Negotiating Seller Financing

[Michael Puckett]

I am negotiating seller financing with the seller on a duplex. I know that the seller is all about the interest and wants to retire - he wants to passively collect checks without any management. He has paid the duplex off. He has offered to sell it to me for the exact amount he bought it for $150,000. Value of the duplex is around $160,000.

Would this be a reasonable way to negotiate (or am I completely misunderstanding the concept):

Scenario 1: Seller decides not to budge on the 8% interest rate so I offer to keep the rate at 8% but to purchase the house at $125,000 in order for him to make his interest and keep my monthly payment low enough to have a high cash flow on the property. Meets his needs of collecting a big check on interest in retirement and meets my needs of cash flow. Also gives me a great deal on well kept duplex.

Scenario 2: Seller budges on the interest giving me 6% but keeps the price at $150,000. This keeps my monthly payment equivalent to scenario 1 resulting in high cash flow and keeps his property priced at fair market value.

Which scenario is better? I like scenario 1 where I use the leverage of his desire to retire and keep the interest high resulting in cash flow for me and immediate equity in the duplex. But maybe I am looking at this backwards and thinking of interest all wrong. What do you think? Do you have another negotiating tactic I should try?

By the way I have a relationship with the seller and we are friends. He is on the end of his real estate career while I am trying to get started. He genuinely wants to set me up to succeed.

[Tim Winter]

@Michael Puckett, I actually offer 3 options every time. Do the Starbucks trick where you put the option that you want him to pick in the middle, between two other options that more in favor towards you. 

For example, for the interest only option, you could also have one that does amortize, but over a shorter time period, at a lower interest rate to keep the payments about the same. 

You could also offer him a lease option, or master/sandwich lease where you'd lease it from him at a set price, and agree to meet his $150k price in the future at term (say 2- 3 years down the road) and he takes a lease payment from you. Ask him to credit you a portion of the lease payments and when he asks why tell him you're saving him all the hassles, and its your incentive to never bother him about the property (which if he's heading into retirement he doesn't even want to know he still has a property.. just wants a steady check automatically deposited to his account) 

Offer an all cash option that is not obscenely low, but if he were to go for it, that you could find a partner (someone with the extra capital) to make the deal still happen. The all cash option could be beneficial to both you and your partner as your over time net will be higher. 

It's good that you have a friendly seller, and have a relationship as that will make the deal go alot smoother over this negotiation phase. Just make sure, as friends, you are not making his end of the deal so good its at your detriment. Work out the numbers and make sure you both are getting something out of each option. 

Let me know if you need someone to bounce ideas off of. I'm always up for talking real estate and creative options.