Best practices in structuring seller financing
I wanted to reach out to the BP community and lean on you for advice and to learn. I have a client (I'm a licensed RE agent) who's home I am selling. I was just approached from a neighbor who is interested purchasing with seller financing. I always want to provide my clients with detailed explanations of options when buying or selling so they (with my guidance) can make informed decisions that will be the best option for the results they are seeking.
I have never done a RE transaction with seller financing. I understand the general concept but I am not comfortable enough yet with the details to accurately explain the positives and potential negatives to my client. I've researched the topic on BP, but I am not finding the best explanation based on my clients situation. I would love you input!
Let me explain the situation with regards to the property. My client inherited this property from her mother when she passed away a few years ago. It is a single family home on a property that is zoned commercial. The official zoning is C-RS (commercial rural service) but as the home was built is 1919 so it is existing, non-conforming and can be used as a SFH or commercial business. It is surrounded by a cabinet shop on the left side, a couple commercial buildings in the back alley that are used primarily as storage for various businesses and a bar on the right side. It is in a very small town (about a block long) and sits directly on a major thoroughfare through the area. There have been tenants that were finally evicted a month ago. My client has cleaned up all the trash/crap the tenants left and is planning to clean inside and paint a little to make it more presentable. It most likely needs a some rehab work for someone to make it a good SFH again. There are years of deferred maintenance.
My client is tired of owning it and simply wants to sell it. She is comfortable with my valuation. Knowing this will be a tough property to sell and possibly tough for someone to get a loan on, I was very conservative. There is no mortgage on the property. She owns it outright. There was an appraisal done in 2015 for $140K. I have conservatively valued and suggested a sale price of $160K-$165K based on increased values the past 3 years coupled with the challenging location and current condition.
One of the neighboring businesses is interested and threw out the possibility of seller financing. I had shared the value range with them. They proposed the following with seller financing:
- Purchase price of $165K
- $25K down payment
- Loan at 7%, amortized over 30 years
- Monthly payment of $875 (actual payment amortized with these #'s would be around $935)
- Balloon payment for balance in 5-7 years.
My question to the BP community is what do you think of these numbers? Or, how would you structure differently and WHY? Based on my limited experience of this I was thinking the down payment was a little low and the interest rate was a little low. Again, I want to walk my client through how this would work so she can be fully informed.
Thanks in advance for your input!