What would be good seller financing terms on this property?

Question

Whenever I see a good investment property I ask if the seller will hold the  note.. Most times the answer is no, but a recent agent just told me to propose a plan to him and he'd see if his client would have interest.

What would you propose as seller-financing terms on this property?  Sale price 360k, taxes 5k, 2 units - each rented out currently in 1 year leases for $1400.

Property is in a VERY nice area and both rents and value will consistantly go up without any issue.

I know I'd never get approved for a loan right now with my DTI, so seller financing is probably my only option.   I am specifically looking for how many years/interest rate/etc you would propose for this purchase.  Thanks!

Bill Gulley · Answer

If a note was made in 94 it's amortization could well be ongoing with around 40+K left...guessing as I can't find my calculator!

A note and deed of trust is the way to go if they have no encumbrances, but really, 5% down is very thin to suggest that. Do you have any other assets that could be pledged? Other properties with equity, securities, mom and dad'sequity, boats, cars, planes, hogs (lol) anything?

Low down payment deals are most often contract for deed transactions with an escrowed deed and non-judicial foreclosure agreements to simplify the owner taking the property easily in the event of default. I'm not sure if a CFD is good in PA. I'd also suggest the CFD rolls into a note and deed of trust later as you build equity, at least as an option.

Do you know why the seller wants to sell? Doing any deal is about solving problems, meeting expectations and making money for both really, at least to some extent.

James H. · Answer

Don't look at it in terms of what the best terms you can get the owner to agree to. Do a rent analysis and determine what would make the property profitable. Then work form there. Offer below what you want and try to get the owner to accept that or make the middle negotiation point end where your threshold number is for profitability.

I am like you in that m DTI is screwed, and mine will be for a few years. Most owner finance deals are offered by investors. Usually, the investor has it figured out that if the financing would allow the property to be profitable if the end buyer rented it, then that investor might as well rent it himself. Otherwise, as Bill Gulley said, there will be some balloon. Even with a balloon the payments almost never work out for a buy and hold investor to get financing form another independent RE investor. The only time this really happens is if the seller is distressed for some reason.

Bottom line is, owner finance is usually reserved for those with bad credit, bad DTI, or any mitigating factor that prevents bank financing. So the terms are almost never favorable to the buyer in any given market. I'm not saying its impossible - its just rare. Don't be afraid to walk away from a deal. Don't think you win JUST because you get financing. Remember that the goal is to make an investment - not to just buy something.

Kim Rock · Answer

I would not be able to put 10% down.. Most likely 5%

They appear to own it free and clear - the last mortgage was in 1994 for 68k and I don't see any refi's since then.

Bill Gulley · Answer

The seller does appear to be asking too much. Does the seller own the property "free and clear"? That will make a difference as to how you structure the deal.

Generally, if you look at what the owner is getting on an after tax basis and go about 20% below that you might talk them out of the problems of ownership. Your down payment should be factored against the cash flow as well, in other words, what kind of income does the down represent.

Your balloon payment (doubt any seller wants to carry for 20 years at a fixed rate, LOL) needs to be manageable for you, make sure of it.

Patrick Snyder · Answer

Are you planning on putting any money down?  If you put down 10%, and get an accepted offer of 360k and the owners agree to carry at 6%, your P&I payment is about $1940.  Add $400/month in taxes and 60/month in insurance, and you're at $2400/month in expenses.  This doesn't factor in vacancy, repairs, etc.  Are the utilities the responsibility of the tenants or do you pay some/all of them?  I would say that you would need to get the property for much less (under 300k perhaps) and get very favorable terms if you hope to stay positive each month.