Investor Needing Advice On Seller Financing Opportunity

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Investor Needing Advice On Seller Financing Opportunity

Eugene Rogachevsky
Investor · Long Beach, CA · Member since 2016 · 75 posts · 24 votes

Hello All,

This is a question regarding seller financing. The property is located in California. 

My uncle would like to sell his property and do seller-financing. I would like to purchase this property from him. I have never purchased a property utilizing a seller-financing strategy. 

Details:

1. He owns the property free and clear

2. He wants to avoid paying capital gains

3. He would like to sell for $205k with a 5-7 year term 

4. According to him, I can "make the numbers work for me (investor)" and then we will decide whether it makes sense to move forward 

     a. This implies we can do X% down, Y% interest; as long as it makes sense from my standpoint I can pretty much dictate terms.

My questions are....

1. Given the aforementioned information, what would constitute good terms so it's a "win-win" for both of us. 

2. Do I include the Taxes and Insurance (that he's currently paying?) in the total payments and he just makes the payments for those items when they're due? 

    a. Or do I get insurance in my name? 

    b. Will the taxes be sent to me from now on? 

c. There is an HOA. Who is responsible for making those payments?

3. What is best from my perspective and why?

    a. Interest only payments?

    b. Principal only payments?

    c. Principal and Interest payments? 

4. Let's say as an example I propose $205,000 purchase with 5k down and 5% interest with a 7 year balloon. P&I is around $1075 (Taxes and Insurance = $225). At the end of 7 years I would have a Principal reduction of around 21k (as en estimate). When the balloon payment is due to him, do I only have to pay him 179k? 

(Current rent is 950--market rent is 1400; I will do a renovation (20-25k) and rent to corporate tenants (e.g. travel nurses) for 2200-2500).     

Thank you in advance. 

Eugene

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  • Matthew Enos
    Coraopolis, PA · Member since 2018 · 36 posts · 27 votes
    8y

    @Eugene Rogachevsky What do you believe the after repair value would be? If you purchase for 205 minus the 5K down and then pricnciple paydown of 21K then the balance would be 179K. When i buy a property with seller financing I protect my interest by getting title in my name. This would trigger transfer taxes and he would more than likely pro-rate the property taxes. This may mean you have to bring more than 5K to closing. Your are also doing 20K in repairs. At the end of 7 years, you would have to make the ballon which means you need to be less than 80% of ARV or bring more cash. Even with seller financing I would not pay more than ARV minus repairs

    Why do you believe you can get more rent than what fair market is? Is this continuous or does it have high rent followed by longer vacancy periods?

    0Reply
  • Eugene Rogachevsky
    OP
    Investor · Long Beach, CA · Member since 2016 · 75 posts · 24 votes
    8y
    Matthew Enos the current comps are between 208-220k. He hasn't raised rents in a few years so that's what leads me to believe I can get market rent for it. However, I want to use this property for travel nurse housing. I can get 2200-2400 per month for it because I'm getting that from another condo I own in the same city under the same business model. Vacancy period between tenants is 1-2 weeks and they typically stay 2-3 months. In your experience what option is best from investor stand point... interest only payments? Principal and interest? I don't mind coming to the table with more than 5k. I was just throwing out that hypothetical example to see if someone had any thoughts on it. He said to let him know what works from my standpoint to make the deal work and he'll roll with it. Also, when the balloon is due in 7 years, how does it work from his standpoint when it comes to capital gains taxes? Does he still pay capital gains on the full purchase price of 205k? On a different amount? Thanks
    0Reply
  • Matthew Enos
    Coraopolis, PA · Member since 2018 · 36 posts · 27 votes
    8y

    @Eugene Rogachevsky I don’t know how he would pay on teh capital gains. I’m assuming if he is cash basis then it would be as cash came to him vs accrual basis. That is an election he makes within his business. I would ensure you know your own criteria with regards to cash on cash, return on investment, and return on equity as good examples.  If you know those numbers then you don,t need to rely on others, they either pass that criteria or they don.t  

    Different areas if the country are different. For example, in Pittsburgh pa I get over 50% cash on cash return which would be unheard of in some of the higher priced markets. But I do know my criteria and then I just asssess whether I met it or not

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    8y
    Eugene Rogachevsky Are you using it as a primary residence? If so you need to double check as for primary residences balloon mortgages may not be allowed under current laws
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  • Eugene Rogachevsky
    OP
    Investor · Long Beach, CA · Member since 2016 · 75 posts · 24 votes
    8y

    @Chris Seveney it's going to be a rental property. What we settled on was 200k purchase with 5k down at 5% interest only (amortized over 30 years) with a 7 year balloon. 

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  • Travis WylieBusiness Member
    Property Manager · 17112 · Member since 2016 · 271 posts · 151 votes
    8y

    A key decision to make is whether or not title will transfer before or after the balloon payment.  As @Matthew Enos pointed out, in order to give you the best protection it is best to transfer title right away, but I have done a seller financing deal where title is still in the original owner's name until the 5 yr balloon is due/they are paid off and at that time we will transfer title.  I've paid her 1% transfer tax which is being held in escrow until she is paid off.  Since title didn't transfer that means insurance/taxes are still her responsibility.  I had her add me as an additional insurer to her insurance policy to give me some protection.  My payment to her includes 5% interest + insurance+taxes.  I manage the property and get all the rent (it's a 2 unit building with a garage that is rented), and reap all the tax benefits.  Yes, it's a little risky that title did not transfer, but being that this is your uncle hopefully he's not trying to pull anything over on you.  Sometimes it's best to keep in the original owner's name because the insurance is often cheaper if they've owned it for a while with no claims.

    Regarding paying him off when the balloon is due, I think the most common approach would be to get long term financing and pay your uncle off.  I believe the capital gain he will incur will be at the time that title is transferred at whatever that sales price is.  If title isn't transferred he will be passively taxed on the monthly payment to him.  Please check with your CPA on this.  

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