Seller Financing

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Seller Financing

Josh V.
Investor · San Diego, CA · Member since 2015 · 15 posts · 0 votes

Hi! 

I have a question / would like some advice on how to proceed. Specifically with first negotiations numbers on a particular property I am interested in. What I need to come up with is an initial offer that the seller would like yet makes sense with the numbers of the property. What I really don't want to do is turn him off by my offer completey, however if it if the numbers just don't make since I'm cool with that too. After reading a lot on BP it seems like it comes down to full price offer with great terms for me or I offer him something lower after inspection and we talk term rates and length.  He isn't too keen on having a lengthy term I feel the 10 year mark that he hinted at is the longest he would go. So I'm trying to walk a line with keeping the property in the black and making him happy too. A 1150 monthly payment is the cut off for me with this property. 

In my mind I'm thinking the follow. Let me know how you would proceed. 

1. Short Term, full-price, 0% apr 

2. 15-20yr, 3-5k down, low % apr

3. 30 yr, 0 down, little bit higher % 

- Duplex 150k, occupied 1500.00 a month in rents 

- Seller doesn't not have a mortgage on property

- He's tired of being a land lord. 

- Is open to seller financing after I asked. Seller said he would obviously prefer all at once but do shoot me over an offer. 

Thank you so much for your help!

Josh

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Brian Gibbons
Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
11y

You dont say this to home sellers but "in your head you say", over and over

1. I need to find a problem, with the house or with the seller.

2. I need to offer CASH PRICE or 2 TERMS OFFERS that I can live with.

3. I must look and sound like a RELUCTANT BUYER, not an EAGER BUYER.

I learned this 30 years ago, always works.

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  • Brent Paul
    Rental Property Investor · Shakopee, MN · Member since 2015 · 985 posts · 374 votes
    11y

    What are the property taxes and property insurance costs on the property?

    $1500 a month total for both sides?

    Do you have any idea what the appraised value of it as is?

    What is the condition of the property?  Well taken care of run down?

    There could be additional costs for you in the long run.

    If the roof leaks and you have to replace it next winter can you afford it? Plan for the unexpected.

    The first year I owned my first house I had to put in a furnace and ac. 6 months later the sewer backed up and flooded the basement.  I spent over 10k my first year in repairs to the property.   

    There will be things that pop up along the way to repair.

    a 10 year loan at 4% would run you about 1250 a month.  Now that's not including property taxes, property insurance, property management or  maintenance costs.

    I would try for the 15- 30 year mark that will allow you the most cash flow.

    But before making this deal I would be absolutely sure the numbers work.  You don't want to buy a deal with no or very low cash flow.

    0Reply
  • Josh V.
    OP
    Investor · San Diego, CA · Member since 2015 · 15 posts · 0 votes
    11y

    Thank you for the reply @Brent 

    • Tax and Ins (includes hail and wind) - 3000.00 annually
    • 1500.00 total (750 per unit) 
    • Recently appraised at 150k 
    • 3 year roof 
    • My offer would be contingent on inspection
    • Yes the numbers need to work. 
      • I'm going to go with a initial offer of 3.5 for 20 years    
    0Reply
  • Brent Paul
    Rental Property Investor · Shakopee, MN · Member since 2015 · 985 posts · 374 votes
    11y

    250 per month for taxes insurance

    870 per month for mortgage

    =1120 per month

    1500-1120= $380

    However that doesn't account for money that should be set aside for vacancy, repairs and if you outsource the property management there will be an additional cost.

    Run those numbers and if they look good.  If so then see what the seller says about your rate.  It may take a little negotiation on your part, but stick to your intuition, keep your cool and he might just let you have it.  

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  • Josh V.
    OP
    Investor · San Diego, CA · Member since 2015 · 15 posts · 0 votes
    11y

    Thanks Brent! I have the numbers for cap x saving and prop management. The property should still give me about 150 when sid nd done. Happy Deal Hunting my friend!

    ps

    Get a picture and set up a profile man. Its always  good to put a name with the face.

