Seller Financing Structure

12 Replies

I have an opportunity to purchase a property from another investor with seller financing. Im new to investing and this would be my first seller financed purchase. Im looking for some guidance and suggestions on the best way to structure this deal. The property is $80k and rents for $925. 

Try to get as long a term and as low an interest rate as possible, make sure the loan amortizes over time if it is long term otherwise you will have to refinance again anyway.

I've done 2 seller finance deals, so I'm no "expert," as others here may be.  But I will note that most seller finance deals will have some sort of balloon payment after X years.  It buys you time to search for better financing options and it gives the seller a piece of mind that he/she will get paid sooner than later.

Seller finance deals tend to have a larger % rate and depending on the seller, they may run credit checks and delve into your financials.  As a seller, they also tend to get a fairly good down payment.

The mechanics of it....I gave the terms to my attorney and he provided a promissory note that the buyer signed, with the property being added as security.

At closing, it's a normal close, with a HUD statement and the buyer signs the mortgage and promissory note. Seller is responsible for loan servicing and sometimes the seller will end up selling off the note to get paid sooner at a discount.

I hope this helps a little.

@Kirsten Braddock a traditional loan would require you to put down 15% or maybe 20%.  It would be amortized over 30 years.  Interest rate right now would be something like 5.5%-6%.  My thought is that either you need owner financing because maybe we couldn't qualify for a traditional loan OR the owner financing is a better deal that a traditional loan.  Meaning, if you can qualify for a traditional mortgage, but the owner financing is something like 8%....then why do the owner financing?  But if you don't think you can get the traditional loan, then try to structure the owner financing in a similar fashion to benefit you as best you can.  The seller MAY NOT be able to provide a 30 year term.  Sometimes people offer a balloon payment...meaning the payment is based on a 30 year term (which makes your payment as low as possible) but I owe you the full amount in 5 years or so.  Then in the 5 years you can refinance out.  Hope that makes sense.  Feel free to ask more questions if you need.  Thanks!

@Kirsten Braddock The best way to structure is the cheapest way you can negotiate. I'd start by asking them what they would like to receive and let them make the first proposal. See what they come up with and go from there, who knows what they'll say. I'd shoot for the lowest down payment possible (or none) so you can keep your cash, no interest, amortized for 30 years with a 5 or 10 year balloon (obviously as long as possible). If they bring up interest, start really low and go up until they either agree to a deal or until you're too high for the deal to make sense.

Obviously what I said to shoot for is best case scenario but if someone is motivated enough they'll agree to a lot.

@Andrew Postell My husband and I have good credit, but wanted to try a creative strategy. We are trying to purchase multiple properties this year, but will have slumps through the year where we wont have 20% for the down on each property, so we thought this would be a good option to get around that problem and still hit our goal. I was thinking we could refinance out of the initial loan after we have hit the 80% LTV so we won't have to put any money down at that point. @Grant Rothenburger The seller would like us to present an offer with all of the terms. Do you really think it's possible to do no money down? I would think there has to be some incentive for the seller. They could easily list the property but if they sell to us then it will close out quicker. 

@Kirsten Braddock I think there are a lot of different reasons for people to sell using owner financing. I have been working on making contact with sellers where one of there main concerns is not paying what they see as 'high taxes'. Typically older, tired, want to pass on the wealth to the kids etc.... By doing a low down payment, they can deffer and spread out the tax burden. The tax basis 'steps up' once they pass on is one thing in the equation too. 

Dan Dietz

@Kirsten Braddock It's possible sure. Maybe present an offer with something low like $2k down first if you're worried they would walk away if you offered nothing down.

@Kirsten Braddock The seller financed deal I sold to a young couple was a $65K duplex.  They scraped together $5K for the down payment and I was comfortable with that because if I need to foreclose, I do have something in hand. Low or no down payments are few and far between.  When I list any of my rentals for sale, I always get a ton of beginners asking for no money down seller financing.

I would look at the deal closely to make sure it is actually a deal before considering seller financing.  There is usualy a reason it is offered (can't sell conventionally, poor condition, over prices...). 

Locally, I have seen several people trying to screw people over on properties offering short term financing with a decent down payment.  For example, one deal looked like what is shown below:

Price-$130k

Down payment-$30k

Loan terms 7% with a 1 year balloon

The reality is that the property he is trying to sell is not even worth $100k in it's current state.  

I have seen a few others selling properties with inflated values with a 5 year balloon and lower than market financing with a decent down payment as well. 

In both cases, the buyer would not be able to get financing on the property even meeting the loan terms.

Make sure to look at the deal closely and make sure you have an exit strategy in place! 

@kevin nichols as someone who has done seller financing before can you add any more color on why you would consider accepting it as the seller?  I'm always interested in presenting seller financing in my multifamily offers but struggle to understand what's in it for the seller? No need to 1031, hold the note without managing the property, etc.  ?

@Justin Elliot The 2 properties that I seller financed, I basically looked at a compound interest calculator to do my calculations.  If the buyer paid me X today and I put it in the market with an average rate of return of 5% how much would I have after 15 years?

If I seller financed to this buyer at X%, how much would they pay each year? And then compound that over 15 years of adding it into the market.

My one example is a $65K duplex...I sold it to a couple.  I bought it for $45K and sold it the next day for $65K to the couple.  The put $3K down and I seller financed $62K over 15 years.  (I didn't do a balloon).

I think I'm charging them 9 or 10% interest.  Over the course of 15 years, I compounded that out to see how much more I would get vs. getting the money up front.

The other part of the equation, for me, was the property.  I initially bought it as a rental. It was in a very good neighborhood across the street from a nice park, etc.  The rental potential was good.  So, if I ever have to foreclose, I would be "happy," to take the property back.  There are some properties I've owned that I wouldn't say the same for.

The one thing that sticks out, is that I sold to owner occupants.  I didn't sell to a starting out landlord who went to a weekend seminar and thinks they can build a rental empire with no money down.

I'm no expert and I'm sure other folks here have complex worksheets for seller financing, but I feel like the above worked for me.

I love buying and selling with private seller financing. The main questions I ask sellers is what are they going to do with the money from the sale of their property and then I build my offer from there. 

A deal I recently did went like this.

This seller was diagnosed with cancer and didn't want his wife to get stuck with the stress of landlording. He did however, like the idea of still bringing in monthly cashflow for his wife.

I bought his duplex that was in great shape but the seller was well below market rents. My purchase was based on the income that was coming in. I offered $5,000 down on a $132,000 purchase with interest only payments at 3% for 8 years at which time a balloon payment is due. ( He chose the interest rate ) 

I sold the duplex 30 days later for $155,000 with $10,000 down at 6% P and I payments with a 5 year balloon due. This loan is Wrapped around the loan I structured when I bought it. These numbers were based on the proper market rents.

My spread on this deal is $519 per month. We structured the balloons to coincide with each other since the underlying loan is interest only and the wrap loan is amortizing.  

Plus, after 30 days we have zero cash out of pocket.

The key to getting seller financing is finding the true needs of them and solving their problem.

Happy Investing

Derek Dombeck

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