M.
  • Morris County, NJ
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David M.
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Replied Feb 6 2024, 16:21

@Bill Brandt I'm sure there is.  But, since never did this so never looked into it.  I still think its kinda wonky that a person should just issue a note "out of the blue" sort of, for one property with no experience doing private lending.  I think its even worse when perhaps the seller thinks it a good idea, when they have no idea of the risks.