Wholesale A Seller Finance Deal?
Houston, TX · Member since 2012 · 84 posts · 14 votes
I have some leads coming in from a mailing I sent out, and a couple of the owners are interested in seller financing. Could I put the deal under contract, and assign it to a buyer just like a regular wholesale deal?
I start with what it will rent for. Knock off all the expenses you will have while holding the property: Taxes, maintenance, vacancy, management/overhead, & insurance: 40% is adequate. A lot of posters on here say use 50% and that is really a much more realistic number especially if you hold long term. It is the big capital expenditures that don't come up every year which eat up the cash flow. Things like roofs, water heaters, A/C units gone bad, tree roots in the sewer line, etc.
Let's say this property rents for $1,000 / month. After you deduct for expenses, you are left with, let's agree on $500. That means you have a total of $500 to cover any debt service, or the amount you agree to pay the seller every month, and money for groceries if you don't have a job and want to eat.
I might make an offer with my monthly payment being somewhere around $350 per month giving me $150 profit and that would also be the return on any down payment you give.
Here is an example of an offer I made yesterday:
Woman has a $55K house. She owes $16K on a note against the house. It will rent for $800.
I offered her $45K. I would put $16K down to pay off her $16K note, and give her a note for the remainder of the equity, $29,000, payable 5% interest amortized over 180 months with monthly payments of $229.33. I also said I would give her a balloon payment of the balance, $12,152.37 in 10 years.
If I were in fact able to rent the house for $800 and my payments are $229.33, that leaves me with $570.67. Deduct out the expenses, I use 40% ($320), I am left with $250.67 / month cash flow which equates to 18.8% return on the $16K down.
Of course, these numbers are never 100% accurate. There are always surprises and I have found, more often than not, I make less than I expect from a deal.
The upside is, after doing a few of these and holding them for a few years, you get to raise rents and your monthly payments to the seller don't change. Also, you are paying down the loan every month which means you are building wealth through equity accumulation.
There are literally millions of ways to structure a seller financed deal from no payments, no interest, to interest only and balloons. It is up to you what your tolerance for risk is, what the seller needs, and what you can get the seller to accept. If you want to learn more about creative financing, I highly recommend you seek out Peter Fortunato. There is nobody on planet earth who is better at structuring creative deals and teaching you how to do them.
Short answer: Yes.
I don't wholesale seller financed deals. Why would you ever slaughter the goose that lays the golden eggs? Negotiate good terms on those seller financed deals and you won't be wholesaling very long before you have enough income coming in every month from your well purchased rental portfolio. When it comes to seller financing, I'm a buy and hold investor.
What are some ideal terms for a deal? Aaron Mazzrillo
I start with what it will rent for. Knock off all the expenses you will have while holding the property: Taxes, maintenance, vacancy, management/overhead, & insurance: 40% is adequate. A lot of posters on here say use 50% and that is really a much more realistic number especially if you hold long term. It is the big capital expenditures that don't come up every year which eat up the cash flow. Things like roofs, water heaters, A/C units gone bad, tree roots in the sewer line, etc.
Let's say this property rents for $1,000 / month. After you deduct for expenses, you are left with, let's agree on $500. That means you have a total of $500 to cover any debt service, or the amount you agree to pay the seller every month, and money for groceries if you don't have a job and want to eat.
I might make an offer with my monthly payment being somewhere around $350 per month giving me $150 profit and that would also be the return on any down payment you give.
Here is an example of an offer I made yesterday:
Woman has a $55K house. She owes $16K on a note against the house. It will rent for $800.
I offered her $45K. I would put $16K down to pay off her $16K note, and give her a note for the remainder of the equity, $29,000, payable 5% interest amortized over 180 months with monthly payments of $229.33. I also said I would give her a balloon payment of the balance, $12,152.37 in 10 years.
If I were in fact able to rent the house for $800 and my payments are $229.33, that leaves me with $570.67. Deduct out the expenses, I use 40% ($320), I am left with $250.67 / month cash flow which equates to 18.8% return on the $16K down.
Of course, these numbers are never 100% accurate. There are always surprises and I have found, more often than not, I make less than I expect from a deal.
The upside is, after doing a few of these and holding them for a few years, you get to raise rents and your monthly payments to the seller don't change. Also, you are paying down the loan every month which means you are building wealth through equity accumulation.
There are literally millions of ways to structure a seller financed deal from no payments, no interest, to interest only and balloons. It is up to you what your tolerance for risk is, what the seller needs, and what you can get the seller to accept. If you want to learn more about creative financing, I highly recommend you seek out Peter Fortunato. There is nobody on planet earth who is better at structuring creative deals and teaching you how to do them.
If you don't understand how to use a financial calculator, I recommend you seek out Gary Johnston. Google his name. He teaches a class called Financial Freedom and it is in my top 5 must attend classes for anybody who ever relies on a monetary system. You can also go to Staples and buy a HP 10BII financial calculator and get Jimmy Napier's book "Invest in Debt" and teach yourself. I started with Jimmy, then took Gary's seminar.
There are other things to consider as well;
- how long has the seller owned the house? They will have to pay all the recapture of depreciation in the year of the sale so if you don't put enough down, you may create a financial hardship for them.
- is it their primary residence? Section 1021 allows for a tax exemption on a primary residence, but within certain time limits.
- What is their tax bracket? They may not want any principal back and only want interest payments.
- What is the condition of the house? If it is a wreck, that is more money out of your pocket. You might consider a trade; fix up in lieu of down payment.
- Does it come with a tenant and what is that tenant paying? If they are not at market rent, you will need to either raise them up or structure terms based on what the seller is getting now. I have done this very successfully, then kicked all the tenants out and re-leased the bldg at market exploding the cash flow. Also, if you raise them up too much, you risk them leaving which means you now have to pay for a tenant turn over. These typically cost me a few thousand dollars for paint, carpet, etc.
- Is there an HOA? These eat into your cash flow like a fat kid into a chocolate cake.
Too many more to list, but ask lots of questions, and practice, practice, practice!
Man...thanks a lot Aaron Mazzrillo
Aaron I understand your comment about killing the goose. How would you structure a deal were the house needs to be gutted from the floor boards to the roof? 3/1 1077sqft
Arv is around $310, rents are $1700-$2000. Needs everything!
Owner is out of state and said if he ends up selling it he wants to seller finance for tax reasons.
OMG!
NO!
http://law.scu.edu/site/gary-neustadter/contracts-2012-13/main/cases/SaewitzUnilateral.html
An installment sale or note is a bilateral contract, you can NOT assign the obligation of one party to finance and place another party in place of the other party without consent. Installment contracts are initially bilateral agreements that become unilateral requiring one party to act, such as delivering the deed after payment has been made.
Does anyone really believe they could walk into a bank get a committment for a loan and then walk outside and assign that loan committment to some bum on the street???? does that even make sence?
The seller providing any kind of financing under any contract to a specific buyer has no obligation of any kind to honor that offer to any jughead you drag off the street. :)