What makes a good seller financed deal?

Question

I'm in the process of vetting some seller financed deals for my solo401k portfolio. I'm looking at monthly cost to seller vs. anticipated rental income, purchase price relevant to the ARV of the area and interest rate, balloon, etc. What criteria do investors use to determine if a seller financed deal is good? What should I consider about the purchase price, interest rate, and other terms?

Stanley Yeldell · Answer

Key Factors for a Good Seller-Financed Deal

• Cash Flow: Rental income should exceed monthly payments (PITI) by at least 1.25–1.5x.
• Purchase Price: Compare to ARV and market value for fair pricing and equity potential.
• Interest Rate: Aim for competitive rates; higher rates must still allow positive cash flow.
• Amortization/Balloon Terms: Favor longer amortization and align balloon payments with your exit strategy.
• Down Payment: Lower upfront costs reduce risk but should meet the seller's expectations.
• Flexibility: Seek no prepayment penalties and fair late-payment clauses.
• Property Condition: Ensure the property’s condition matches terms through inspections.
• Seller Motivation: Assess the seller’s willingness to negotiate favorable terms.
• Exit Strategy: Have a clear plan for refinancing or payoff at term end.
• Portfolio Fit: Ensure the deal aligns with your financial goals and risk tolerance.

Vetting multiple deals and consulting professionals is crucial to making sound decisions.

Lauren Sanford · Answer

@Felicia Vinces it sounds like you missed our Year End Live show and Podcast of "Real Estate Notes Show' where 2 15 year experience note investors break down what makes a note valuable.

Ken M. · Answer

When I do a seller financed deal, I'm looking at a pretty broad range of factors. The first thing I ask is why am I Buying the property.

I always look at the exit strategy first, is it going to be a rental, a lease option sell, am I planning on living in it. Just because a seller is willing to do seller financing doesn't mean they will sell for a price that makes sense to buy. They are either dealing  with a property they are having problems with or they want more than market vale.

But, basically it's experience that wins the day. Unfortunately experience means you've made some costly mistakes :-) So, to avoid those costly mistakes, when I take on a new approach in investing, I buddy up with someone that already has experience doing them. Because there are nuances to seller financing, a lot of space would need to be devoted to covering the subject to make sense, and that requires sitting down to a cup of coffee for a long discussion. It also gets treated differently in Texas vs CA vs AZ. There are state specific items to take into consideration.