Help me Formulate Seller Financing Terms

7 Replies

I have a 3 building multi-property (1 commercial and 2 multi-homes) in Michigan that I am considering, for which the seller is willing to finance.  He has owned it since 1996, and is over 60 years old and still works full time.  According to him, he says he needs to sell for family medical reasons.

I haven't nailed down exact numbers, however I'd estimate a seller financed price of 140K, and he suggested 10% down.  He would do 'much less for all cash."  I'd rather not use so much cash on one deal, so seller financing is my goal.  Any suggestions on how to structure a seller financing deal?  Not sure what the common term lengths, interest, etc.   I think it's been on the market for quite some time.  Property definitely needs some cosmetic rehab-it's been a bit neglected.  I'm considering offering a higher down payment with a reduction in sell price.  For example, if I were to offer 8% interested+principal, 30 year amortization, 7 year balloon.

Reasonable or unreasonable terms?  Any input/suggestions are welcome.  

@Nick Rose save your cash (10% down is pretty reasonable)...no need to go higher than that. If this is a fair deal, shoot for more favorable terms to maximize cash flow (i.e. get a lower mortgage payment). 

If there is an upside (you can lower costs and increase rents by renovating) than a 7-year balloon is solid...8% interest is probably high for a property in this price range....start lower. 

There are a thousand options...I would rather consider a stepped up progressive mortgage: i.e. start with lower fixed payments so you can fix this place up with the cash flow and increase the payments once stabilized...

But it sound like there is quite a bit of deferred maintenance...how do you plan to cover repair and cap ex?...your own cash?

Ask for interest only. Why not? Assuming 140k is a good deal why not try for 5.5% IO. From where I sit 10% down is a dream and 7 year balloon seems fair.

@Brandon Sturgill

Thank you for the input.   A stepped progressive mortgage is interesting, I'll have to consider structuring such a deal.  I'll likely offer a couple of options to the seller.  

As for rehab, I plan to pay cash.  The properties in the area are inspected and certified, so there is nothing too extreme.  I think the seller repaired what was necessary to pass inspection, but did not put money into making the property look appealing.  No pride of ownership.  

Scheduling a walk thru with a contractor this week.

@Brian Gibbons  

I'm open to other financing options for sure, if they make sense.  So far, this seems to be too small of an opportunity for commercial lenders, and I would think private lenders' terms wouldn't be as attractive.  Could be wrong.

@Matt Hoyt

I also think 10% down is great, and from my perspective 5.5% interest only seems low to offer.  That's just me though.  Maybe there are those out there that think it's a good rate.  

You could be totally right on the 5.5% for your area. I know zero about Michigan. But I do know that the seller is making less than 1% in the bank in 2016 so maybe worth a try if the other terms are all fair. In my neck of the woods banks are 2.5-5%, hard money is 9-13% with points and everyone else is in between...

Couple things, one you mentioned a triplex, that is a single family dwelling and financing falls under Dodd-Frank rules, he doesn't live there so he may be defined as an operator-dealer, secondly, you mentioned medical problems.

Are those medical issues in his immediate family? If so he may wind up having to dispose of his note to qualify for medical benefits from the state. This could be an opportunity or a huge blunder because when a note holder has issues, the borrower will generally have issues as well. The opportunity might be that you could payoff the note with a discount, but ask your CPA about forgiveness of debt and much of that can be avoided getting a note buyer involved.

 Check state law, while you think this would be a commercial loan, it may not be due to the type of property and it being funded by equity, that's an installment purchase. 

Seller financing does not add value to real estate, don't overpay, you may compensate with a higher rate of interest but check usury laws in your state.  

It's not hard to do an adjustable rate mortgage, 2.5% above the 1 year T-Bill is fair and you can begin much lower, say 4%, this is a good way to get your seller to hold the note (if he can) with a longer amortization, 15, 20 years, no balloon. Put a floor and cap rate on it, like 4/9, that should always be manageable.  

Sounds like you may have the money to buy it or refinance it, but at what cost? While interest only sounds good for cash flow these rarely work as planned as there is no equity gained, if you have the funds that may not be an issue but it comes back to bite in short periods like 3 to 7 years. 

 Need to ensure that the lender doesn't account for payments, send them to a joint account for him to withdraw , this way the checking account will show your payment history.

Tax wise, it's better to pay his closing costs than put the same amount down.

No prepayment penalty, a seller or non registered lender cannot charge points either, that is prepaid interest. 

Take these basic terms to your attorney, financing your own deals really isn't a DIY thing anymore, after you've done a few under the new regulations you might cut your teeth on one later on, but not for your first note. Having an attorney means you aren't accepting liability for introducing or selling the terms to the seller, if he gets into trouble you can have trouble too.

Good luck :)

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