Lexington, KY · Member since 2010 · 315 posts · 133 votes
I am in the market for long term buy and hold rental properties. I have the cash to acquire a couple of units but would rather use that cash as a down payment in an owner financing scenario. I do not believe that I am in a position to get bank loans very easily, which makes owner financing more attractive.
I have come across some sellers who are open to the idea of owner financing, depending on the terms. I need help in crafting the terms of the note that will be both attractive to the seller and beneficial to me.
My thought has been to offer around 20%-25% down, 6% fixed interest, and a 15-20 year amortization. But, I wanted to post here first and get some suggestions so that the owner financed offers I make are as clean, concise, and coercive as possible.
Are you buying subject-to or with a seller carryback? Both?
I wouldn't pay on a 15 or 20-year amortization. No freaking way. 30 years minimum is what I would want. You can play with the rate and amortization period to get the loan constant you want though.
The down payment 20-25% is awesome but the duration doesnt seem too attractive. I will say keep the duration under 7 years. I dont know the asking price and ARV of the acquisition but you could of even offer 10% down with an interest of 8% for 3 yrs then use the other 10-15% for another rental property. Then once you close, you gotta to start to work on your credit to improve your fico score. so when the term is due in 36 months you can refinance.
By coercive, do you mean that as in coercive persuasion, to elicit compliance or an agreement to undermine dealing in good faith?
Anyway....Utilizing seller financing is great, if you can.
I always suggest taking a longer amortization without a pre-payment penalty. Your obligation can be paid off as soon as you want, but your obligation to pay will always be minimized.
The rate you are offering appears to be fine. But this may be something that might be subject to change due to possible requirements.
I get the feeling that these may not be owner occupied residential properties. Before you make the offer, I suggest you check as to your transaction being in compliance with the SAFE Act.
If the SAFE Act applies in this situation, your note will be drafted for you by a mortgage originator. And, if the SAFE Act applies and the seller is not exempt, the seller may not discuss loan terms with you.
Now how's that for a crock?
So, what's your proposed deal and type of property? Might consider making the loan terms in the form of a request and part of the offer.
There are a few properties i'm looking at, none of which are single family owner occupied.
As an example, i'm looking at a 5 unit property 2bd/1.5ba each. Rents are currently $400, fully occupied, all utilities are the tenants responsibility - owner pays about $40 per month for trash and $20 for common area electric/security lights.
A longer amortization term is better for me as I plan to use this owner financing as permanent financing, I do not want to refi with a bank if possible. I have a high credit score but currently am leveraged as a high as a bank will go in terms of my personal DTI.
The SAFE Act is a big concern for me. But, I do not fully understand it, even after reading a bit of it. And yes, I would like to make the owner financing part of the offer.
And by coercive I meant persuasive and appealing to the seller.
Curious, do you look to maintain high cash flow with not as much regard for paying them off, or are you just trying to minimize your required payment while keeping cash flow high and always having the opportunity to pay off if you like.
Are you buying subject-to or with a seller carryback? Both?
I wouldn't pay on a 15 or 20-year amortization. No freaking way. 30 years minimum is what I would want. You can play with the rate and amortization period to get the loan constant you want though.
Bryan, I don't want to take this too far off topic, but the next logical step is to constantly stay leveraged. Do you refi to get equity out of your properties? And stay leveraged? You seem to be conservative with other aspects of debt, but not here.
I can't speak for Bryan but I am seeking the latter: I want to minimize my payment and maximize cash flow while maintaining as much flexibility as possible in terms of prepayment, etc.
... why do you want 30 years amortization. Dont you want to finish to pay quicker and save on APR.
If you have some motivation to pay it off quicker, you can just increase the principle amount you pay, or you can make a lump sum principle payment. But if you are locked in with that shorter term, you have no choice BUT to make that bigger monthly payment (unless you choose to go into default).
Curious, do you look to maintain high cash flow with not as much regard for paying them off, or are you just trying to minimize your required payment while keeping cash flow high and always having the opportunity to pay off if you like.
Cash flow = Good. I like that have it as high as possible without having too little debt. In theory there is an optimal mix for this. In practice 70%ish debt is what I generally target.
I don't have enough cash to pay off all of my debt at once if that is what you were asking. Having long amortization periods and debt that isn't subject to being called all at once (due-on-sale) is good for this.
Bryan, I don't want to take this too far off topic, but the next logical step is to constantly stay leveraged. Do you refi to get equity out of your properties? And stay leveraged? You seem to be conservative with other aspects of debt, but not here.
I do refinance my properties and occasionally do pull out equity if it makes sense to do so. I generally don't like paying the higher rates for "cash out money" though so I only do this when my leverage is way lower than it should be and the transaction costs don't eat my lunch. Our portfolio isn't extremely old so this isn't a huge issue for us yet and I refinanced many properties recently to reduce rates significantly.
