Need help wording a seller-financing proposal
Investor · Nashville, TN · Member since 2015 · 429 posts · 143 votes
First go at offering a seller financing deal, and I'm a little unsure if I'm wording the offer correctly. Here are the numbers:
4plex for $156k
- I'm offering to pay ALL of the buyer's/seller's closing costs, and pay both agent commissions (3%). It's basically a down payment of $14,000.
- The note principal is still based off of the full $156k, since there wasn't a reduction in principal.
- $156k @ 4% interest, amortized over 20yrs with a 5 year balloon
- They receive a payment of $945.33 for 60 months (total of $56,700)
- When I refi after the 5 years (unless they want to continue), they receive the remaining principal balance of $99,300
Is this a win-win for both sides? The 5 years might seem a little long to the sellers. I'd go as short as 3 yrs if they wanted to cash out quicker than 5
Thoughts?
@Mark Douglas The first thing to understand about owner financing is price is the most irrelevant term in a contract. Read the "Power of Zero." Great book and it explains it in depth
The two terms you want to see from your side to make owner financing a good deal for you is:
So you would offer on this particular one:
Sounds like a blind offer with less than 10% down, IMO, bump that up to 10-15% and ask for financing at 5 years, bump the interest rate up to 6%.
Attach a seller finance addendum to the contract, one may be required by the Realtors on their addendum, but you should supplement the contract with additional information.
Simply use a letter and when you begin explaining the numbers use the word "approximately"
Then show the numbers.
Short paragraph(s) about you, the pitch is about your ability to pay.
Your intentions of making repairs and improvements, putting more cash in signals your skin in the game, more than just a down payment.
Before you go down this path, find out as much about the seller as you can, their needs must be met, do they have other assets to move and buy a new house.
Otherwise, looks fine. Good luck and have a great Thanksgiving! :)
Your way is essentially at $170k with $14k down.
I like Bill's idea of an LOi. Mine have a couple broad stroke scenarios with escalating price points.
For example, $117,862 cash out, $137, 761 with 20% down at market rates and 5yr balloon or $156,000 with 10% down and same.
They'll often pick one option. Also say why you like the property and how you plan on improving it. Provide references from other SF deals if you have them. Good luck and congrats for thinking outside the box, Mark!
Why would you ever negotiate against yourself? Hey, why not put 25% down and bump that interest rate up to 10%? Holy cow!! Where does one come up with these ideas!!???
I'm going to go the other route; why offer any interest at all? They won't collect any putting that money in the bank. You could always point out cars are sold with 0% financing all the time! Beside, they aren't even lending you any money are they? No. They are not. What we are really talking about here is nothing more than terms of the sale. It is how you will convert their equity (nothing more than a dream) back into cold hard cash. The first thing you need to do is explain to your sellers that equity is not money. Can they buy food with equity? Nope. So, why should you pay interest on equity? Can I take my equity down to the bank and get some interest on it? Nope. Certainly can't. I could borrow MONEY against my equity and pay interest on the MONEY. But again, we're not talking about money are we? They are not making you a loan. Loans involve someone actually having some money and in this situation, nobody is talking about money.
Traditional mortgages are paying 4%-ish. That'd be a great starting point as well if you don't have the courage to present them with a zero interest payment plan. You certainly have some good data as proof of what the market is offering to borrows buying in your area.
And as far as win-win goes, there is no such thing. If you think there is, you're doing marginal deals or getting taken to the cleaners and you don't even know it. It is absurd to even pretend you will ever truly know what someone else wants. They might tell you, but sellers lie every day all day even on Sunday. Nobody knows what anybody truly wants.
Make the deal work for you. If they take your offer, great. If not, on to the next one. I bet there's easily 100+ 4-plexes in Nashville you can make offers on. You're not in business to hand out congratulatory trophies to people you're trying to do business with. If you think I'm wrong, your offer at its face value is a tax burden for them. Nothing down? Great for you, but depreciation recapture (due in the year of the sale) is going to be a tax liability for them in just 5 months from now when they pay their 2016 income taxes. But, you don't really care about their tax problems do you? Of course not or you would have asked them what they paid, how long they owned it and calculated what that depreciation recapture would be so you made sure you put enough down to cover that cost for them. That is about as close to that ridiculous win-win philosophy as you could get, but it sounds still more like a win for them and a lose for you.
Win-win. Read "Start With No" by Jim Camp and start making offers that make sense and money.
Pretty poor advice IMO Aaron, it isn't a win-win by a long shot.
Creating financed installment deals isn't for the smooth talking salesman, predatory lending issues goes both ways, to a borrower who devised the deal or the lender who devised the arrangements.
No interest is saying about the same thing as, give me the cash to buy your place, I'll sign a note, but you shouldn't be entitle to interest on your money, after all, I'm buying it. And that is a win-win???
Fast talking marketing types get newbies in trouble, there are many who proclaim to be experts that really don't understand the differences between real and personal property and they don't care.
Equity is a marketable asset, just like a dollar bill, or a note, accounts receivables, or any instrument representing value in terms of money.
Yes, you can convert equity to cash and obtain interest on that cash or other returns from other opportunities. Go get a HELOC and write a check for dinner, you're paying interest on the money that was converted.
You can pledge equity to leverage other deals, so there is value, just need to know how to use it.
Traditional mortgage? Interest is based on risk, not greed in the finance world......not saying profit isn't considered, but the interest rate is to reflect the risk taken by a lender of cash or equity.
You're not getting a traditional mortgage, did you have the place appraised, did you turn over your financials and tax returns, are your assets and liabilities verified, no, a seller financed buyer usually doesn't do that and not doing so and the risk to the lender goes up, doesn't matter who the borrower is, the lender is just taking the borrower's word as to underwriting an installment deal.