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  • Edward Prochilo
    Real Estate Investor · Fountain Inn, SC · Member since 2015 · 7 posts · 3 votes
    11y
    I know this isn't exactly the kind of answer you're looking for but, this is what I've been taught. It's more a general answer without regard for the actual numbers. Give them multiple offers that all work for you and let them choose the one they prefer. Usually three offers, one cash, 2 different terms. If none work it's either not a deal or you might be close on one and can negotiate further from there. People like choices and if they pick what they get they'll be much happier about the deal. Hope that helps a little. -Ed
    3Reply
  • Josh V.
    OP
    Investor · San Diego, CA · Member since 2015 · 15 posts · 0 votes
    11y

    Love that advice @Ed! That sounds spot on. I'll send him 3 different scenarios and let him choose what he likes. Brilliant!!!

    0Reply
  • Jesse Waters
    Investor · Aiken, SC · Member since 2014 · 398 posts · 120 votes
    11y

    To echo what @Edward Prochilo said, multiple offers are a good idea.  First, make sure that each offer satisfies your objectives & is something that you can live with.  Secondly, make sure that you are accounting for all your expenses, start with the 50% rule and go from there, I have found where I invest, we end up around 42-45% for actual expenses, so the 50% rule works for me.

    Also, consider an offer with a balloon payment.  This way you can put it on a 20 or 30 year term with the balance due in say 5 or 7 years, ie refi through a traditional lender.  By then you should have the equity needed so you don't have to bring any cash to the closing & your initial seller is cashed out quickly.

    I am in the middle of a deal on two single family properties from a retiring land lord, no mortgages, he isn't in a rush to sell and we are doing seller financing for a few years then I will move them off under a conventional mortgage.

    Hope this helps.

    1Reply
  • Doug P.
    Investor · Kitchener-Waterloo, Ontario · Member since 2008 · 1k+ posts · 1k+ votes
    11y

    @Josh V. As a rule of thumb, in my experience when a seller says: "Make me an offer." It means they are NOT motivated. In your case my rule is confirmed by the fact that you're needing to walk a fine line to try to keep this 'deal' profitable.

    When a seller has a lot of equity or owns the property free and clear, the first thing you need to do is negotiate the lowest price you can. Then you ask if they will finance it. And only if they mention interest do you then negotiate a rate.

    As it stands right now you're really negotiating with yourself with no idea what the seller really wants or needs.

    When you said that the duplex is $150k I'm guessing that means that's what it's worth? How much is the seller willing to sell it for all cash? If his number is also $150k you have an uphill battle on your hands. If you don't know, then start with that. Go back to him and say:

    "Mr. Seller, I hear you saying that you're sick and tired of dealing with tenants and just want to get rid of this property. Let me ask you, if I came in with an all cash offer, took the property as-is, paid all the closing costs, and closed on the date of your choosing, what's the least you will be willing to take for the property?"

    1Reply
  • Josh V.
    OP
    Investor · San Diego, CA · Member since 2015 · 15 posts · 0 votes
    11y

    Thanks for your input Doug! I'm currently not in a position to make an all cash offer. However if that werr the case I would totally use your advice bud!

    @jesse are balloon payments even legal still?

    0Reply
  • Jesse T.
    Herndon, VA · Member since 2014 · 1k+ posts · 324 votes
    11y

    I am a different Jesse, but to answer the question about a balloon - DF allows them if the property is not owner-occupied.  Most commercial loans are done this way.

    Do you have a down payment?  Is your financing lined-up as much as possible?  Start off with how low you can get him to go with a cash offer.  It shouldn't make a huge difference to him if you get financing that closes quickly or pay him cash.  If that month makes a difference(offer him a tiny premium for bank financing vs. cash).

    Terms should make it easier for you to make money early on, but they don't increase the value of the property.  You have to pay the same monthly(interest-only) at 5% on 200K or 10% on 100K, but the later is a much better deal(assuming it is a deal at 100K).  It is more a problem for the seller, but stay away from 0% interest - use the IRS minimum rates.  If 3% interest kills the deal, it isn't a deal.  The seller also potentially benefits from owner financing from a tax point of view - which should further lower any premium you would pay for it.

    1Reply
  • Jesse Waters
    Investor · Aiken, SC · Member since 2014 · 398 posts · 120 votes
    11y

    Yes, balloon payments are legal.  They are commonly used in commercial loans.  A loan will come due after 3 or 5 years (balloon) even though its on a 20 or 30 year schedule.  And, as I understand it, seller financing is still legal under Dodd-Frank so long as the property isn't owner occupied.  Since the property is owned free & clear, then seller financing is really nothing more than private money lending, just with out involving a separate lender.

