Would you accept this seller financing offer?

Creative Real Estate Financing
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Would you accept this seller financing offer?

Corinne Alconera
Residential Landlord · NV · Member since 2014 · 13 posts · 4 votes

Would you accept this seller financing offer?

Buy and hold 2-units

20% down payment

30 year amortized note w/5 year balloon payment

Cash flow is $100 per unit

Most 2 units in this area go for $30 - $40,000 less (traditional financing)

I'm interested in knowing what members think. This is my first seller finance experience.

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Brandon Hicks
Investor · Avilla, IN · Member since 2013 · 796 posts · 769 votes
12y
So you're putting 20% down, there's a 5 year balloon AND you're paying an extra $30k for the experience?? If you're going to pay a premium you should be getting a financing package with terms that you can't get from the bank. For example: NO cash down, 30yr amm, 5.0% fixed and no balloon and maybe a year or two of interest only payments or something....
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  • Scott Stevens
    Savannah, GA · Member since 2014 · 100 posts · 38 votes
    12y

    You are selling the property right?

    0Reply
  • Brandon Hicks
    Investor · Avilla, IN · Member since 2013 · 796 posts · 769 votes
    12y
    So you're putting 20% down, there's a 5 year balloon AND you're paying an extra $30k for the experience?? If you're going to pay a premium you should be getting a financing package with terms that you can't get from the bank. For example: NO cash down, 30yr amm, 5.0% fixed and no balloon and maybe a year or two of interest only payments or something....
    2Reply
  • Corinne Alconera
    OP
    Residential Landlord · NV · Member since 2014 · 13 posts · 4 votes
    12y

    Thank you Brandon. I guess deep down I knew the answer to my question, but hearing it from someone with experience makes me feel better about my decision to walk away from this offer.

    2Reply
  • Brant Richardson
    Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes
    12y

    If you have 20% to put down then talk to the bank and see if you can get a 30 year fixed rate.

    0Reply
  • Corinne Alconera
    OP
    Residential Landlord · NV · Member since 2014 · 13 posts · 4 votes
    12y

    Thank you for your comment Brant; however, I think I'll keep looking for a better creative financing deal. I know they're out there …. this is the second one I have come across …. it's just a matter of finding them.

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y

    Seller financing doesn't dictate whether or not it's a good deal. What does $100 cash flow mean to you? Are you taking rents minus PITI. Or are you including all the costs and variables: purchase price, comparable value, rents, repairs, expenses, vacancies. Then there's all the variables of the loan: down payment, interest rate, length of loan.

    I never walk away without making an offer, even when I know there is no chance of acceptance.  What's the point of leads if you don't use them to at least learn to refine your own criteria?

    Why not crunch the numbers and make a counter offer that works for you? 

    1Reply
  • Corinne Alconera
    OP
    Residential Landlord · NV · Member since 2014 · 13 posts · 4 votes
    12y

    Hello K. Marie,

    The $100 cash flow per unit is rent less PITI. I did not figure in the repair and vacancy percentage (the tenants pay for all utilities). I will be looking at the property next week sometime and based on what I see, I may rethink the numbers and submit my offer accordingly.

    Thank you for your input K. Marie… it's food for thought.

    0Reply
  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    12y
    Originally posted by @Corinne Alconera:

    Hello K. Marie,

    The $100 cash flow per unit is rent less PITI. I did not figure in the repair and vacancy percentage (the tenants pay for all utilities). I will be looking at the property next week sometime and based on what I see, I may rethink the numbers and submit my offer accordingly.

    Thank you for your input K. Marie… it's food for thought.

    Run away.  Run away now.

    $100 after PITI is a terrible deal, no matter how you look at it. Vacancy, repairs, common utilities(if there are any) and capital expenditures will chew up the cash flow, and then your checkbook afterwards, on this place. You mentioned that you were paying a premium for the place, which is a sign that this isn't going to work out well for you.

    I applaud you for seeking out a creative deal.  It shows thought and quality process from your lead generation.  Remember that doing a deal for the sake of doing a deal is a major mistake.  There are some places out there that wouldn't be worth owning if they were being given away.

    What are the actual numbers on this deal? I would find out exactly how much the following expense are going to cost you each month. "The tenant pays" is a good answer as well. Put those numbers up here and I'll tell you what I would pay for the place.

    Purchase Price

    Interest Rate from Owner

    % Down (20%, from your post above)

    Taxes

    Sewer and Water - ? Are you allowed to split this between the two houses?  Are the lines already separated?

    Trash - The tenant pays

    Heat/Utilities - The tenant pays

    HOA

    Cap Ex and Ops

    Insurance

    Mgmt Fee - as a % (general consensus here on BP is 10%. include it even if you think you are going to self manage)

    Vacancy- as a %. (8% represents 1 vacant month/unit/year)

    1Reply
  • Brandon Hicks
    Investor · Avilla, IN · Member since 2013 · 796 posts · 769 votes
    12y

    Yeah....run away from this deal for sure.

    $100 a door after PITI with a 20% down is like buying a ticket on the Titanic!

    Not to toot my own horn but read through some of my old posts on land contracts. Ive done a bunch of land contracts totally 24 units over the last 3 years with mostly no cash down. Ive laid out the buying process and so forth in other responses.

    Decent properties that cash flow on 20 year amortization or less with nothing down is what I look for. I use commercial financing to refi so 20 year amortization is the norm.

    0Reply
  • Corinne Alconera
    OP
    Residential Landlord · NV · Member since 2014 · 13 posts · 4 votes
    12y

    Thanks for your replies Aaron and Brandon….since you put it that way…….

    Yikes! Yes, 20% down is a lot of money and yes, I could do better with a bank than the 5-year balloon payment. I appreciate both of your input….this is such a great forum! I am so glad I found BiggerPockets! You may have saved me from making a huge mistake!

