Need Serious Creative Options for this deal Owner Financing!!

Creative Real Estate Financing
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Need Serious Creative Options for this deal Owner Financing!!

Alexis Zion
Real Estate Investor · Milwaukee, WI · Member since 2014 · 50 posts · 6 votes

Hi! I'd really appreciate any and all advice on this topic.

I have found a property I'm interested in. It is an MLS listing that has been on the market for over 300 days. The seller owns it outright. After making several offers, the seller said he will only go to $155,000 (from $167,000 asking price). I think the value is closer to $130,000. There are two realtors involved (his and mine).

Our previous offers were using conventional financing with 20% down. For my final offer, I'm considering asking for owner financing to allow me to meet my cash flow goals while not putting as much of my own money into the down payment. I'm willing to give him the price he wants for the terms I want.

I'm thinking of a $15,000 (10%) down payment and 2 years of principal only payments followed by 3 years of principal and interest at 4-5%. After 5 years I would refi through a commercial lender and pay the seller out in full. This would be my first owner financing attempt.

A few questions:

How likely is it that he will accept 2 year of principal only payments?

How would you structure an owner financing offer?

Any suggestions about communicating through the agents to the owner? 

Who would handle the payments over the next 5 years?

Who would close the deal?

What's a good back up plan?

Is there a calculator for this idea?

Thanks in advance for your help

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  • J.R. King
    Real Estate Agent · Clinton Township, MI · Member since 2015 · 27 posts · 2 votes
    10y

    Use your Realtor to structure the deal for you. You're basically doing a land contract. Your Realtor can write up the land contract purchase agreement with your terms on it. He will do an amortization schedule for your 5 years of payments and make it noted on an addendum that the first 2 years are principle only. Then after 5 years there will be a balloon payment of the balance. But make sure 5 years is long enough and you can definitely be refinanced then. 

    As far as if he's likely to accept it or not, you never know unless you try. You're basically making an offer to him just like any other offer, and he can accept, decline, or counter any part of it. 

    As far as who would close the deal, you still go through a title company. Either the one you choose, the one your Realtor chooses, or the one the Seller chooses. The commissions for the Realtors gets paid out of the down payment. The title company records your interest in the property by way of a land contract memorandum, and you still should get tittle insurance. 

    You and the seller will handle the payments over the next 5 years. Unless you hire a property management company, then they can pay the seller directly on your behalf. Keep records of all payments made, so that if the time ever comes, you can prove that you made them all and are keeping with the amortization payment schedule. 

    There is a calculator for it. You simply use the calculator for what you're doing, I'm assuming renatal property. Then you input all the information as if it were a mortgage. 

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  • Tom S.
    Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
    10y

    @Alexis Zion  Alexis, as mentioned above, the key is to be able to refinance in 5 years.  You're paying over the appraisal price.  Assume the place is worth $130k even 5 years from now (it could appreciate, although there could be another market downturn), and assuming it's a rental property, a bank might lend 75% of value.

    So $130k * 75% = $98k refinance amount.

    But your loan is $140k now ($155k asking less 10% downpayment).

    So that's a $40k + gap you have to close in 5 years, otherwise you'll have to bring money to the table at closing.  If you can't, you could face foreclosure.  Make sure your principal only payments close that gap.

    Good luck and let us know how the offer goes!

    - Tom

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  • Chris Ramos
    Flipper/Rehabber · South Jordan, UT · Member since 2016 · 142 posts · 37 votes
    10y

    This is a coin toss, so if you don't want to spend a lot of time going through and creating the perfect/semi complicated offer just write up your terms as an LOI (letter of intent). Even sign and date the LOI and have a signature line for the seller, then there will be something in writing for both you and the seller to refer to in ongoing conversation. Most likely there will be a counter of some sort if they are willing to play ball and then at that time if you both come to an agreement then you and your realtor can put the time into writing this up. Your realtor will most likely appreciate this approach as well, since time is limited. Also to help make this more attractive and to put more money in the sellers pocket up front just pay both realtors a portion of their commission's now and the other portion when the deal is completed. The selling agent has had this listing for a long time and most likely at this point half of something Now is better than all of nothing. Your agent just needs to go along for the ride. Lastly you can always obtain the help of an escrow company, they are a third party that receives payments from you and then disperse's them appropriately. They pay the seller monthly, keep a reserve for taxes and most importantly keep everything accounted for, this is a feel good for the seller. Since the seller owns it outright you won't need to be concerned that they are pocketing the payments and not making their payment to the bank. Hope this helps.

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