Potential Seller Financing Deal in Austin, TX

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Potential Seller Financing Deal in Austin, TX

Elliott Sanchez
Professional · Austin, TX · Member since 2015 · 11 posts · 2 votes

Hey BP Fam-

I have a potential seller financing deal on a fourplex in Austin and I need some advice. I'm an agent and I represented the buyer on the purchase of this property a few years ago. The property is 100% occupied and it has been since my client purchased it. In addition to being in an area with high occupancy (like most of Austin), it is also in an area that has seen good appreciation, about 3-4%. My client owns the property free and clear he generates a 9% return on his investment. The trouble is he has had a terrible time with property management companies so he wants out. I approached him about purchasing it with seller financing, explained seller financing, and it has peaked his interest. Since I have never put together a seller financing deal I have several questions about how to structure the deal. Conceptually I understand seller financing but I don't have the experience, yet, to structure a deal. Here are a few of my questions-

1. He is asking for a interest rate of 9% and I know this is high. I understand it is all negotiable, but is there an average? Or, are all deals structured differently? Is it possible to pay more for the property for no interest on the loan? 

2. Is there an average loan term? I was thinking 5 years but I think the seller may prefer a shorter term. What risks are associate with a shorter term loan?

3. Is 5% too low of a down-payment?

4. Market value is $260K. If I paid over market value, let's say $280K, with a 3-5 year term, and 0% interest rate; would this be a good deal? Or if a 0% interest rate is out of the question. How about an offer of $280K, 5 year term, with a 5% interest rate? Would this be a good deal?

5. Am I missing anything?

I guess I should mention that I would be cash flowing approximately $500 a month in cash flow (net-net).

Thank you in advance for reading this long post, and for any advice that will follow.

Cheers!

E

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Stephen Chittenden
Rental Property Investor · Gambrills, MD · Member since 2014 · 372 posts · 88 votes
10y
Not in TX, but last year we bought a triplex for about 13% down, 5.5% interest, one year balloon, 20-year amortization. In the process of refinancing with the seller to a 15-year, 25-year amortization loan at 6.25%. At refinance, we're going to make an additional principal payment of about 3% to provide him a small lump sum payment that he wants this year and reduce our principal balance (and monthly payment). The principal pay down is less than we would pay in fees to refinance with a bank. I think those terms are pretty favorable, but it can give you an idea of what can be done if you can find out why the seller needs.
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  • Andre Key
    Investor · Austin, TX · Member since 2011 · 155 posts · 23 votes
    10y

    Elliott,

    Unless this guy is very generous I dont think the 0 interest is going to work but hey why not ask. Also it will be difficult to know your cash flow from it without knowing the interest rate. In Austin most sellers want 15-20% down, and it's best to give your self as long a term as you can especially if it's free and clear. 

    I would set my criteria, if you want to net 500.00 then calculate what interest rate vs rent and debt service will make it all work. Its really all about the sellers motivation and goals over what he will take. 

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  • Chance Housos
    Investor · Sachse, TX · Member since 2015 · 223 posts · 66 votes
    10y

    You may try structing the deal with x amount of interest for a few years then the rate goes to y. There are many options with seller finance. Does he own it free and clear?

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  • Tom S.
    Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
    10y

    @Elliott Sanchez

    I dont' see how the property would cash flow with the numbers you posted.  If you pay $280k, 10% down, 5% interest rate, for a 5 year term, I get monthly mortgage payments of $4,755.  Can you post the rent roll and other expense?

    Or do you mean 30 year amortization, and a balloon payment in 5 years?  If that's the case, definitely don't pay more than market value as you might have to bring money to the table in order to refinance it in 5 years.

    - Tom

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  • Lawrence Robinson
    Flipper · Columbia, SC · Member since 2015 · 66 posts · 29 votes
    10y

    Not that your seller is a slum lord, but have you considered that there may be rehab requirements which could very well be the source of contention between the seller and his  tenants? Also, any purchase close to retail leaves a very small margin of error for unknowns. Finally, I would get it inspected before even considering any offer at all. The basis for your offer should obviously take into consideration occupancy as well as any necessary rehab work and, of course, management fees. Good luck!

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  • Nick L.
    Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes
    10y

    First question - where in Austin are you getting a quad for under $300k? If it's a badly maintained property with crappy tenants and a lot of deferred maintenance, you have to figure that into your calculations.

    Second question - what are the rents and expenses? What level of monthly payment can the NOI support?

    I would take the deal if all of the following are true:

    1. You cannot get conventional lending or use a partial seller second with primary conventional

    2. The property can definitely cashflow even with the 9% interest - even neutral is ok as long as you are sure it can do it

    3. You have a definite exit strategy, for example you are sure you will have 25% equity for a conventional refi in 3-5 years

    4. You have cash on hand to perform any repairs that are needed before the property generates any real cash flow. Including fixing deferred maintenance issues.

    If any of the above are not true, you're setting yourself up for a very risky situation.

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  • Stephen Chittenden
    Rental Property Investor · Gambrills, MD · Member since 2014 · 372 posts · 88 votes
    10y
    Not in TX, but last year we bought a triplex for about 13% down, 5.5% interest, one year balloon, 20-year amortization. In the process of refinancing with the seller to a 15-year, 25-year amortization loan at 6.25%. At refinance, we're going to make an additional principal payment of about 3% to provide him a small lump sum payment that he wants this year and reduce our principal balance (and monthly payment). The principal pay down is less than we would pay in fees to refinance with a bank. I think those terms are pretty favorable, but it can give you an idea of what can be done if you can find out why the seller needs.
    1Reply
  • Elliott Sanchez
    OP
    Professional · Austin, TX · Member since 2015 · 11 posts · 2 votes
    10y

    Thank you for your time, I read every reply and I learned quite a bit about seller financing from the responses. There was a ton of great information. I am able to qualify for a conventional loan so I think it's best that I explore that option first.

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  • Jerry PadillaBusiness Member
    Lender · Rochester, NY · Member since 2014 · 3k+ posts · 1k+ votes
    10y

    @Elliott Sanchez 

    I definately agree that the best route to go is conventional financing. Interest rates are great right now. You would be required to put down 25% and you could ask the seller to pay up to 2% of the closing costs. You can have up to ten mortgaged properties with conventional. Private, hard money and seller financed properties still count towards mortgaged properties. 

    [email protected]585-204-6923
    PrimeLending 4.8583 Reviews
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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    10y

    9% is way more than I pay for my seller-financed properties.  I usually get them down to 6% with long terms (15-20yrs) after building rapport and sharing references.  The most I've paid is 6.5% with 20% down for a 20-yr.  

    The IRS doesn't allow 0% interest.  There will be 'implied' interest anyway.  To offer 0 to someone seeking 9 is silly.  Know your seller.

    For the record, my seller carry's don't show up on my credit report anywhere.  I would go conventional long before I paid 9%, though.  Sounds like a good find either way @Elliott Sanchez!

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