    0Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    11y
    Originally posted by @Doug P.:

    @Josh V. As a rule of thumb, in my experience when a seller says: "Make me an offer." It means they are NOT motivated. In your case my rule is confirmed by the fact that you're needing to walk a fine line to try to keep this 'deal' profitable.

    When a seller has a lot of equity or owns the property free and clear, the first thing you need to do is negotiate the lowest price you can. Then you ask if they will finance it. And only if they mention interest do you then negotiate a rate.

    As it stands right now you're really negotiating with yourself with no idea what the seller really wants or needs.

    When you said that the duplex is $150k I'm guessing that means that's what it's worth? How much is the seller willing to sell it for all cash? If his number is also $150k you have an uphill battle on your hands. If you don't know, then start with that. Go back to him and say:

    "Mr. Seller, I hear you saying that you're sick and tired of dealing with tenants and just want to get rid of this property. Let me ask you, if I came in with an all cash offer, took the property as-is, paid all the closing costs, and closed on the date of your choosing, what's the least you will be willing to take for the property?"

     Awesome Doug.

    Here is a motivated seller list of questions

    https://www.dropbox.com/s/dpnlyz7cza8bwg3/Motivate...

    1Reply
  • Doug P.
    Investor · Kitchener-Waterloo, Ontario · Member since 2008 · 1k+ posts · 1k+ votes
    11y

    @Josh V. It's a negotiation tactic. Chances are he's not going to come back with a price that would make sense for all cash (i.e. 60-70% of FMV). If he did you could easily find a partner or wholesale the deal, don't let money or lack of it hold you back.

    Once you have his lowest cash price you can explain that it's more than you're able to pay all cash, but maybe you can work out a deal involving financing.

    0Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    11y

    You dont say this to home sellers but "in your head you say", over and over

    1. I need to find a problem, with the house or with the seller.

    2. I need to offer CASH PRICE or 2 TERMS OFFERS that I can live with.

    3. I must look and sound like a RELUCTANT BUYER, not an EAGER BUYER.

    I learned this 30 years ago, always works.

    4Reply
  • Josh V.
    OP
    Investor · San Diego, CA · Member since 2015 · 15 posts · 0 votes
    11y

    Alright guys! The offer has been sent off! 2 that makes sense numbers wise for me as well as the negotiation tactic Doug!

    Time to play ball! 

    Thank you all for you help and input! 

    0Reply
  • Andy H.
    Investor · Stockdale , TX · Member since 2015 · 89 posts · 28 votes
    11y

    @Josh V. I'm curious to know how this turned out as I may have found an opportunity where seller financing is an option, and I'm starting to research the best way to go about it. 

    0Reply
  • Josh V.
    OP
    Investor · San Diego, CA · Member since 2015 · 15 posts · 0 votes
    11y

    @Andy 

    @Andy H. the seller ended up turning down the deal....... There were no hard feelings or anything he just decided he didn't want to do the seller financing and wanted to hold out until he finds an out right buying if he can. 

    I'll be following up with him for sure! 

    0Reply
  • Andy H.
    Investor · Stockdale , TX · Member since 2015 · 89 posts · 28 votes
    11y

    Thanks for the update. Sorry to hear it didn't work out. 

    0Reply
  • Michael Volek
    Investor · Arlington, TX · Member since 2014 · 114 posts · 92 votes
    10y
    Originally posted by @Brian Gibbons:

    You dont say this to home sellers but "in your head you say", over and over

    1. I need to find a problem, with the house or with the seller.

    2. I need to offer CASH PRICE or 2 TERMS OFFERS that I can live with.

    3. I must look and sound like a RELUCTANT BUYER, not an EAGER BUYER.

     I really enjoyed that link. Great advice and I can't wait to apply it.

    1Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    10y
    Originally posted by @Michael Volek:
    Originally posted by @Brian Gibbons:

    You dont say this to home sellers but "in your head you say", over and over

    1. I need to find a problem, with the house or with the seller.

    2. I need to offer CASH PRICE or 2 TERMS OFFERS that I can live with.

    3. I must look and sound like a RELUCTANT BUYER, not an EAGER BUYER.

     I really enjoyed that link. Great advice and I can't wait to apply it.

     Hi Michael

    See https://www.biggerpockets.com/search?utf8=✓&term=B...

    More negotiating tips 

    0Reply
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