Seller Financing rates/terms for residential sale?
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
2y@John P.
9.9% financing and do not finance for more than 10 years is my recommendation.
I recommend just to sell it outright personally vs seller finance as you claim to increase buyer pool. But you left out a keyword “qualified”.
7e investments53 Reviews
6 Replies
- 2yMike GrudzienPro MemberLender · Eugene, OR · Member since 2019 · 2k+ posts · 1k+ votes
John,
Gathering answers from the Forum is a good start for general information. But, when it comes time to put the deal together and pull the trigger: work with a seasoned real estate attorney with experience in structuring seller carry deals and writing thorough docs that cover your interests, especially with the "what ifs?"
Mike - Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
@John P.
9.9% financing and do not finance for more than 10 years is my recommendation.
I recommend just to sell it outright personally vs seller finance as you claim to increase buyer pool. But you left out a keyword “qualified”.
7e investments53 Reviews - Investor · Seattle, WA · Member since 2023 · 87 posts · 44 votes2y
Quote from @John P.:
Thinking to sell a rental house in Memphis for around $200k. Thinking to offer seller financing to increase interest in the property and I like some of the advantages of seller financing. Have never done this before. I intend to use a loan servicer as I assume they make sure that taxes and insurance are paid!? Curious what are common terms/rates/etc... these days? It would rent for about $1,500 fwiw. 10% down? Balloon in 5 or 10 years? 8% interest? 10%? I just don't know. Or do you base terms on down and their credit application? Any guidance would be appreciated.
Seller financing can be a great way to sell a property while offering flexible terms and potentially earning a higher return than traditional investments. Here's a guide to some common terms, rates, and factors you might consider when structuring seller financing for your rental house in Memphis:
1. Down Payment
- Typical Down Payment: 10% is a common down payment for seller financing, though you can set this anywhere between 5% and 20%, depending on the buyer's creditworthiness and how much risk you want to take on.
- Advantages of a Higher Down Payment: The more a buyer puts down, the more equity they have in the property, which can reduce your risk of default. A higher down payment also demonstrates the buyer’s commitment.
- Flexibility: You can adjust the down payment based on the buyer's credit history, employment stability, and ability to pay.
2. Interest Rates
- Current Seller Financing Rates: Seller financing rates tend to be higher than conventional mortgage rates due to the increased risk for the seller. Currently, typical interest rates for seller financing are 7% to 10%.
- 8% Interest: Offering an interest rate of 8% is a good starting point. If the buyer has good credit, you might go lower, while buyers with poor credit might justify a rate closer to 9% or 10%.
- Market-Based Adjustments: Keep in mind the current prevailing mortgage rates (which are currently around 6-7% for traditional financing) and adjust accordingly to stay competitive while still reflecting the added flexibility of seller financing.
3. Loan Term and Amortization
- Common Term Lengths: Loan terms for seller financing vary but often range from 15 to 30 years to keep payments affordable for the buyer.
- Balloon Payment: Many seller-financed deals include a balloon payment due in 5 to 10 years, at which point the buyer would need to refinance or pay off the remaining balance. This allows you to cash out earlier if needed.
- Example: You could offer a 30-year amortization schedule with a balloon payment due after 5 or 7 years. This makes the monthly payment more manageable while still giving you the option to exit the deal earlier.
4. Monthly Payment Amount
- Rent Comparison: If the property would rent for $1,500 per month, you may want to structure the financing so that the monthly payment is similar to or slightly below this amount.
- Example: A $180,000 loan (after 10% down) at 8% interest on a 30-year amortization would result in a monthly principal and interest payment of about $1,320, which is close to the rental value and should be appealing to buyers.
5. Qualifying the Buyer
- Creditworthiness: Just like a bank, you should assess the buyer's creditworthiness. You don’t have to be as strict as a traditional lender, but it’s wise to check their credit score, employment history, and income stability.
- Flexible Terms for Stronger Buyers: If a buyer has a strong credit history and steady income, you could offer better terms (lower interest, smaller down payment, longer balloon).
- Tighter Terms for Riskier Buyers: For buyers with weaker credit, you might require a higher down payment, a higher interest rate, and/or a shorter balloon period.
6. Using a Loan Servicer
- Loan Servicer Benefits: Using a loan servicing company is a smart move, especially for first-time seller financing. They handle:
- Monthly Payment Processing
- Escrow for Taxes and Insurance: They ensure property taxes and insurance are paid, which is essential to protect your interest in the property.
- Record Keeping: They also maintain records, which can be invaluable if any issues arise during the term of the loan.
Conclusion
Given the details of your property and the $200,000 sales price, a possible scenario could look like this:
- Down Payment: 10% ($20,000)
- Loan Amount: $180,000
- Interest Rate: 8%
- Amortization: 30 years
- Monthly Payment: Approximately $1,320 (principal and interest)
- Balloon Payment: Due in 5 or 7 years (this allows for refinancing or payoff while giving you some flexibility).
These terms are flexible and can be adjusted based on the buyer’s credit, down payment size, and negotiation. Also, having a loan servicer handle the logistics will make it easier to manage the transaction while ensuring that taxes and insurance are handled correctly.
Always consult with a real estate attorney to ensure that your seller financing agreement complies with state and federal laws.
- Typical Down Payment: 10% is a common down payment for seller financing, though you can set this anywhere between 5% and 20%, depending on the buyer's creditworthiness and how much risk you want to take on.
- Investor · Member since 2024 · 182 posts · 63 votes2y
We Would suggest creating 2 Notes so that you could keep the 2nd and sell the 1st lien. Then you will come continue to have cashflow at infinity return for the next 30 plus years.
- 2yGregory SchwartzBusiness MemberRental Property Investor · College Station, TX · Member since 2016 · 1k+ posts · 1k+ votes
@John P. I like seller financing as a strategy to continue to receive passive income particularly when you don't have an immediate use for equity in the property. My recommendation is do not advertise your terms. Let the buyer offer you terms then counter as required. A very seasoned investor pounded it in my head years ago, when it comes to negotiations, "never say the first number." :)
good luck
Schwartz Realty Group5117 Reviews - Investor · Member since 2024 · 182 posts · 63 votes2y
Quote from @Gregory Schwartz:
@John P. I like seller financing as a strategy to continue to receive passive income particularly when you don't have an immediate use for equity in the property. My recommendation is do not advertise your terms. Let the buyer offer you terms then counter as required. A very seasoned investor pounded it in my head years ago, when it comes to negotiations, "never say the first number." :)
good luckAbsolutely, "Never Split the Difference" book is a great negotiating book for this. We actually plan to have the author on our podcast soon as well. But if you have not read the book, we highly recommend it.
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