FSBO, Seller Finance, 0% down, 0% interest, what could go wrong!?

Question

Investment Info:

Single-family residence buy & hold investment.

Purchase price: $150,000

Cash invested: $900

FSBO, Seller-financed, 0% down, 0% interest BRRRR-to-be. Tenants will be out soon to begin the remodel. This will be my first remodel from a distance (previously I've done all my own work). Remodel budget is $40k baseline with up to $60k for contingency expenses.

Hoping to market to University of Arkansas students and hoping to rent for $1800+

Joe Splitrock · Answer

@Jehon Bendokas the only problem I see is the IRS doesn't allow 0% interest. The seller will be stuck paying taxes on interest income due to imputed interest rules. They are kind of screwed when the IRS catches them. If you care about these people, have them talk to a tax professional before they file taxes and straighten this out.

Looks like a great deal though!

Jehon Bendokas · Answer

@Matthew Reid , @Jonathan Hernandez - no balloon payment. I know the people who own it very well, they know I'm an investor and I know what they paid for it. The home was originally purchased 7-8 years ago for them to rent a place to their son. They purchased the home for $78K cash. Although the home is mostly updated it is what I would call a "handyman special". The materials are all lower-end consumer-grade, e.g. cheap laminate, painted panelling, etc. Their son believed that it would sell for $180K through a realtor friend of his and I broke down the costs to them. They were planning on paying their son a large lump sum of money (from the profit of the home). After I explained that after a 6% commission, cap gains on the "investment property, income tax (to be reported by the son) that it would be more economical for them to sell it to me for $150K with no realtor. They agreed. I was willing to seek conventional financing, however I asked the question, "would you be willing to finance it for me, aka act as the bank," since they owned the home free and clear, they were willing. I told them I would appreciate if they provided me a lower interest rate and they scoffed and said "we aren't going to charge you interest."

Realistically, this is a $130K home needing help to make it rent-ready. I didn't want to low-ball, I didn't want to make them feel like I was ripping them off. Because at the end of the day - they could have sold an overpriced fixer-upper to some out of town investor who can afford smaller margins in exchange for long-term appreciation. That isn't me, yet!

The agreement is $1000/mo until the loan is paid in full - I gave them verbal assurance that I would not take 150 months to repay them, that I would be refinancing it within the first 2 years, hopefully.

I know I had a pre-existing relationship with these folks, however, the important underlying lesson is that forming and maintaining trustworthy relationships is extremely important. I find a way to talk about real estate investing with almost every person I interact with. I want to plant that seed in their mind for when they have a property to get rid of, they can seek my guidance or assistance - whether I buy it or not.

Matthew Reid · Answer

Is there a Balloon payment?  How soon you gotta pay that thang back?  That sounds like a pretty nice deal to me!!! How did you go about negotiating this?  Tell me your secrets!!!!  HAHA!!!!

Sean McDonnell · Answer

Congrats on your deal! How are you paying for the rehab? What is the ARV? Are you going to refinance into long term debt and pay the seller off? Sorry I have so many questions haha

Michael Ward · Answer

Seems like you got a great deal!

Jehon Bendokas · Answer

@Joe Splitrock thanks for this - I’ll look into it!

Jehon Bendokas · Answer

@Shanna Vataj what do you mean by consideration?

Shanna Vataj · Answer

There has to be some consideration for the contract - even $1.

Why are they giving the cow away for free?

Jehon Bendokas · Answer

@Michael Ward I will be looking for property management

Dmitriy Fomichenko · Answer

Congrats @Jehon Bendokas !

FSBO, Seller Finance, 0% down, 0% interest, what could go wrong!?

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