    Aaron, thank you for the breakdown of what I need to consider when crunching actual numbers. You have included more numbers than I had thought about.

    I will be reading your posts Brandon…,,

    0Reply
  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    12y

    @Corinne Alconera 

    I take a look at investment properties using the 1% rule first.  

    Then I check the actual numbers to see if the deal is worth looking at.  

    Generally those steps take less than 2 minutes per property.  

    Once the place has passed both tests, I figure out how I'm actually going to acquire the place.

    0Reply
  • Corinne Alconera
    OP
    Residential Landlord · NV · Member since 2014 · 13 posts · 4 votes
    12y

    @Aaron Montague

    What is the 1% rule? (Still learning….)

    0Reply
  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    12y

    @Corinne Alconera 

    1% Rule:

    Does the monthly rent roll equal or exceed 1% of the purchase price?

    If yes: Start digging into the actual numbers and see if there is any money to be made.

    If no: Pass and go to the next property on your list.

    Stick with that for the moment.

    $125k asking and $1450/month in rent.  Start digging.

    $220k asking and $1650/month in rent. Pass.

    At 1% your are going to find that most deals are not worth doing.  As the ratio creeps in your favor (1.1, 1.2, etc) the deals start looking better and better.

    2Reply
  • Corinne Alconera
    OP
    Residential Landlord · NV · Member since 2014 · 13 posts · 4 votes
    12y

    @Aaron Montague

    Thank you for the explanation of the 1% rule. I will definitely use both tests in the future.

    0Reply
  • Brandon Hicks
    Investor · Avilla, IN · Member since 2013 · 796 posts · 769 votes
    12y

    Most people here use the 2% rule, which is the same concept.

    0Reply
  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    12y

    Yes, the x% rule is a great starting point.  I live in New England, a spot in which the 2% rule is a pipe dream.  A glorious dream, but not much of a reality.  There are a few spots in this country where folks are finding deals closer to 3%.  

    Best of luck with all your endeavors!  

    2Reply
  • Brandon Hicks
    Investor · Avilla, IN · Member since 2013 · 796 posts · 769 votes
    12y

    Yeah mine are closer to 1.5% id say on average. I buy with no cash down so my return of capital is pretty quick in most cases. At the point the return is infinite.

    0Reply
  • Robert AdamsBusiness Member
    Real Estate Broker · Henderson, NV · Member since 2009 · 1k+ posts · 373 votes
    12y

    @corinne I see you are in NV...The property you are trying to buy is in NV as well? As others have mentioned be sure to calculate all expenses as well as piti and vacancies and repairs.

    [email protected]702-349-9175
    The Adams Team at Rothwell Gornt Companies4.970 Reviews
    WebsiteView Page
    0Reply
  • David Boykin
    Real Estate Consultant · Augusta, GA · Member since 2014 · 36 posts · 8 votes
    12y

    I'd say anything below 1.5% is hard to cash flow. I've found 2% to be pretty tough to find for decent properties. I run my numbers using the 50% rule for expenses and base the mortgage on 100% financing at 1% above the current rate. If it still cash flows, then I look at actual numbers and make a decision based on the most conservative calculation. 

    0Reply
  • Corinne Alconera
    OP
    Residential Landlord · NV · Member since 2014 · 13 posts · 4 votes
    12y

    Thank you all for your valuable and most appreciated input! I am absorbing as much information as I can so that I can apply them toward future potential deals.

    @Robert Adams I go back and forth between Nevada and Illinois. I plan on investing in both states, preferably through creative financing methods.

    0Reply
  • Gautam S.
    Real Estate Investor · Eola, IL · Member since 2014 · 137 posts · 22 votes
    12y

    Good to know about 1% Rule. I will also try to apply that for quick decission!

    0Reply
  • Robert AdamsBusiness Member
    Real Estate Broker · Henderson, NV · Member since 2009 · 1k+ posts · 373 votes
    12y

    @Corinne Alconera 

     I see. If there is anything I can help with in the Vegas market please don't hesitate to reach out.

    [email protected]702-349-9175
    The Adams Team at Rothwell Gornt Companies4.970 Reviews
    WebsiteView Page
    0Reply
  • Rich Hupper
    Broker / Investor · Tewksbury, MA · Member since 2008 · 1k+ posts · 351 votes
    10y

    Hi I have a question regarding a purchase money mortgage. If the seller agrees to purchase money mortgage equal to 25% of the purchase price. Where would a buyer go and get the other 75%? Would the bank have to be a portfolio lender? Are there any conventional loans that would finance the 75% in first position with a 25% second position purchase money mortgage?

    Thank you

    0Reply
  • Brandon Hicks
    Investor · Avilla, IN · Member since 2013 · 796 posts · 769 votes
    10y

    @Rich Hupper

    Unless you're buying at a huge discount or have a great relationship with the bank (and yes it would have to be a commercial/portfolio lender) I don't think you'll be able to achieve 100% financing in this manner. 

    A more likely scenario would be to find a private money lender for 70-75% of the price and give them a first position mortgage and have the seller hold the balance as a 2nd. 

    Honestly though, I've not had much of an issue getting sellers to just hold all the paper. Look up my posts on land contracts/scaling for more on how my deals are structured. 

    0Reply
  • Rich Hupper
    Broker / Investor · Tewksbury, MA · Member since 2008 · 1k+ posts · 351 votes
    10y

    @brandon 

    @Brandon Hicks

    I will definitely do that. Where I am in the north east most property sells for 300-500 for single families. It is getting more and more expensive here and it seems like all sellers want to do is get their cash and call it a day. Most agents / sellers do not even know what a purchase money mortgage is from my experience.

    0Reply
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