Seller financing: How would you pitch this?

Question

Hello BP community!

I'm in my first attempt to negotiate a seller-financing deal and trying to research if there is a benefit to the seller to receive a higher purchase price vs a higher interest payment? As an example, with 0% down on a 30-year amortization:

- $300K purchase price at 4% interest = $1432 monthly payment
- $250K purchase price at 5.5% interest = $1419 monthly payment

This example ends up with a similar monthly payment. I've done the analysis, and either option works for me as a buyer, but is there an advantage to pitching one option over the other?

I'd ask the seller to contact his accountant for specific details that pertain to his tax situation, so this is more of a general question. I'm not looking for tax advice...more like negotiating advice :)

Thanks in advance!

Wayne Brooks · Answer

@Nancy DeSocio The seller will Much more tax on interest income than on cap gains tax.

Aaron K. · Answer

@Nancy DeSocio to add to what @Wayne Brooks said the seller would pay more in tax with a higher interest rate and you would pay much less because that interest is deductible, whereas a higher purchase price is only deductible 1/27.5 in a given year.

Cordell Martin · Answer

@Nancy DeSocio Ask sellers what they plan to do with the money from selling their property. If they talk about stocks, annuities, etc it’s a good opportunity to discuss seller finance along with a visual to show some monthly payments. Referrals from professionals like title company, attorneys, etc whom you have worked with before help to alleviate feelings of ‘scammy’ some may have with seller finance.If they have a plan for the money (buy a camper, renovate part of their home, etc) it might not be feasible. Could offer enough down to cover the cost of what they want to buy, then see if they would finance the rest if a bank loan isn’t feasible for any reason.Good luck!

Joe S. · Answer

If you can meet with the seller in person and you have the ability to work out an agreement on the spot as the seller participates in the negotiation that is usually the ideal way. Of course having some sort of game plan in your mind ahead of time will definitely help. Always take a purchase and sale agreement with you and know it well enough that you can fill it out on the spot. I’m amazed at how many Potential buyers go on appointments without a purchase and sale agreement.

Joe S. · Answer

Definitely figure out a number that would work for you as far as terms. If the seller is already well versed in interested rates in owner financing then it might not be ideal for an investor to purchase as far as a rental.

Nancy DeSocio · Answer

Hi @Cordell Martin, thanks for the suggestion! Funny thing with this is that he flat out told me he wants to hold the note to defer capital gains and that the interest can somewhat offset what he would previously make on the property. He wants the passive income without the headache of owning the property, but when he started tossing out numbers, it would never work for me as a buyer. If I want to pay a retail price, put 25% down and hold a high interest rate, I can pick any property off the MLS (and do better at the bank). So I'm trying to negotiate this in a way that works for both of us, and maybe that doesn't exist...but I still want to try :) @Joe S., if we get to the point of looking at the property, I'll definitely have the contract with me and ready to go. I completely agree with you on that point!

Aaron K. · Answer

For you the interest rate being higher is going to be superior, you will always have the option to refinance, with a higher purchase price you'll always owe them that extra $50k, most seller finance deals are not held and amortized over 30 years in part because they normally have much higher interest rates than a normal mortgage.

Nancy DeSocio · Answer

Thanks for the feedback, @Aaron K. and @Wayne Brooks! I agree with your points and should have added some additional detail in that although the loan would be amortized over 30 years, we would include a balloon payment (to give me the option to refi) and a pre-payment penalty (to give the seller assurance he'd continue to accrue interest for a guaranteed period of time). If he held the note with a 7 or 10-year balloon payment, he'd more than make back the $50K in interest alone while reducing his capital gains tax. I guess I was thinking of it as a benefit to him if the interest income is taxed differently than the purchase price (capital gains), but I can reach out to an accountant for that kind of guidance.

Wayne Brooks · Answer

The owner would be foolish to take the second option, as compared to the first....you could refi soon, he’d lose $50k