Good Seller Finance Terms

[Mike McCarthy]

I'm considering purchasing a pair of duplexes from an older gentleman. He's been renting these properties for 25-30 years and is looking to be done with them. I'm considering a seller-finance offer to help with closing speed and not go through the mortgage process. (though I do have good credit score, decent DTI - but mortgages are a pain these days).

What would be a reasonable starting point for an offer regarding financing?  Price would be around $450K.  If I was getting a conventional mortgage, I'd be putting $112K down (25%), and pay 5.75-6% for a 30yr.

What should I offer him to be both reasonable and competitive?

[Don Konipol]

@Mike McCarthy

I never heard of the 555 method, and see absolutely no logic to it. Despite the catchy name, why should everything about your mortgage offer have the number 5 involved? Is there some kind of magic to the number 5 I’m unaware of?

As a 40 year experienced investor who has actually purchased six (not five, six) properties utilizing owner financing, and sold about 20 with owner financing, I suggest you start with something closer to what a competitive offer would be. You don’t want the seller to either be turned off by the idea of owner financing, or consider you a flake, both of which would be likely if you offered 5% down.

I know of no sellers that would be dazzled by the installment sale tax information. Most people realize that if they receive no money they pay no tax. Why people believe they can convince a seller that this is somehow advantageous to receiving income and paying taxes on the income is beyond me. This is like telling someone to not work, because if they receive no income they’ll save a lot in taxes. Further, the explanation of if you only receive your profit a little at a time you’ll be able to “find” deductions to offset it is counter intuitive- either you have deductions from income or you don’t - you don’t “find “ them . This mis information is the stuff associated with slick real estate pitchmen and laughed at by professional investors.

Unless the seller is desperate to unload AND doesn't need cash, which is usually why someone's desperate, so it's an unlikely scenario, then the seller may become interested in seller financing if the borrower has 20% cash down payment as skin in the game. Why 20%? Because over the years that has been established as the MINIMUM down payment figure for a real estate purchase with only two exceptions: first being for loans with third party guarantees like FHA or private mortgage insurance (if available), second being for lenders willing to accept a higher risk for a much higher interest rate. Like hard money lenders who'll lend 95% but at 14% with 6 points.

So we are at a minimum 20% downpayment. Interest rates at a minimum comparable to investor rates on comparable properties. Most sellers aren’t motivated by anything less than 7%. Terms get more interesting, because the higher the interest rate you are willing to pay the longer the term you can ask for. With a 7% rate I’d ask for a 20year amortization and a 10 year balloon. With an 8%+ rate you can ask for a 20 year no balloon as the seller may be able to sell the note at a reasonable discount once it seasons.

My initial offer would be something like 20% down, owner finance balance at 6.5% interest amortized over 20 years with a 10 year balloon. If owner accepts great, if not you’ll need to find out his objection. Is it price, terms, interest rate, or does he just not want to owner finance?