To me this is a conservative approach. Low loan constants and fixed obligations is good. Painting yourself in a corner with REQUIRED higher payments on shorter amortization periods is not a good idea IMO...especially with owner financing where the seller is generally not sophisticated enough to ask for an increased rate in trade for the longer amortization period.
I'll make a generalization here. The older one get, the less long-term debt a RE investor is interested in. In the same way, you want your investing to be more completely passive in retirement. Your returns might be less, but there is less to manage and keep you up at night.
I agree with that Jon. I am quite young relative to many investors on here.
I actually track my weighted average LTV every month and target a lower percentage over time. I still would want longer-term money though because I can always prepay the note. If I don't want to amortize debt I don't have to with a lower payment and lower loan constant.
Jaham, your 5 unit possibility is exempt from the SAFE Act, by definition it applies to one to four family properties. 5 and above is commercial.
You'll find that most idiots who are capable of doing seller financing will realize that agreeing to a longer fix rate would require a higher rate to be paid. Especially unsophisticated lenders in commercial properties.
I generally prefer to make an offer (excluding SAFE Act compliancce issues) by asking for seller financing that is acceptable to me rather than putting the terms up front with an offer price. I always sit down with a seller and discuss financing and go over each aspect and the reasons why so that there is a clear understanding between the seller (investor) and muself. I never shuffel loan terms through a Realtor!
When the SAFE Act applies, investors will need to make known the terms that are acceptable to them initially. Not doing so and simply providing an EMD, might mean losing your deposit when you turn down a loan originated for the seller with unacceptable terms to you. Just as you would clarify a conventional laon being made at or below a certain rate with the number of points.
Jimmy....If you buy subject-to and let the seller carry some paper back too the bulk of your financing will likely be driven by the underlying financing. I would shoot for at least a 7-year balloon on the money if the seller demands one. Try to get a longer amortization period if the seller is rate sensitive. Try to get lower rates if the seller is (very unlikely) amortization sensitive.
7 or more years on a seller financed note is unusual, but I have done a few at 10 and 15. But you are usually looking at 3 (should be about 42 months for refinancing depending on borrower). The best way to get a SF loan tied in longer is with repricing opportunities.
Going to an ARM with 3, 4 or 5 year lock periods. Every term the rate can adjust. Most individuals will take a point over a conservative index rate, if it's sold right. Saying one point over 1 yr T-Bill (12 months prior to the adjustment) can be attractive. A cap of 4% starting at 6% means you'll never be over 10% (where most SF notes are anyway). Suggest a start rate as a floor, in other words the rate would never go below 6%.
The age of the seller will have alot to do with how long they picture themselves carrying the note. A guy 60 is not going to be looking at 7 or 10 yr. note, but if the seller is 40ish, bill the deal as a retirement if he does not need it to live on, taking him to 6o or 65.
Doing a SF deal is not going to be about you the borrower if the seller is not offering SF in the first place, doing it will be a concession so you will have to make it attractive. Find out what suits the seller and solve his problems. Consider taxes, term, marketability of his note in the event he needs cash and assignment to his estate/trust. Compare it to his alternatives for other investments after taxes and make your deal the better option. Good night!
Most of the people I have bought from are distressed and "young" (not 60ish) and they took longer-term financing. I agree that their age matters a lot.
I wouldn't structure anything with a 3-year balloon for our personal portfolio unless the deal was just ridiculous with those terms and too hard to pass up.
Are you finding 30 year fixed on properties when ownership exceeds 4 mortgages? One thread here suggests that the lender wants commercial which becomes more variable when owner shows more than 4 mortgages.
David Beard posted a lengthy response to this in another thread. US Bank and a few others are writing those loans (5-10) right now. I am refinancing a property with one of my Fannie/Freddie bullets today and the underwriting is ridiculous. Be prepared to be very frustrated.
With some owner financed deals you eliminate this brain damage, but the tradeoff is dealing with a seller that likely doesn't understand lending well or the possibility of a note being called if you buy subject-to. I like to buy subject-to and refinance when the timing is good to do so.
Are you finding 30 year fixed on properties when ownership exceeds 4 mortgages? One thread here suggests that the lender wants commercial which becomes more variable when owner shows more than 4 mortgages.
Do you mean a 30 year fixed seller financed loan or are we changing the topic
Two questions, as I'm I've never done owner financing with a realtor involved.
1. As you mentioned realtors, did the mls offer owner financing or did you just decide to offer that way?
2. Do the realtors actually let you talk to the seller? I've wanted to do that once, but wasn't able to.
To the original poster: Who cares what is attractive to the seller in a buyers market? They should just be glad they have a live body in front of them talking about buying the property. When you are buying, using seller financing, you want to get in with the least down, longest term and lowest rate. When you are selling using seller financing you want to try to get as much down as possible and sell at a rate that is higher than market on shorter terms. Seller financing 101.