The interest and down I suggested is a fair representation of the lender's risk, in other words, if things go wrong and the little old lady who sold the property has her attorney involved about something else and then discovers her being screwed over, there are many paths they can take to clean a predator's clock.
Very simple question to ask yourself before pulling the trigger on any deal: What would a judge say? You never know who sees your deal or how it may blow up. That will usually keep you dealing fairly, honestly and therefore profitably. :)
I just closed on my beach house with a seller who was tortured by distractions and gad great difficulty focusing on our deal.
The solution was to meet for dinner first and sit down with a "talking points" sheets so that we could keep the conversation flowing and on-topic.
I cannot tell you how difficult it is to get two A.D.D. Guys (Both seller and Me) in sync to vet out each term I spent over six months patiently creating a trusting sales environment with the objective of buying with large cash down from two, 1031 sales, plus a large seller financing Note secured by the property (in a neighborhood where home are $5-7 million).
There are so many great things you can do with seller financing, including risk reversal and contingent payments.
I think the biggest thing that other miss, maybe including @Bill Gulley and probably including my good buddy @Aaron Mazzrillo Is planning for Life Events occuring to the note holder later and transactioneering terms that provide opportunities to renegotiate certain aspects of the debt later.
Life happens and people need cash or other changes. It's the ability to foresee these things that is where additional benefits can be realized. Payments, interest rate and cash flow are only a handful of the things that are really important...later.
Actually, I was keeping it at the 101 level, the Phd comes much later, but yes, I can make seller financed/equity notes dance to any tune you'd like to play. And without getting crazy, inappropriate, shyster, predatory moves involved. Good luck with the first one. :)
@Rick H. Every seller financed deal I put together, and they are few and far between here in SoCal in the market I work - (just to be transparent because someone will read this and decide they are going to go out and do nothing but seller financing deals) one of the first questions I ask myself is, "I wonder how much longer this person might live until I can get a huge discount when their heir gets their hands on this note?"
That being said, I am still focused on getting a good deal today. If I can get 0% financing on today's deal, that discount will have a much higher yield later when Sally Squashhead the internet shopping queen comes calling or gets one of my annual letters informing her of the small pile of money I recently "came into" and would she consider taking a bigger check today for a few less payments later.
I have a 0% note that I just received a call on. The person who had the note is dead. The house the note was secured against is gone. I moved it to another property and sold the house a few years ago. The person who has the note now has already called me once asking questions.
@Bill Gulley Bad advice? But your advice is to offer to pay more even before the seller says "No thanks!" And again, we are not talking about cash. The seller isn't sliding a pile of money across the closing table and then the buyer is sliding it back. The seller is selling most likely because he/she has no money. "You want $100K for the property? Great!! I'll pay you $1,000/month for the next 100 months." How is getting their asking price a bad deal for them? Or am I supposed to sell their house for them and buy it at the same time? I wish I had something for sale that you wanted!
Also, we are not talking about terms on a house sweet grandma with the delicious hard candy lives in. It is a 4 plex. Investors typically buy 4 plexes. When someone buys an investment type property that will most likely be sold to another investor and now finds himself in a cash crunch situation, he better be prepared for an investor type offer.
Taking my hard earned cash (which I can do more than a million other things with) and making a substantial down payment and then getting less cash flow every month while I take all the risk is not just bad advice, it is down right horrible advice.
I just closed on my beach house with a seller who was tortured by distractions and gad great difficulty focusing on our deal.
The solution was to meet for dinner first and sit down with a "talking points" sheets so that we could keep the conversation flowing and on-topic.
I cannot tell you how difficult it is to get two A.D.D. Guys (Both seller and Me) in sync to vet out each term I spent over six months patiently creating a trusting sales environment with the objective of buying with large cash down from two, 1031 sales, plus a large seller financing Note secured by the property (in a neighborhood where home are $5-7 million).
There are so many great things you can do with seller financing, including risk reversal and contingent payments.
I think the biggest thing that other miss, maybe including @Bill Gulley and probably including my good buddy @Aaron Mazzrillo Is planning for Life Events occuring to the note holder later and transactioneering terms that provide opportunities to renegotiate certain aspects of the debt later.
Life happens and people need cash or other changes. It's the ability to foresee these things that is where additional benefits can be realized. Payments, interest rate and cash flow are only a handful of the things that are really important...later.
Sounds like Rick, the late Jack Miller, Peter Fortunato, Jimmy Napier and I look at deal structuring differently. :)
@Mark Douglas The first thing to understand about owner financing is price is the most irrelevant term in a contract. Read the "Power of Zero." Great book and it explains it in depth
The two terms you want to see from your side to make owner financing a good deal for you is:
So you would offer on this particular one:
Just so you know, you're not calculating the balance properly at the end of 5 years.
The balance at the end of 5 years is $127,801. What you layed out with your balance being the subtraction of your total payments would be 0% interest.
@Mark Douglas, You have a lot of great advice here, some probably better than mine. First, I try to add everything I pay into the purchase price. While the deduction is better than depreciation, when it comes to refinancing down the road it helps. Next I often 2 offers, one with a higher price where they finance and one where I just get a bank loan. I usually offer 2% interest and point out to them that it is 8X what a bank will pay them for a CD. I use 15 year amortizations if I am doing a no money down owner finance. At the end of 5 years a 15 year loan will have 20% of the loan amount paid off, just what you need for 80% equity for a bank loan.
A lot of what you do should depend on the deal itself. How will it cash flow using the various options? If you are putting 20% down with the owner carrying the balance why offer the same rate a bank will charge? Make the deal good for you too. Good luck.
Mark, I'm thinking about putting together a seller-financed proposal this weekend. This was an interesting and informative thread. I'm wondering if you'd be available to chat about how this worked out in the end?