0% interest on a seller financing deal

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0% interest on a seller financing deal

Addison McCarty
Lynchburg, VA · Member since 2017 · 7 posts · 0 votes

First post to BiggerPockets and my potential first deal as an investor with hopefully many more to come. I would like some advise (contract, clauses, ideas) to make this deal as good as possible for me. I will give the scenario below.

Beautiful 4br 2.5b FSBO owned free and clear (on the market over a year) for 235k (appraises for 238k conservative). Talked with the seller and he is willing to finance the deal at 0% interest with a payment that matches a 20 year schedule (about $850 a month not including taxes/insurance). However, he wants a balloon payment at the end of 7 years. He also wants 30k down (I know, so much for no money down deals...) I want to do a lease option on the house if I close the deal and it could conservatively bring $1250-$1400 a month rent no problem. I also have 3 colleges within 15 min of this house as a back up rental plan.

I don't want to put 30k down which is pretty much all I have to get started in real estate but at the same time, this deal has potential to score big time and would be willing to tie up that cash for a good enough deal. A renter paying 100% equity is hard to pass up. The seller is very motivated but because of the low holding costs, he is not going to be taken advantage of (nor am I in the business of taking advantage).

Can I get your honest opinion!!!! I am self starting my real estate business and would value some expert guidance.

-Addison-

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Russell BrazilBusiness Member
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
9y

0% interest....I'd do this deal in a heartbeat. I wouldn't be looking at a lease option on the backend, just a straight rental though. It doesn't matter if you are just breaking even because your going to build equity up very quickly on a 20 verses a 30 year note. 

Everyone telling you not to buy is only looking at the cash on cash return and that will be low to non existent on the 20 year note...but with 0% interest combined with the 20 year note your internal rate of return is going to be very nice.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    Lastly once he figures out he will have to pay imputed interest this deal could go puff... if he never talks to a tax advisor up front .. and no one lets him know..   then maybe igt comes together.

    I have sold a Lot of my OREO with zero interest to investors.. short term fully amortized.

    I set payments up so they would be zero cash flow to a little negative.. but in 3 to 4 short years they now own them free and clear... I think that's a far better strategy than playing the minimum cash flow per door game and amasing all sorts of debt.

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  • Nate T.Pro Member
    Investor · Tempe, AZ · Member since 2014 · 146 posts · 74 votes
    9y

    Lots of nay sayers on here... there are plenty of good ways to make this work.

    You could sell the house on a wrap with 30k down at a reasonable interest rate, with a 6 year balloon. Then you've got good cash flow and $0 tied up in the deal.

    Or bring in a partner to put up the 30k.

    I would also have no problem keeping it as a rental at a break even cash flow or slight negative since you're building equity so fast.

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  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y
    Originally posted by @Jay Hinrichs:

    Lastly once he figures out he will have to pay imputed interest this deal could go puff... if he never talks to a tax advisor up front .. and no one lets him know..   then maybe igt comes together.

    I have sold a Lot of my OREO with zero interest to investors.. short term fully amortized.

    I set payments up so they would be zero cash flow to a little negative.. but in 3 to 4 short years they now own them free and clear... I think that's a far better strategy than playing the minimum cash flow per door game and amasing all sorts of debt.

    How does "zero interest to investors.. short term fully amortized" get them out of having to pay imputed interest? And, how do you amortize zero interest without subtracting it ALL from the total?

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Brent Coombs  I was the seller I PAID inputed income tax... not the buyer..

    I was a lender in possession of about 200 OREO's that I owned in 08 to 2010.. slicing dicing anyway I could unload them... LOL.. and many I sold to investors for zero interest.

    My dad came up with zero interest way back in mid 80s when we had large land holdings and interest rates were 20%....

    In the land game he would sell on contract  rare was a cash purchase.. then he would take back a note and then sell the note after it was seasoned a bit.. for a given rate of return to the note buyer.

    Well this was about 15% for a note buyer.

    you take the same note pay it off in 30 months at Zero % and we would get the same amount of cash as the note seller as a 7 year note at 15%... PVM  calcs.

    So fast forward 30 some years later and I pulled that one out of the play book and it worked really well not only that I NEVER had one default they pay one year and they have too much equity to walk.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Nate T.  Exactly .........  I get it if your buying low end rentals the only reason to buy them is cash flow because usually to try to exit them you lose money.

    were as well positioned nicer property you can actually sell them for more than you paid for them.

    And you need to because when you go to retail them you will no doubt have to do a pretty extensive remodel to bring it from rental standards to retail standards.. At least in many parts of the US.

    Not so much were we live as people are just clamoring to get into anything they can get into and not many SFR are rentals like other areas of the country

    I like the 100 to 200 a door theories if your going to scale a rental business... but I Like far more Equity that is real... although not a popular thought process on BP.

    As you get the replys  you cant eat equity.... appreciation is just speculation etc etc.. well I have made millions on that speculation  LOL over the years.. that's were the big money is made .. again unless you can scale the low dollar cash flow rental game.

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  • Larry Smet
    Flipper / Rehabber / Real Estate Investor · Toronto, Ontario · Member since 2012 · 392 posts · 77 votes
    9y

    @Addison McCarty

    You may consider getting an appraisal (or BPO) done so you're on the same page re value - as was stated before, if it's been on the market for a year at $235k then it's not worth that, no matter how pristine it is.  If you're able to build equity over 7 years it seems to me that a likely way to reclaim your downpayment (if you haven't sold it rent-to-own) is to do a conventional refi on it.  For this deal you definitely want to download as much of the maintenance as you possibly can onto the tenant-buyers.

    Good luck

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