Investor · San Francisco, CA · Member since 2013 · 147 posts · 97 votes
For all the Owner Financing experts out there. I need your assistance doing a seller financing deal as the owner/seller.
I own a free and clear property and I had someone contact me and offered to purchase my property at retail price with me carry back a loan.
Her offer: Retail Price with 20% down (I asked for 30% down)
5-year-loan amortized over 30 year with balloon payment at the end of the fifth year. ( I asked for 3-year loan). She will get the deed, I will get a deed of trust with promissory note.
Interest rate 5-7%. What do you think is fair interest rate for this type of a transaction as the owner/lender. Should I ask for higher interest payment or points? I'm prepared to offer her lower interest rate if she willing to put bigger down payment.
The reason for me to consider such a transaction is the following:
- I invested about 47k into this deal and the buyer offer 66k which is at or slightly above retail price. So at the end of the 3-year I make a profit
- I get nice cash flow without dealing with tenants issues, don't worry about repairs or vacancy
- use the down payment money to invest in another property
- experience structuring such a creative deal
Do you have any tips for me as the owner? did I miss anything? would you do it if you were me?
The house was listed on FSBO sites as well as on Zillow, Postlets and the like so she offered me full asking price and now I'm trying to get the best deal I can get as far as the terms go. Obviously, I want to get a higher down payment and higher interest rate with short balloon payment. Even though every deal is different and one can structure this in many ways, I want to get an idea of what are the "standard" terms for owner financing deal.
Over 1,500 of them I'd say what usually is there is 10% interest, 3 year balloon, but 5 is very close too, no pre payment penalty, 30 year on short balloons, 20 and 15 year amortizations on longer balloons, basically allowing equity to be established. Now, those are common terms, but things have changed, owner occupied if your note falls under the new laws, won't have a balloon in 3 years, 5 at minimum if it's a high rate (not interest rate) mortgage, you really won't be setting terms as she will need to qualify, the mortgage originator will do that for you and you decide if it's good for you. :)
Investor · San Francisco, CA · Member since 2013 · 147 posts · 97 votes
12y
The house was listed on FSBO sites as well as on Zillow, Postlets and the like so she offered me full asking price and now I'm trying to get the best deal I can get as far as the terms go. Obviously, I want to get a higher down payment and higher interest rate with short balloon payment. Even though every deal is different and one can structure this in many ways, I want to get an idea of what are the "standard" terms for owner financing deal.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Brian, that's a new name to me.
You mentioned retail price, will she be living there, if so, check out the Dodd Frank legal issues. There's a recent thread titled Dodd-Frank, you can ignore that one, there are about 6 people on here who know what's going on, so dig a bit......better yet, get to a mortgage broker.
Your first SF deal isn't really a DIY thing anymore, get with your attorney. RE is local, see your attorney. :)
Investor · Sugar Land, TX · Member since 2014 · 223 posts · 62 votes
12y
Haim,
You may want to review the Dodd Frank rules. Buyers must be qualified more rigorously, and balloons are not allowed. After 5 years, you can have provisions to increase the interest rate providing incentive for the buyer to refinance. There are of course more rules that need to be followed in this situation.
The house was listed on FSBO sites as well as on Zillow, Postlets and the like so she offered me full asking price and now I'm trying to get the best deal I can get as far as the terms go. Obviously, I want to get a higher down payment and higher interest rate with short balloon payment. Even though every deal is different and one can structure this in many ways, I want to get an idea of what are the "standard" terms for owner financing deal.
Over 1,500 of them I'd say what usually is there is 10% interest, 3 year balloon, but 5 is very close too, no pre payment penalty, 30 year on short balloons, 20 and 15 year amortizations on longer balloons, basically allowing equity to be established. Now, those are common terms, but things have changed, owner occupied if your note falls under the new laws, won't have a balloon in 3 years, 5 at minimum if it's a high rate (not interest rate) mortgage, you really won't be setting terms as she will need to qualify, the mortgage originator will do that for you and you decide if it's good for you. :)
Investor · San Francisco, CA · Member since 2013 · 147 posts · 97 votes
12y
@Bill Gulley. The buyers will keep the property as a rental property so it's not an owner occupied situation here. Should I still be concerned with the Dodd Frank Rules? I don't want a mortgage originator to qualify them for me.
