Structuring seller finance deal as Seller

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Structuring seller finance deal as Seller

Jill McCannPro Member
Investor · Norfolk, VA · Member since 2019 · 20 posts · 5 votes

I need help understanding how to structure a seller finance deal. We received an offer for family property and now that it's time to close they buyers are requesting we seller finance. The property is owned by brother and sister and there is no mortgage. Can someone help me with terms? 

The property has 4 homes, acreage and farmland. The new buyers want to farm and use most of the homes. We need enough money for one of the owners to purchase another home or negotiate he stay living there. But the other owner also needs money from the exchange. Both would appreciate the monthly income over a lump sum as well, and it will help with taxes as the property is inherited and has increased in value. 

The buyer has proposed 13% downpayment, 4% interest, interest only payments for 3 years and then interest only plus $1000 for another three years and then loan paid in full. These terms do no seem favorable to me. Can someone help me structure and offer advice for terms and anything else to consider and include? 

Thank you!

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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
2y

@Jill McCann

If they cannot afford it conventional terms then they most likely cannot afford it with your terms and it can be more of a headache down the road. I would not take less than 25% down and 9.99% interest and have a five year balloon on the loan

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    2y

    unless this property is unsalable on the open market or your selling it for far more than its worth

    this is a Pass full stop.. 4% is not even close to market rate for seller financing it should be 8 to 10%

    and if you need cash then you have factor that into their down payment.

    AS for structure and if you guys come to terms.. its simple for you siblings to simply be co beneficiaries of the note and mortgage..  Each to your % ownership.. then one of you can do collections and pay the other ..

    And if your set up for an exchange then switching to financing is not really going to work at all. 

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  • Jill McCannPro Member
    OP
    Investor · Norfolk, VA · Member since 2019 · 20 posts · 5 votes
    2y

    Thank you! Agreed! Just wanted confirmation. My thought was interest should be closer to 8-10%. 

    The situation is unique in that I don't think the owners could handle a typical real estate transaction for this property. Distant relatives approached them about the property and they all independently came to a sales price. I think they could get more, but they've already agreed, and that is that. 

    So now we are to terms. The buyer agreed to a purchase price and all fees/costs. The sellers will not 1031 or anything else. They aren't tax savvy and neither are high income earners (both very low income/retired) and won't really entertain any savings strategies. Think Appalachia hillbillies :) For all parties involved. 

    Trying to help as best I can as they are all trying to do this on paper and I'm trying to be patient and help. 

    Can you offer a suggestion of what you think would be favorable terms? Anything else to consider? 


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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    2y
    Quote from @Jill McCann:

    Thank you! Agreed! Just wanted confirmation. My thought was interest should be closer to 8-10%. 

    The situation is unique in that I don't think the owners could handle a typical real estate transaction for this property. Distant relatives approached them about the property and they all independently came to a sales price. I think they could get more, but they've already agreed, and that is that. 

    So now we are to terms. The buyer agreed to a purchase price and all fees/costs. The sellers will not 1031 or anything else. They aren't tax savvy and neither are high income earners (both very low income/retired) and won't really entertain any savings strategies. Think Appalachia hillbillies :) For all parties involved. 

    Trying to help as best I can as they are all trying to do this on paper and I'm trying to be patient and help. 

    Can you offer a suggestion of what you think would be favorable terms? Anything else to consider? 



    based on this its what ever you all agree to and are happy with.. as long as you get some cash and you record your DT or mortgage in first position and then have co bene's on the mort/dt / note then thats all you really need.. you all might want to talk to a decent CpA about this.
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  • Jill McCannPro Member
    OP
    Investor · Norfolk, VA · Member since 2019 · 20 posts · 5 votes
    2y

    Sorry to be unclear. We only agreed to sales price. The whole seller financing part is the new part. It seems you're saying the other terms are ok but perhaps increase the interest rate? 

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y

    @Jill McCann

    If they cannot afford it conventional terms then they most likely cannot afford it with your terms and it can be more of a headache down the road. I would not take less than 25% down and 9.99% interest and have a five year balloon on the loan

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  • Eric James
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    2y

    Ate you aware of stepped up cost basis on inherited property? If y'all yo an accountant before making a deal 

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  • Jill McCannPro Member
    OP
    Investor · Norfolk, VA · Member since 2019 · 20 posts · 5 votes
    2y

    Thanks for advice. 

    Yes I've told them for 2 years to talk to an accountant while they were waiting on this to go through. They haven't. So, now the family wants it done and is ready to move (was waiting on their property to sell). 

    I also got clarification on the terms. 
    Already determined:

    Sell price 

    Buyer pays all fees, no appraisal etc.

    What they are now asking (opposite from original post):

    86% down

    Seller Finance remaining 14% over 6 years with interest only payments first 3 years and interest plus $1000 last 3 years. They proposed 4% rate. 

    Note:
    The buyer is 94...

    I think we'd probably prefer they seller finance more of it to help with tax burden? But this is where we are. 

    Advice? Other than talk to CPA (which I very well know and have told them for years).

    1Reply
  • Jill McCannPro Member
    OP
    Investor · Norfolk, VA · Member since 2019 · 20 posts · 5 votes
    2y
    Quote from @Eric James:

    Ate you aware of stepped up cost basis on inherited property? If y'all yo an accountant before making a deal 


     Yes. They inherited it 12 years ago. Town and land has rocketed since then. They aren't even sure they got it out of probate...they've never used professionals for anything, accounting or otherwise. Never bought homes (live on family land). 

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  • Jill McCannPro Member
    OP
    Investor · Norfolk, VA · Member since 2019 · 20 posts · 5 votes
    2y

    Ok so I guess another question is I don't even know what professionals to get involved here. 

    CPA

    real estate attorney? 

    title agent? 

    The lump sum will be life changing to them, but they do not know how to handle money so I will be in charge of figuring that out too. 

    Also, the one owner has lived there rent free for 12 years and will get capital gains exclusion for primary residence. How will the lump be divided between owners considering this? And other owner lives out of state. I just don't know where to start or who to ask/retain for help. 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    2y
    Quote from @Jill McCann:
    Quote from @Eric James:

    Ate you aware of stepped up cost basis on inherited property? If y'all yo an accountant before making a deal 


     Yes. They inherited it 12 years ago. Town and land has rocketed since then. They aren't even sure they got it out of probate...they've never used professionals for anything, accounting or otherwise. Never bought homes (live on family land). 


    if its not been probated your going to have a delay if buyer wants title insurance
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  • Peter Walther
    Specialist · Winter Springs, FL · Member since 2009 · 1k+ posts · 747 votes
    2y

    First, since they're negotiating over financing, it sounds like there hasn't been a meeting of the minds and there may not be an enforceable contract.

    Second, like it or not, they need to get (and pay for) professional advice i.e. CPA, attorney, title agent.

    Third, I think BP is not a place to get actionable advice particularly for a convoluted situation as you've described.

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