Continue Seller Financing or Refi to Conventional?

6 Replies

Hello BP, Newbie first time poster who did his first deal in April and am now working on my first triplex deal and needing some community advice. 

I found an of-market triplex in my community I am interested in and the seller is willing to Owner Finance the property for a maximum of 2 years. Sale price on the home is $205k and I will put $20k down bringing my balance to $185k starting January 1 (closing with title company Dec 28). Conventional mortgages require 25% down on multi-families and I didnt have the $50k+ to get conventional financing and didnt want to take that much out of pocket so am fortuneate the owner is willing to carry the mortgage. Owner has agreed to $1035/month and will credit me $1000 every month towards equity in the home. I will also pay, taxes, insurance, etc.  After 2 years I would have a mortgage balance of $161K (205,000 sale price - 20,000 down - $24000 credit after 24 payments = $161,000 balance). 

My question is would you refinance the property immediately into a conventional loan and get out of seller financing deal ( I have a bank with no seasoning period lined up) or pay down the balance each month then refinance the $161k balance into a 30 year, or less, thus increasing cash flow in two years?  My math shows it would take me 7+ years for my equity in the property to reach that $161k balance as opposed to the 2 years with owner financing. 

Its essentially a question of equity vs cash flow and I'm just looking for another perspective on the deal. Also, triplex will rent for around $2650/month.  Thanks all, looking forward to your thoughts...

@Daniel Kern   I would keep the owner finance deal for the 2 years, if the $1035 is allocated as $1,000 principal and $35 interest.  With a standard 30 year mortgage, it's almost the opposite, most of the payment is interest.

Quick tip, pay for an appraisal to make sure the house is worth $205k.

Welcome to BP!

- Tom

I agree with @Tom S. - take the seller financing. In addition to the really excellent equity paydown, you'd be saving the second set of closing costs and giving yourself more flexibility with banks. After a certain number of loans (for my bank it was 3) the down payment % jumps. So you have one bank-backed loan at this point, which would allow you to do owner-occupied financing, which is almost always more generous, on your next purchase. 

You could also owner-occupy the triplex in two years when the owner-financing expires, change to an FHA, and potentially pull cash out and recapture some of that equity for another purchase. As Tom said, as long as your market value is right the seller financing gives you more options now and in the future.

Great points guys, thank you for the feed back. @Shawn Q. what do you mean "you have one bank-backed loan at this point, which would allow you to do owner-occupied financing?"  I currently carry two mortgages, my primary residence and one rental property (and the triplex at the end of the month). Wouldn't owner occupied financing only pertain to my primary residence?

@Daniel Kern keep the owner financing that is a great deal.  You would never pay down that much loan balance with a conventional loan.

Thanks @Melvin List   What are your thoughts after the two years.  Refi into 30 year for cash flow or 20/15 year to payoff house? Also, it's written into contract that I could get a third year "extension" which I hope to capitalize on so again it's a question of length of refi?

Without a doubt I would take advantage of those loan terms for as long as the owner is willing to proivde them. My first instinct is that the favorable loan terms are baked into the sale price, and that the owner may be getting more then market for providing them.

You will get a better rate for a shorter term loan, in my experience about .5% for a 15 yr versus 30. The decision on which one you want to use is up to you, I suggest pulling up a simple mortgage amortization calculator to see what your equity payment is for the two loans. From here you can determine if that cashflow difference that differentiates the two loans is worth paying for in interest.

Good luck!

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