Buying on seller financing for my rehab
Investor · Spokane, WA · Member since 2013 · 19 posts · 1 vote
I recently was working with a seller and gave her 2 offers. One all cash for $100,000, and another offer for $110,000 but she would carry a note, and get paid when the project was finished. She didn't seem interested at all, and said just send me something in writing that explains this. I never bothered cause I could tell she was going to waste my time. However, she called me after about a month and was wondering why I never sent her anything.
So my question is, whats the best way to structure a deal where she gets paid 110k for the house, but on the back end, after I fix it up and sell it to a retail buyer.
Secondly, how best can I describe those terms to her so she can understand it. The answer to the first question may sum up the second question, but I had to ask.
Thanks in advance. I know there are some creative studs and studets who have put these deals together. Would love for you to share
Lots of ways to structure this, and things do vary state to state. First off, you need to see what her needs are for the next six months and what her expectations are. There is a negotiation to be made. First off, she may need a little cash, but can wait on the rest, etc. She may want payments, may not. If she has an immediate need for $10k, but not the $100k, then you need to know that to structure your offer.
Saying that, my first offer would be something like $110k paid when I sell it, I use my money and time to fix it up, market it, etc. It'd be a sale with an owner carried mortgage at $110k, no payments, no interest for 6 months, after that interest only at 6% (saying it rarely goes that long, but you want coverage if it does, but she gets some assurance that I'm trying hard to sell it ASAP, which is exactly the case). Worth a try, but interest only at 6-8% with a 12 month balloon is still a win.
Your description on how it'd go down is pretty accurate. You need to account for insurance and closing costs and such and just cover all bases, but that's pretty much how it goes. You close it, she gets a security deed, you get a house with an owner financed mortgage. When you sell it, its paid off at closing just like a bank would be.
If she says no to any of that, just ask her what her concerns are, there are usually ways to satisfy them. Just an aside, I'd never spend rehab type money on a house I didnt own, so I dont know that optioning it is a good option as mentioned previously. Certainly can structure it that way, but you are over exposed in my book.
As far as presenting to her, you need to keep it as simple as possible and try to anticipate and satisfy her objections. They will be risk of loss, time until being paid, your ability to perform, what happens if you screw up the repairs, etc. I had to buy a life insurance policy once to get a private lender over the hump, but they rarely think that far ahead.
Also, you can send her something in writing, but you really need to hammer the details out in person. The "I'll send you something" is a cop out because you weren't in familiar territory. OK to do as you learn of course, but just know they'll almost never bite on anything creative if you send it in writing without any follow up and the more time they have to ask their best friend, brother in law, or dog, the less chance you have of getting your terms.
Joe Gore
Hey Joe,
Thanks for the comment. Because I dont understand exactly how it works (thats what attorneys and title companies are for, and I havent done this yet) I am hoping someone can explain it to me as if I was her.
As I understand it...
We go to closing, everything is done by a third party closing agent, title is transfered into my name, and seller is given a deed in first position for 110,000. We fix up the property, put it on the market, and sell it. At closing, the title company look at title and see if there is any payoffs that need to be done. At that point, they will see a payoff for 110,000. Our retail buyer will wire in the funds, and you will be paid off your 110k and my company will collect the difference.
Hows that sound? Theres probably a better way to explain it
I second @Account Closed s post, @Danny O'Bannon c'mon man!
I would JV with her, do the work, secure the debt of rehab w a mechanic's lien, have an option to buy x% of equity for $10 plus services rendered as consideration, record the option, sell the house, make a profit, win win.
@Jackie Lange might want to say something here about the option.
RIP JMiller
I kno I kno, I should have sent it, but its not over yet. Your feedback is appreciated.
Lots of ways to structure this, and things do vary state to state. First off, you need to see what her needs are for the next six months and what her expectations are. There is a negotiation to be made. First off, she may need a little cash, but can wait on the rest, etc. She may want payments, may not. If she has an immediate need for $10k, but not the $100k, then you need to know that to structure your offer.
Saying that, my first offer would be something like $110k paid when I sell it, I use my money and time to fix it up, market it, etc. It'd be a sale with an owner carried mortgage at $110k, no payments, no interest for 6 months, after that interest only at 6% (saying it rarely goes that long, but you want coverage if it does, but she gets some assurance that I'm trying hard to sell it ASAP, which is exactly the case). Worth a try, but interest only at 6-8% with a 12 month balloon is still a win.
Your description on how it'd go down is pretty accurate. You need to account for insurance and closing costs and such and just cover all bases, but that's pretty much how it goes. You close it, she gets a security deed, you get a house with an owner financed mortgage. When you sell it, its paid off at closing just like a bank would be.
If she says no to any of that, just ask her what her concerns are, there are usually ways to satisfy them. Just an aside, I'd never spend rehab type money on a house I didnt own, so I dont know that optioning it is a good option as mentioned previously. Certainly can structure it that way, but you are over exposed in my book.
As far as presenting to her, you need to keep it as simple as possible and try to anticipate and satisfy her objections. They will be risk of loss, time until being paid, your ability to perform, what happens if you screw up the repairs, etc. I had to buy a life insurance policy once to get a private lender over the hump, but they rarely think that far ahead.
Also, you can send her something in writing, but you really need to hammer the details out in person. The "I'll send you something" is a cop out because you weren't in familiar territory. OK to do as you learn of course, but just know they'll almost never bite on anything creative if you send it in writing without any follow up and the more time they have to ask their best friend, brother in law, or dog, the less chance you have of getting your terms.
I almost always use a multiple offer strategy when presenting offers. If the seller can't make a decision right away, I send the offers in writing explaining the details of each offer and the BENEFITS to the seller.
For your $110,000 offer, just explain that it would be a note with a SINGLE payment due within 6 months (after the house is fixed up and sold).
Keep in mind that Dodd-Frank will make it much harder to get buyers qualified after January 10th because of the 43% debt to income ratio and many other new qualifications. It may take longer to find a qualified buyer.
If you might need more time, it is better/easier to pay a flat fee for a 3 or 6 month extension than to start paying interest. $1000 would probably buy you extra time. A flat fee is something a civilian seller will understand. If you make it too complicated, they will just say no.
Good luck with the opportunity. Let us know what happens.