New to seller financing and have some questions!

[Victoria Spagnolo]

Hi all. I'm looking into seller financing, as I'm looking to put little to no money down, and I have a few questions as I am analyzing a deal. What kind of property is best for seller financing? Is this strategy best for investment properties with tenants already living there/properties that can be rented quickly? I'm asking because I found a property where the owner is open to seller financing but the house needs lot of work. It's in a great area so after renovations that includes value adds such as adding another bathroom, I think the ARV could be around $250-$270k. He's asking for $150k, but I think he may accept a lower offer, plus interest. This is his parents' home and he wants to sell it by owner (off market). The $150k includes an adjacent lot about the same size that the house sits on - which is another reason why I'm interested in this deal.

I'd maybe propose interest-only payments in the beginning and then a balloon payment after the renovations, when I am able to refinance or sell. I would be responsible for the monthly interest-only payments but I have a partner who is wiling to put down money for the renovations costs. All in, I am estimating that renovations would cost about $60k. My partner wants a return on the money he's lending for renovations, which we can get with either a sale or refinancing, correct

Is this something I can work out with seller financing? What interest rate is fair for something like this? How would I sell this to the owner? Obviously theres the interest and the tax incentive. Is that enough to convince someone to do seller financing?

Thank you in advance! Appreciate any and all insight on seller-financing!

[Don Konipol]

The first thing that stands out to me is that you say "This is his parents' home". If this is correct you're dealing with someone who doesn't own the property, can't deliver a verified warranty deed, and may have no authority to negotiate a deal. I say this because many children of elderly parents think that their status as heirs, or potential heirs give them standing to transact on behalf of their parents; the reality is unless specific legal actions have been previously taken, they do not. Are the parents living? If not is your contact the sole heir? Is the property in probate? If the owners are alive are they incapacititaded? Does the heir have a legally binding, court recognized power of attorney? Does the POA give them the specific right to sell this property?

So, you need to establish your contacts ability / right to sell the property before engaging in any negotiations.  

Now, on to your questions concerning seller financing.  Any answers anyone give you will be dependent on (1) seller circumstances (financial, motivational, social) (2) your financial situation, goals, abilities, and (3) current economy and local market conditions.  And the answers will still reflect the bias of the responder!

Best bet is for you to obtain good basic knowledge of the intricacies of seller financing.  Start with reading a book by Wendy Patton.  Here’s one caveat on your particular deal though- seller financing at 90% coupled with 100% financing for repairs and upgrades leaves a 99.9% chance that the resultant cash flow will be negative.  Home prices (in general) are about 25 - 40% “out of balance” with rents.  So, unless the investor either works a deal with 0 % interest, or someone acquires a property TRULY 30% below market, or limits leverage to 60%, they will have to deal with a negative cash flow rental monthly.