Investor · Tampa, FL · Member since 2010 · 377 posts · 56 votes
Hey guys,
I recently met a seller who owed nothing on his property. It's a good property, under 10 years old, 3/2 with 1300 sqft, etc etc.
The house has comps from 70k (fixer) to 90k (move in condition). It can rent for $1,200 per month. My goal was to buy and hold. The condition of this house is move in ready.
I was prepared to pay 80k with 10% down and he would finance 90% @ 5% with a 10 year balloon. He was fine w/ holding the note, but wanted 100k as the price. I told him I'd meet him in the middle @ 90k and it was my final offer. He told me he wouldn't go any lower than 100k so I walked.
My question is do you usually pay more for the ease of seller financing or no? I am really just trying to see how valuable seller financing is to you guys - thanks for your input!
Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
15y
It isn't about paying more for seller financing. It is about paying more on price in order to get better terms. I certainly don't like your 10 year balloon. I would consider that if I had zero interest, which I do get.
Also, why are you paying 5%? If he got cash and put it in the bank how much would he get? If he got 1% and you paid him 2% to carry paper that is 100% more than he would get in a savings account! 5% is what banks get for loaning money. He isn't loaning you any money at all so why even pay interest?
I have and will pay interest, but I certainly negotiate for not paying until the street lights come on. If I do pay interest, I won't pay more than what banks charge. I did a deal recently and the seller took back $100K at 4% on a $110K purchase price.
If the seller is going to get full price, he should be giving you favorable terms; low monthly payments, low / zero down payment, long pay back period, etc.
The real reason I like seller financing (I prefer to call it seller terms) and don't focus on price/terms up front so much is that the deal isn't done until that note is paid back in full. I like to call in about 12 months and make the offer of some cash for a little discount. I have gotten as much as 50% off a note for making small cash offers. After they do it once, that start thinking of you as an ATM and will call and make offers to you. That is where the real deals are made!
Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
14y
Bryan-glad you made sure that you mentioned that this is your opinion. Opinions are kind of like a butt hole, everyone has at least one. You can have yours and I will have mine. Rich
PS – this subject does not need to be discussed again in this thread.It is not the title of this thread, so don't hijack it. Just direct anyone interested to your previous comments on the same subject.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
14y
I just call it like I see it Rich. Of course it is just my opinion, but I am sure it is an opinion that would be shared by most people that look at the circumstances objectively. If one of the reasons to obtain seller financing is to indemnify catastrophic risk at someone else's expense without them being compensated or aware of said risk it is unethical. Since you made reference to it above I figured it was worth noting. It is definitely germane. If the topic comes up 1000 more times and you use this line of reasoning to justify seller financing I intend to point out it is unethical 1000 more times.
Los Angeles, CA · Member since 2008 · 557 posts · 70 votes
14y
Originally posted by Bryan Hancock:
Saying a seller should only get 1-2% assumes that their only investment is in deposits at the bank. The seller could easily get more yield in literally thousands of other investment products. I don't find this argument very compelling. It may work on some unsophisticated sellers, but it is arguably taking advantage of sellers.
I'll second that. I hear this argument a lot and ignore it. It's even an argument they teach you in real estate license school; as an example of why a seller might finance (a better return than the bank or a CD).
If I am buying and holding this way and the numbers pencil out as a win (50 percent rule + desired margin) and the numbers are also a win for the seller(5% plus a 10K fee), I'd probably do it.
Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
14y
I'm not going to go down your silly path so get your normal last word in and we're done. You assuming that your opinion will be shared by the majority is also presumptious. If I took the time to point out your "opinion assumptions" every time you posted, I wouldn't have time to respond to those members actually asking for help and suggestions. Have a good day and post your last word. Rich
Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
14y
Very interested thread here.
At the end of the day, I would think you'd have to look at the cash flow numbers before you can say whether it makes sense to pay over market. But I don't think I'd ever say never to anything.
Paying over market but getting 5% interest might be the same as paying market but paying 7% on a commercial loan amortized over 20 years.
I'd want to know what the numbers would look like at the end of the 10 years. How much would you have paid off? If you can add $300 a month cash flow for the next 10 years and end up with a loan that will be 70% LTV of better, why not do it?
But if its risky, then you probably have some room to negotiate before walking away. Lessen the down payment, lower the interest rate or bump out the balloon (from 10 to 15 years).
That might make the numbers work for you then.
But to say you absolutely won't pay more for market on a house that you're not having to get bank financing on isn't something I would do. Just need to see the numbers right.
I'd be curious to know what your estimates are for cash flow on this thing.
If you're paying a 90k note at 5% amort over 30, your payments would be $483. Taxes and insurance? $300/mo? That leaves you with a little over $400 a month for cash flow and expenses. In this market, thats a fair deal. But its a very good deal given you're only having to put down 10%.
In 10 years, you'll owe 73k. So the question is how much will that house be worth? 120k? If its at 90k now in this depressed market, 120k, might be reasonable.
Thats actually a good deal to me. Although, if it were me, I'd ask to lower my down payment. Give him the over market price, but I'd want to tie up less cash on a deal that I'm overpaying for.
Investor · Tampa, FL · Member since 2010 · 377 posts · 56 votes
14y
Hi Shawn,
I walked because I didn't think it was worth paying that much higher for this particular deal. Good thing I didn't because my 90k offer back then is more like a 70/75k now.
With that being said, I did however just sign a contract for a 10 unit property that I paid just a bit higher for. The market cap for this property is about 9%. I am paying the price @ 8.5% - slightly higher. I am ok with that because the seller is ok with 15% down and 3.75% interest rate with no interest in year one. my irr comes out to over 19% in year 5 and i'm ok with that.