Interest-free seller financing

[Na Christian]

My goal: create an interest-free loan which is appealing to a potential homebuyer, yet doesn't make too big of a discount on my end.

For example: If I sold my $300,000 house with 20% down ($60,000) over 30 years, at 6.7% interest rate: $1548.67 principal and interest per month
1548.67 x 12 x 30 = $557,521.20

What I would do would offer a lower monthly payment and no usury, but it would effectively be like a prepayment penalty.

Arbitrarily, let's say 20% off the monthly payment, or $309.73 less per month: $1238.94 monthly payment.

House would be sold at $446,018.40, which is $111,502.8 less than the total paid with a normal mortgage, but $116,018 more than the market price. This is 20% off, or 80% of the original total cost, if you include interest. Down payment would still be $60,000.

Of course if buyer defaults on the loan I would still foreclose, and I would require home insurance/property tax in escrow like the banks do.

Do you think this would work?

[Scott Trench]

Here are reasons why I wouldn't do this as a buyer:

- I bring you $60K, and now have negative $80K in equity. Ridiculous. I will not lose the forest (the fact that I would be buying a property that is deeply negative equity) for the trees (the fact that it might "Cash flow"). 

- I understand basic tax principles. If you give me a loan at 0% interest, then everything up to the Applicable Federal Rate (AFR) is considered a taxable gift. As of May 2024, that rate needs to be 4.55% or higher. That's $20,293 per year in "income" I will have to declare. 

- Depending on appreciation, I will be underwater for at least a decade in this "deal". While I am capable of holding onto a property like this, I fear for the newbies who have very real risks of not being able to hold onto the property long enough to get out from underwater.

Because the buyer of this property is likely to be inexperienced and not know or think through all of the items discussed here, this strategy may put you in a ridiculous position of power for at least the next decade over the buyer. 

I hope that novice investors on BiggerPockets stay far away from this type of deal. 

But, sadly, I think that if you posted this for sale out in the real estate investing world, saying you are open to seller finance at 0% interest, you might have an incredible amount of interest, and be able to take advantage of many newbies who have no idea what they are doing.