The buyers are experienced investors and the reason they want to do seller finance deal is because they max out the number of Fannie Mae loans they can qualify for. They have a good credit and good income and I will definitely screen them if we can agree on the terms.
Seems that I can ask for a higher interest rate in 8-10% range.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Forget Dodd-Frank, but not entirely.
Haim, you're asking two different things, what the common interest rate is for all the notes that are out there, made in the past, sorry I took it that way, you're asking what is going on today with sellers. Many it appears are being made below 5%, rates have dipped as you know. Your 5-7 is reasonable and as you said fair.
I don't recall seeing anyone ever asking for 35% down, I'd say you're pushing to hard on the down but you might get it, you can always ask.
Trying to save a dollar doing this yourself will be a mistake IMO. You need to do what is common in your area, that means an attorney.
Underwriting is not about qualification in a deal like this as it is to identify risks, a seller financed not should never be done without underwriting the transaction. Interest is set to reflect risk, it's not pulled out of thin air so much but you certainly negotiate the expected income. You need to be aware of the issues.
This is pretty much a plain Jane SF deal, not really creative stuff going on here. I really suggest you 1. slow down and 2. read seller financing topics here. Lots of information. Read issues with notes as well.
If someone just blurts out note terms for your deal, they don't know what they are talking about. Shaun made a good point, about your borrower.
You're saying this buyer is an investor, that means they have experience. I've made many deals basically on buyer's terms if they were acceptable, then pushed on minor issues like 3 or 5 year balloon or 7 years, then on interest that was acceptable for the risk and ROI.
Just because the buyer has 10 loans doesn't mean they can't put 25% down and go commercial at the bank at 5.5%
You should also look to foreclosure laws in your state, with a note and deed of trust there is no rinse and repeat, take it back, sell it and keep it all, you become a lender, there are legal issues there that are discussed on BP.
While some of us do understand what's going on with Dodd-Frank, and it doesn't apply to commercial loans, there is a flavor that has been set in dealing with residential properties, some won't agree I'm sure, but any deal between two small investors are not going to be viewed as sophisticated high capital commercial transactions, it's going to have an individual flavor to it even if it is in a business entity name. I'm not saying the DF Act will be applied, I'm saying the degree of fairness may be looked at in many ways as if it did simply because it is between unsophisticated parties. The haphazard ways of years ago may not fly if things go south. An attorney can tell you how your deal will be seen in local courts, no one here can. So, again, underwriting should be done.
No where near enough information to say how you should structure your deal, the buyer will certainly know what they will do, push too hard on down payments and high rates and they may walk away. I'd say look at what they offer first, see an attorney or even a mortgage broker, may not cost anything for an opinion. Then negotiate the deal. :)
@Bill Gulley - she is somebody you would refer to as a "note guru".
As said in Red October........Another one?
Name your poison!
If you want a marketable note, any mortgage broker will probably tell you what it should look like for nothing.
It's a long thread, "What do you want Mr. Note buyer" search for it. It's about a condo, but there are areas discussed that are very relevant, the SAFE Act was a big deal at the time, some changes there you can catch up with but the basics are still there. :)
Investor · San Francisco, CA · Member since 2013 · 147 posts · 97 votes
12y
@Bill Gulley. Here are the two options that the buyer offered to me:
Recent Comparable sales in the same neighborhood in the 65-75k range.
Both plans will be for 42 months (3.5 years)
Plan A:
Asking Price: $65900 25% Down Payment: $16475
You Hold A Mortgage Note at 5.9% for $49425
Our Monthly Payment to You: $265.32
Interest You Receive: $10210.88
Total Amount in Your Pocket from Sale: $76110.88
Plan B:
Asking Price: $65900 30% Down Payment: $20000
You Hold A Mortgage Note at 5.0% for $45900
Our Monthly Payment to You: $246.40
Interest You Receive: $8003.92
Total Amount in Your Pocket from Sale: $73903.92
Buyer going to keep the property as a rental and has good credit.
Do you think it will be attractive to sell the note?
