Need Help Structuring Seller Financing Deal

8 Replies

Hi Folks,

I'm looking to structure my first seller financing deal on a property I'm going to see tomorrow. I know the seller from an open house when his property was listed. It didn't sell, and he reached out to me a few days ago to work out an off-market deal. Here are the details:

Property: 3/1, 912 sqft, 10,000 sqft lot, built 1950's

ARV: $130-140K

Asking: $100K

Repairs: $20K (estimate)

Rent: $1200/mo

The seller owns it free & clear and wants at least $70K down. He hasn't mentioned anything about interest (and I'm not going to bring it up unsolicited). So here's what I'm thinking:

Purchase price: $95K

Downpayment: $70K

Cash flow: $800/mo

COC return: 10%

Terms (Financed amount $25K): 24 mo, 36 mo, longer? Fixed monthly payment ($200-300/mo) with balloon at the end? If he asks for interest, what's a reasonable rate (5%, 7%)?

My strategy is to wholesale this deal to an investor in my network. Thanks in advance!

Most of my off-market seller financed buys are with 10% down.  75% down without any equity to speak of can only work for a super long-term hold.  A great asset in a great neighborhood with 1% rents per month can work if you hold for decades.  

But, when you throw in that it needs $20k in work you're kinda in no-man's land. As a B&Her I want a rentable house in good shape and will pay 90-95% of FMV with good seller financing. A flipper needs a steep discount. You're neither. See what I mean?

I'd be skeptical putting so much down. If every i isn't dotted and t crossed you/your buyer  could really lose a lot of money here.  What if it's a contract for deed or land contract and you don't even get ownership?  What if the seller dies or gets a judgement placed against him?

Put down less money or buy outright so he doesn't have a 25% first mortgage @Adam Meadows .  The seller is definitely in the driver's seat here.

@Steve Vaughan thanks so much for the feedback. Your insights are very helpful. I am hoping to structure this deal in a way that appeals to a buy & hold investor because of the location and rental market. It would be structured as a security deed and a note. The house needs a decent amount of work, so I know that complicates things in terms of timeline to get it rent-ready.

One problem is the seller is looking for a sizable amount of cash. I don't think he would go for anything less than 50% down based on the numbers in this deal. Perhaps there's an angle to negotiate down further on the purchase price to buy him outright.

If a seller financing deal is still on the table, what length of time makes sense for the financing?

Originally posted by @Adam Meadows :

@Steve Vaughan thanks so much for the feedback. Your insights are very helpful. I am hoping to structure this deal in a way that appeals to a buy & hold investor because of the location and rental market. It would be structured as a security deed and a note. The house needs a decent amount of work, so I know that complicates things in terms of timeline to get it rent-ready.

One problem is the seller is looking for a sizable amount of cash. I don't think he would go for anything less than 50% down based on the numbers in this deal. Perhaps there's an angle to negotiate down further on the purchase price to buy him outright.

If a seller financing deal is still on the table, what length of time makes sense for the financing?

 Is a security deed and note like a note and deed of trust / regular mortgage?  Sounds like it.

I wouldn't put 50% down. That's a lot of capital, reducing your COC to nil. I did 25% down on a 7-fam once, 18% down on a 3-family, but those were better than 1%er's.

My typical SF terms are 24yr straight am or with 5yr balloons.

@Adam Meadows , I thought the idea of "Seller Financing" was that the SELLER would be doing most of the financing! You're suggesting that YOU do most of it! The main problem I see with that is: This is not a bargain!

This Seller seems motivated to get every dollar out of it that the market will sustain, (as they're entitled to).

Which makes me wonder: Why haven't you walked away? Why would someone pay YOU more than your Offer?

Get where I'm going with that thought? ie. Flippers often use the "70% Rule", which includes rehab cost.

ie. If a Flipper has $71k to play with, THAT would be their (maximum) cash Offer! (ie.You Offer even less!)

So if you have $70k to play with, you need to become better at sussing out wholesale value - fast! My 2c...

@Steve Vaughan very helpful again. Yes, I think a security deed is similar to a deed of trust. Here's what I copy and pasted from a website: "A Security Deed can have many names. In some cases, it's known as a Deed to Secure Debt, Warranty Deed, or even a Loan Deed. It provides a full and direct legal title transfer from the borrower to the lender, leaving the equitable title with the borrower. The lender then provides the loan. The borrower makes payments, and until the payments conclude, he or she retains only the equitable right (a legal right guaranteed by equity, not from another legal source). During that time, he or she keeps exclusive right of possession and the right of redemption, meaning that the lender cannot sell the property's legal title unless the borrower defaults or they agree on the sale."

@Brent Coombs thanks for your perspective. I see now that this deal, as I presented it, doesn't meet ideal terms for seller financing. I guess my question still remains is there any deal to be had here? Is $95K all-in (purchase plus rehab costs) a "good deal" for a property with an ARV of $140K that will rent for $1200/mo for a buy & hold investor? The all-in cost is less than 70% ARV. And just to be clear, I'm NOT saying $75K purchase + $25K financed + $20K rehab. Just purchase and rehab.

Separately, I'm open to any resources either of you recommend to learn more about seller financing. Thanks again.

@Adam Meadows , if your ARV figure is correct ($130-140k), then sure, $95k all-in should be a deal.

But that still means your offer to the Seller would be no more than $75k, right? 

And in that case, you really don't want your rehab estimate of $20k to be wrong! 

Have you got an experienced and trusted Contractor to quote you for that job - in advance?

(And, have you seen enough Flipping shows on TV to know that rehab budgets invariably blow out?)

And if you're still intent on wholesaling it, just know that your end-Buyer won't offer YOU more than $75k!

So, how much can you offer the Seller, and still make a wholesale profit? [Don't forget about closing costs and fees].

(Or, are you thinking that you might become the Flipper {or, Buy-and-Holder} after all?)....

Originally posted by @Adam MeadowsIt provides a full and direct legal title transfer from the borrower to the lender, leaving the equitable title with the borrower.

 So this 'security deed' appears to be just like a car loan, contract for deed or land contract.  The seller will retain legal ownership.  So...put 75% down on a house purchased at full market value.  Bonus.... you won't even own it until you pay it off completely.  Why are we even talking about this???   

@Steve Vaughan point noted, sir... :-)

@Brent Coombs you're exactly right. If I were to wholesale, I'd get it under contract for $70-72K for a $3-5K assignment fee for myself. But to your point, the rehab numbers have to be airtight (with a 10% cushion or more). 

I appreciate the education from both you guys. Clearly there's something to be said for 67 posts vs. 4,000+

Thanks again!

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