Seller Financing Help!

[Lisa Henrich]

When someone engages in a seller financing transaction, what are the standard stipulations? Loan term? Balloon payment? Interest? What about taxes? Does the owner continue to pay property taxes? I am looking at a property that is currently owned free and clear, in a great location, and has been well-maintained. The owners are older and the property has been sitting vacant. They have used it as a rental in the past. How should I go about approaching them for seller financing? And, how can I make seller financing sound appealing to them? I have a very high personal FICO score but I'd like to obtain my next property with very little money out-of-pocket. I'm looking for a buy and hold SFR. Unfortunately, the property is currently listed on the MLS so realtor fees will be involved. Any help would be great!

Thank you,

Lisa
 

[Bill Gulley]

Having a listing agent involved, the Realtor may well discourage them, many see seller financed deals as a problem waiting to happen and they may try to "protect" their client. So, need to discuss it with the agent first, win them over. That may mean a full price offer and enough to cover costs. really your chance is much better with 10% down, most Realtors will buy that as skin in the game.

Sometimes you can back into the deal with payments at about 75% of what their rents were, rented at $600, take out taxes and insurance, say they netted $450, your payment could be $337.50.  

Older folks love interest earned, they probably know what CDs are paying, so if they sell for cash, where do they need to put that after tax money ? Say you offer 6%, they probably can't get that from any other investment. Use a 30 year amortization and solve for the present value using that payment, term and interest, you get $56, 292.17, call it $56,300.

If 56,300 is 90% of the sale price, divide 56,300 by .9 = 62,555.56, call it a sale price of $65,500.

Cash flow to you is  $112.50, less vacancy at 10%, less maintenance at 10% gives you 91.13, times 12 = 1,093.50. You put in $6,550, 10%, you're getting 17% cash on cash.

Consider your time to manage, but you have a tenant buying your house too.

Another point with older folks, they can end up in a hospital or nursing home, many end up receiving medicare/cade which the must qualify for. If the have cash in CDs from that sale, they must spend down those balances before they qualify. If the asset is a note, the only have to spend down the amount that is the fair market value of that note, that could be 40% less than the amount owing. After the MV of the note is determined, the note could be sold to heirs and pay down that lesser amount.

See when they bought the place, could well be 20 or more years ago, that means a big hit with capital gains from the sale, but not if they carry the note, the pay only on the principal of the gain as it is received, another big savings.

Balloon payments really aren't that good for a seller, but it gives them a repricing opportunity to continue a note, I shoot for 5 years, can go down to 3 years, but not sooner as you'll not be establishing enough equity to refinance from a 90% note, that is getting too close.

Get a loan servicer involved, that takes the seller's headaches away from the note holder's responsibilities, they or you or both of you can pay that expense. If the sale price is lower than the assessed tax value, apply to get them reduced with the sales data. Shop your insurance, you may save enough to take care of the servicing fees.

You need to know what the seller's position is to solve their problems.  Get with the listing agent.  Good luck :)