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Haim, if you need to be cashed out you're going to lose money discounting the note on this. Financing does not add value to the real estate. You can't really make up for a discount by jacking the price up. Not only that but jacking up a price 10% has other issues especially with a balloon note, that keeps equity from being established that leads to a default, usually done in hopes of taking the property back, rinse and repeat types. The issue is that your buyer can't conventionally finance at 75% LTV, what makes you think they can later on? Next, any note buyer will be comping out your sale, as you mentioned, 66K is on the high side of retail, going higher will simply be discounted off the top for the market value of the collateral. It will still be about 75% LTV based on the comped value/ price, which is okay. There is a long list of issues in selling a property at significantly higher prices for offering financing especially if the financing isn't fully amortized or carried long term. As tempting as it may be thinking of profit, it doesn't really matter if the deal is commercial or commercial if you're screwing someone, setting them up to fail.
But, I think the buyer is more astute than that, they gave two options, it may very well be pick one, or be very close to one or they may/can walk. They might give you another chance and resubmit that same offer or slightly better. If they have 10 other properties they aren't newbies. They probably offered what they are really willing to do. If it works, basically, tweek it a bit and take the bird in hand which is often the best sale, one that closes now.
You might sell only a number of payments, not the whole note, that will be less of a hit on the discount. You might talk to your bank, they may loan you money using the note as collateral. A loan will usually be better for you than a note sale.
But it also sounds like you really need the cash out, if that is the case and you can't carry the note, hit them with a cash price as a counter offer. You can see what they are willing to pay. That means you can compare say a hard money lender's deal at 75/70% and discount the difference in the rate. That will be less of a discount than what you'd eat trying to sell the note.
As I mentioned, it needs to be underwritten. They may tell you they are just loaned up, I don't think so as they could get a 70% commercial loan if everything else was good. So, I'm inclined to think there are other issues, qualifying income or credit or both. To do a clean deal, you need to know what the issues are and how they can be addressed over the term.
A note buyer will be doing the same thing, a new note that isn't documented? The worst will be assumed and the discount will be greater.
Taxes, will you have a gain on the sale? You'll have interest income, even so I don't mind paying taxes as it means you're making money, just select the best option in having to pay the liability, seller financed gains are deferred as received. Interest received is interest income.
Then there are collateral and foreclosure matters you need to look at.
That's another, jack up the price issue, if the property comes back to you, as a deed-in-lieu-of-foreclosure, you'll be paying taxes on an artificial price, blue sky, and any sale later may not cover that, so it's a loss. You won't be getting a deficiency judgment from a note funded by equity either as seller financed notes are installment sales, the transfer of title is irrelevant as to installments paid on equity. A note buyer will have a cash basis in equity funded notes, that's different. Another aspect a note buyer will consider.
All that being another reason to underwrite the deal.
Just sounds like, might be wrong, that for cash, discounting the price for a cash/loan sale might be the best option, otherwise, I'd take option A! :)
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y
There's other details we don't have. What's the source of your all-in $47K and is it costing you anything? Do you need to be cashed out asap? Your deal doesn't have a good enough loan to value ratio for a typical note buyer discount and for you to come out ahead.
I'd not be too concerned about your buyers walking away from an aggressive counter. If they think they have a live one that will carry paper they'll stay in negotiations. Many investor buyers (especially new ones) put a premium on seller financing.
Investor · San Francisco, CA · Member since 2013 · 147 posts · 97 votes
12y
@K. Marie Poe. 47K is what I have invested to acquire the property and renovate it. It's currently rented at $895 and generate a nice cash flow. I do not need to cash out ASAP and I am definitely not motivated to sell unless it is a good deal with favorable terms for me. I countered them with an aggressive offer and I'm not too worry if the buyer will walk away.
Orlando, FL · Member since 2013 · 165 posts · 62 votes
12y
You don't need any advice. Do the deal . Have YOUR attorney do the paperwork. .
http://www.biggerpockets.com/blogs/3840/blog_posts/27179-seven-reasons-a-seller-should-hold-a-mortgage Here is a short article about this. You are on the right trail. I personally don't like balloons. If you owe me money at 6%, I am in no hurry to get paid. Maybe I will change my mind in the near future.