All Forum Posts by: Derek Dombeck

Good idea as long as both sides are happy with the structure. When talking to a seller about financing, you need to know your cash flow numbers ahead of time. Otherwise you won't know how much of a payment you can afford.  I typically want to make at least $200 per door so I can reverse engineer my deals based on that number. Next, don't offer the seller an interest rate or term of the payments, ASK them what they would like to have. This is because they may be thinking lower interest rates are being paid by the banks so they are in alignment with what they see advertised. I had a seller ask for 3% interest and I would have paid 6% all day long. I have him what he asked for and he was happy. Side note, after I paid him off, he became a private ate investor in our lending business because we took good care of him from the beginning.
Step 2. Always ask for an extension provision in your deal. If you agree to a 5 year balloon payment, simply say to the seller, Mr and Mrs. Seller, since we can't control the economy, in the event of a recession or slow market at the time of our balloon, would you want to take the property back if I can't sell it or refinance it? Typically, they say no. At that point I say, ok can we figure out a way to buy an extension right now so we don't have to get all stressed out in the future? How about I give you 5k towards the principal and bu p the interest rate up 1/2 a point and if I do that you give me 5 more years?
Obviously, what you offer them varies, but this works almost every time.
Happy Investing!

I live for creative deal structuring and almost never use my own money to fund deals. I've been in this business through good and bad since 2003. If you want to talk, reach out to me.

As a lender, we want security. When you pledge your personal home as collateral, your lender is going to feel like you would do anything within your power to avoid losing your home. That's great for them. BUT........ is it great for you?  Nobody ever approaches us for a loan and says
" I need a loan and I'm going to fail to pay you back," when in fact that is how we look at every loan request. What happens if you fail? Well in this case, you could lose your home. How would that affect your family? To me, it is not worth the risk. I say that after living through the real estate downturn and back then, I had leveraged our personal home and almost lost it. There are many other ways to raise capital for deals without risking your home.

Yes, the IRS has imputed interest rules. However, there are exceptions. I don't have the code section available right now, but a good CPA should be able to advise you.

When a seller takes a 0% interest installment sale, they are taking each payment as principal only which means they are paying long term capital gains tax on it. If they were collecting principal and interest, the interest portion of each payment would be paying ordinary income tax rates.
If the property happens to be the sellers residence,  they fall under IRS code section 121, which says they can sell capital gains free up to a certain dollar amount. So I will offer a higher dollar amount, sometimes 30% over retail value, for their house and they get to keep all the money in their pocket. I get a higher tax basis in the property too. In some cases I can cash flow a property for years and still sell at a capital loss in the future.

There's no such thing as an average rate of interest on a seller financing deal. I did 3 recently in my market, two of them were at 0% interest and the third was at 3% interest only. It's all in your negotiation and your deal structure. I'd suggest learning some creative deal structuring. Then the sky is the limit.

Off market FSBO leads that come to me through direct marketing efforts 

I have a different point of view. When I structure a seller financing deal, I negotiate an extension into the deal upfront whenever possible. Recently I did a deal with a seller at 127k loan on a 132k purchase. We structured a 3% interest only payment with an 8 year balloon.  If we get to the balloon, I can buy an extension with a 5k payment that goes towards the principal. I did another one at 0% interest for the entire purchase price of 70k. That house needed 15k in rehab. So I'm using my cash to improve the value of the property which makes the sellers collateral safer. I also built in an extension on that deal. I can buy a 2 year extension for 5k, again the money goes directly to principal reduction.
The point is to negotiate good terms upfront and you may never have to use a bank again. That's always my goal.

@Travis Smith-Armwood

It's going to depend on the lender.

@Travis Smith-Armwood

Correct sir.