For those of you that buy a lot using seller financing what structure do you start with when presenting to a seller?
Let's set this up saying it's a $100K sale price, with about $75K Equity.
You put 10% down leaving a $90K note.
Would you start by simply offering to pay a flat $250/month for 30 years to give them their $90K? I know it's highly unlikely that anyone with much common sense would do but I'm willing to bet there are some out there that have done it.
So the question is do you start there? Or is that too "risky" that the seller would just kick you out the door and you loose any shot at it?
Or do you start with something more realistic, 20 year note at 5% interest? Do you include a balloon in the first proposal? After 5 years?
I realize the purpose of seller financing can often be to get the seller the price they want and as long as you're cash flowing on the deal you're ahead of the game.
Do you give yourself contingencies to balloon out sooner should it make sense to refi after say 2 years? That would of course all depend on the interest rates as it might just make sense to keep the owner financing in place if they're willing to.
Thanks for any advice just running concepts in my head to prepare myself for negotiations.
Following. I'd like to see what others have to say.
I don't fully understand your question. If you are purchasing a property for $100,000 and putting 10% down, then there isn't $75k in equity. If you mean that the owner has $75k in equity, that has nothing to do with the price that they are selling it for. If they still owed a balance on a mortgage and have $75k in equity that makes it a whole other situation. Are you purchasing the property "subject to" an existing mortgage and then owner financing the remainder of the purchase price?
There just isn't enough information provided to give a proper response.
Sorry @James Stevens
This is purely hypothetical. The idea being that the current owner had a lot of equity but still had an existing mortgage. So I guess yes is the answer to your question. In this situation I’d look to take over the existing mortgage and seller finance the rest.
Which ventures right into how this type of deal can work. Is that the angle to take or start talking about a lease option?
Basically I’m just trying to understand the deeper aspects of seller financing in general and how to structure those types of offers.
@Derek Tellier Taking over the seller existing mortgage isn't the cleanest way to do it. True seller financing means you're taking title and that would trigger the "due on sale clause". Which might not be called, although it might.
In your hypothetical scenario, buying at $100k and 75% equity would mean of course 25k is left on the mortgage. Your downpayment should be $25k and the seller financed note would be $75k, on a $100k purchase. The existing mortgage would be paid off during the closing by the title company. Of course, if you could put down $25k (25%), then it would probably be better just to go to a bank.
The key ideally is to find sellers would own the property outright, and ideally get it for 5 or 10% down. My standard terms when offering are 5 to 10% down, 5 - 6% interest, 30 year amort, 5 or 7 year balloon.
I also disagree with the statement "get the seller the price they want and as long as you're cash flowing on the deal you're ahead of the game".
I would personally never pay over the appraised price (you should have it appraised). You could be one year into it and may have something pop up - divorce, change of life situation, etc. If you're suddenly force to sell and overpaid to start, plus all the commissions and closing costs, you could lose your shirt. On a $100k property, it could cost $10k to sell it including all fees. And if you overpaid $10k, then that's $20k you're going to have to come up with to sell.
Thanks @Tom S.
Very good information and exactly what I was looking for.
What I meant by “get the seller what they want” wasn’t that I would overpay it was that it was a way to offer more than a cash offer. Getting the seller closer to their asking price, assuming that price was still well within what was correct value.
As a buyer, I usually put 10% down, pay a little under 2/3 of market rent monthly as PI at 6%. The term amortizes out at about 24 yrs. On commercial apts or with an older seller there is usually a 5yr balloon.
Offering a payment of $250 on a $100k house probably won't cover even his $25k mortgage payment. I'd maybe start at 4/7 of what rent is to have a chance and still have a little cf.
@Derek Tellier You're welcome and thanks for clarifying. Good luck and there are a lot of deals out there! I bought my first 5 properties with some type of seller financing.