Seller Financing - How to structure deal?

Question

I have been looking into seller financing recently and came across a few opportunities where the seller is open to it - one of them in particular is an investor himself (old guy getting out of the business) and is open to seller financing.

What have your seller financing deals looked like in the past?

This guy in particular is essentially asking for a deal that is basically a hard money loan - he'll loan up to 50k and wants 10% a year. For one this just seems like a bad deal unless the cash flow is high enough to cover both that interest payment, PITI and all budgeted expenses (PM, lawn care, CapEx, Repairs/Maintenence). You'd have to have an amazing deal to make something like this pencil out. This is the thing - he says he'll give a better price IF we use seller financing (I can see why lol). I have cash on hand but would prefer to try a new strategy and maintain high liquidity myself.

I hear about seller financing a lot but I'm having trouble coming across specific instances where it was used and what the expectation would be or the specifics of the deal would look like?

Any advice would be awesome!

Charles Carillo · Answer

@Jeremy H.

Typically, with seller financing, the seller has one number that they are intent on getting. They are looking for a high purchase price, a larger down payment, or a high-interest rate (your situation). Once you find out what their main goal is, you can negotiate the other 2 numbers. This seller already told you that in so many words, "he'll give you a better price IF we use seller financing." The great thing about financing is that it is not permanent. You can always refinance the seller out (make sure there is no pre-payment penalty). As you mentioned, you want to make sure the deal cashflows but, if you are able to negotiate out a lower purchase price, and a lower down payment, maybe this deal might work. I would want to make sure that it is possible to add value to this property in the first 6-12 months, and possibly look to refinance after that time. You would basically be using this seller as a bridge lender.

One other great point with seller financing is that there are no junk fees. Getting a loan from a traditional lender at 10% is not the same as getting seller financing at 10%. After taking into consideration all of the fees from a traditional lender, the real cost of the loan might be 1.5%-2% higher.