Crazy Seller Financing Terms

7 Replies

I saw a craigslist ad for a 3 unit for 120K.  I only have enough for about 10% down right now so I asked the seller if they would consider seller finance for three years. Here were his terms:

10 yr amortization @ 10%, 10% down, 36 month balloon.

In his ad he said the building has a net income of $18900.

Who would be crazy enough to accept terms like this? Am I missing something?

I politely thanked him for responding and told him that I couldn't run a building 3 years with essentially no income.  

Wasting time is not my cup of tea and I know that can burn me sometimes.  Should I be approaching this differently?  I'm mentally prepared for "no" but i'm not mentally prepared to be treated like I'm somehow lucky to work for nothing for 3 years.

You are asking the seller to finance, and you only have just enough for the down payment and now if anything goes wrong. How would you handle the repairs? Just save your money so you can pay cash.


Joe Gore

What's the issue, the higher payment with the 10 year amortization?  Yes, you'll have less "cash flow" for 3 years, but that "cash flow" you're missing is going directly to your principal reduction, which will come in handy when you go to refi in 3 years.  The rate is bit high though.  It sounds he doesn't really want to owner finance it, and is charging for the risk.  Offer a lower interest rate.

I would ask for a lower rate roughly 5% but even 7% would give you some breathing room. The nice thing is that after 3 years you only owe $86,000 which would give you a monthly payment if refinanced to a 15 year ammortization at 5% at that time. That payment would drop down to just under $700. If the property looks good and the number work, then monkey with the numbers to at least cover your hard costs being utilities, property taxes, insurance, loan payment, and cover the variables like repairs, maintenance and vacancy out of your pocket for the 3 years. 

I usually get a 5% rate from land contracts or seller financing situations (as buyer). I also purchase propertues that need work so in lew of a down payment I put my money into the property. I am working on a deal right now where I am trying to get cash at closing towards some of the repairs. Everyone's motivation is different so be prepared and knowledgable and keep looking for the right setup.

Originally posted by @Kyle Hipp:

I would ask for a lower rate roughly 5% but even 7% would give you some breathing room. The nice thing is that after 3 years you only owe $86,000 which would give you a monthly payment if refinanced to a 15 year ammortization at 5% at that time. That payment would drop down to just under $700. If the property looks good and the number work, then monkey with the numbers to at least cover your hard costs being utilities, property taxes, insurance, loan payment, and cover the variables like repairs, maintenance and vacancy out of your pocket for the 3 years. 

I usually get a 5% rate from land contracts or seller financing situations (as buyer). I also purchase propertues that need work so in lew of a down payment I put my money into the property. I am working on a deal right now where I am trying to get cash at closing towards some of the repairs. Everyone's motivation is different so be prepared and knowledgable and keep looking for the right setup.

The amount going toward principal is what I'm missing. 

This is the feedback I was looking for.  These terms wouldn't give me any wiggle room for utility expenses or potential vacancy plus the interest rate he's asking for is quite steep.

I don't know what net income of $18,900 means.  If it includes all expenses then you have some positive cash flow, a 15% cap rate and $12,000 of paydown of principal.  That is an analized return on your money of 34%.  I am even OK with a 10% cost of money if I have a 15% cap rate.

I would want to verify all these numbers especially the net income.  What is the expense ratio to rent?  These numbers look real good if they are true.  I am concerned if you do not have a reserve.  I also think that 5-7% is a better interest rate.

Good Luck

Bill 

Sorry Bill I mis-quoted. The $18900 is gross income.  The expenses would be About $5000 in known expenses.

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