Need Help Structuring Seller Financing Deal

[Cassidy Burns]

Hi BP,

I have an opportunity to do my first seller financed deal.  My property manager knew that I was looking to acquire more units and brought this deal to me, power of networking!  Below I have included some of the details that I have, I am going this weekend to view the properties and find out more details:

2 Different Duplexes:

*$39,000 for Duplex #1 (Assessed at $47,500)

*$20,000 for Duplex #2   (Assessed at $36,200)

Duplex #1 Rents: 

*$600 and $400

*$600 and $200

All In $1,800/month.  After running numbers i'm looking at around $780/month in positive cash flow .

The seller owns these properties free and clear and wants 5% interest and for me to pay any transfer/closing costs, i'm estimating $1,500.

My question is, how do you pay down principal on a deal like this?  Would it be worth it to do maintenance/renovations?  I typically like to add value by doing about $7,500 each building, $15,000 (dependent on viewing this weekend).  

Are you typically just doing seller financing for cash flow?  Eventually if I do renovation would I want to do bank financing?  

Thanks so much for any feedback.

[Jon Holdman]

The fact they own it free and clear is irrelevant to principal paydown.  After the sale YOU own the house, not the seller.  The paydown is computed just like on a bank loan.  If you take a loan for $100K at 5% with a 30 year fully amortized, your principal paydown is computed based on those terms.  Just as if you took that $100K loan from a bank.

How you "service the loan" is up to you and the seller.  The simplest thing is you just send a payment to the seller each month.  I did this with the first house I bought, more than a few years ago.   A bit cleaner is to use a servicing company so you have better records.  Typically with seller financing you would not use an escrow account.  Rather you just pay the taxes and insurance as those bills come in.

The loan from the seller to you is an asset in the seller-now-lender's investment portfolio.  When they die, it passes along just like any other asset.  That would be transferred based on a will, if he has one, or state law if not.  So, it would become an asset owned by one or more of his heirs.  They might notify you of a new address for the payments.   You continue to make payments as before.  The seller could also choose to sell the loan.  Banks do this all the time.  In fact, its very likely that any loan originated by a bank will be quickly sold to Fannie Mae or Freddie Mac.