Creative seller terms, am I doing it right?

Question

Hey folks, first time poster and looking to get my feet wet.  I'm pretty fascinated with some of the deals that people are able to put together with seller terms.  I completely understand that it depends on what the seller's needs are and many just want to take the money and run.  I read an older forum post that intrigued me and the author said something like 'I tell them I can give them the price that they want if they can give me the terms that I need.'

Anyway, there's a duplex that I'm interested in.  It's been owned by a 90 year old woman who lives locally (and owns other properties from what I can ascertain.)  Assuming the bones are good, I'd probably offer 250k for it as it is, but if the seller would entertain terms, there's another couple choices I was going to present.

$250k -- I'll bring my own financing and she walks with 250k (and has to pay cap gains on the difference between that and her basis, which I presume is very low)

$350k -- I'll give her $35k down and the balance as 300 monthly payments of $1050.  (effectively $215k financed at 3.27%)

$450k -- $0 down and the balance paid as 360 monthly payments of $1250  (effectively $250k financed at 4.39%)

Now, I know I'm hoping for a unicorn here, but my question is more around whether or not this is the type of adjustments you would make to your deal to accommodate a seller's wants or needs.

Anyways, thanks for reading and offering your feedback!

T

Marco Bario · Answer

I'm going to offer a counter view to what @Adam Feick offered:

1. She may be living off of rental income from that property. If so, your monthly payments could replace that and be a benefit. Going into an offer thinking "I don't know why she would want to" isn't going to be productive. Better... ask her what she's going to do with the money and use what you learn to craft your offers. Then you're making offers to solve a problem.

2. Avoid balloons. You never know what might happen over the next 5 years and you don't want to put yourself in an uncomfortable position.

One more piece of advice when dealing with older sellers, ask for a family member (best) or her attorney to be present and explain everything to both. You don't want an heir down the road to come at you saying you took advantage of an older person, even though I'm sure that you aren't.

Gook luck.

Duncan Hayes · Answer

@Chris John if the home can sell for 200k right now then that seller wouldn’t be speaking to me. Is the home in retail condition? If I put a beautiful 200k home next to yours will the retail buyer pick yours over the one with granite counter tops and hardwood floors? This solution is for sellers that need it. Or want to collect some cashflow to cover recurring bills each month. It’s not for everybody.

In 10 years you can’t come back to me and ask for higher interest because it’s not written into the contract at time of sale that we agree to that. What money is worth 20 years from now has nothing to do with the deal today. On a fixed interest rate loan, can the bank come back and say, “oh 3% isn’t cutting it anymore, we want 7% now” 15 years into your fixed rate mortgage? No. Seller got to evade capital gains tax, they got full fair market value of the property at the time without repair, and whatever headache associated with the property becomes mine. How would they get all those benefits and rightfully be able to renegotiate years into the deal? Let’s say you buy a house for 200k and in seven years it’s worth 350k. Can the bank demand more money because the house is worth more than what they sold it to you for and they’re having sellers remorse? No.

If the seller is okay with terms then that’s fine with me. If they want to become the bank, that’s also fine. But I want to be treated like a bank customer. Again, this is solution based and if it’s not the solution the seller needs/wants then there’s no obligation to sell this way. If the home was a 200k home and is already updated, they’d either list it or sell FSBO for what they want to get for it and they have the ability to turn down 190k offers. Those folks generally don’t have headache associated with the property either. When you’re annihilating a huge stress factor for folks, the money isn’t the issue. And on top of that, it beats selling it for $70k to a wholesaler.

Adam Schooley · Answer

@Tyler F. Were you able to put a deal together with the owner of the duplex?

Chris John · Answer

@Duncan Hayes

I'm a little confused.  So, instead of selling to Person A for 200k that I receive now, I can sell to you for 200k that I receive in monthly payments for the next 20+ years?  And then, if I ask for interest since the payments of $800/mo in 20 years will be worth half or less than half of $800 now, you'll ask for even better terms?

I really don't want to misstate what you're saying, so please correct me if I'm wrong.  I just want to make sure that I'm understanding this correctly.

Thanks

Adam Schooley · Answer

@Tyler F. you just have to keep moving forward and making offers. Anytime you want to talk let me know.

Duncan Hayes · Answer

Here's an easy way to breakdown these payments in 60 seconds. I'll use an example of a property with gross rents of $2,000.

Gross Rent: $2,000 - 10% (management fee) - 5% (vacancy) - 5% (repairs) - 5% (maintenance) - 15% (taxes) - 10% (insurance) - 10% (minimum expected cashflow) = $800 or you could just multiple gross rent by 0.40, I just gave you a full breakdown of monthly expenses. So with a gross rent of $2,000, the most you can pay the seller is $800/mo. This is PURE cashflow for them. Now, this is NOT seller financing. It is simply a promise to pay X amount of dollars until the debt is paid off in full, but can be referred to as terms. Notice no mention of a down payment or interest. For a $200,000 property this would take 250 months.

Now, if the seller wants interest and a down payment, then you could say something like this:

"Mr./Ms. Seller, I wasn't talking about you financing the property and I was unaware that you were a licensed bank. But, if you want to be the bank I have no problem with that, again, I just wasn't thinking of it that way. If you want to be the bank though, I'd say it's only fair I be treated as a bank customer. Right now, 85% of homes are purchased with 0-3.5% down. VA loans, FDA loans, and FHA Loans. There's even programs for down payment assistance, which make the down payment $0 for the buyer. Is that something you'd be willing to accept? Money is cheap, banks are charging around 3% interest, is that also something you'd be willing to accept? Banks also allow 30 years to repay the debt, with no balloons. Is that something you'd be willing to accept?"

Something powerful my mentor taught me. He said, "there is a difference between terms deals and seller financing deals. The wealth is in knowing the difference." Hope this helps out on the next one. Approach it differently next time, like you're not a buyer but a concerned person in the community just reaching out to see how you can help.

Tyler F. · Answer

Yea, that was one thing I realized.  I'd be underwater from the start, for the most part.

Tyler F. · Answer

Sadly, no.  The owner's family convinced her not to sell.  I definitely learned a lot though and am still on the hunt!  I've narrowed my focus to single family homes for the time being (unless I happen upon an MF opportunity.). I see you're in Ft Laud -- we should talk more!

Wayne Brooks · Answer

@Tyler F. Those seller financed offers would only work out if you Actually, Absolutely were going to keep the property for the Full 30 years.  If you need to sell or refinance in the near or mid term future, tou’d be screwed.

Adam Feick · Answer

@Tyler F.  Without understanding what the income and expenses are for the property it's hard to offer you other options.  I will say, since the seller is 90 I don't know why she would want to finance a property for anything longer than 5 years.  Unless she has heirs and she wants them to receive payments, but this is a long shot.

Instead look at structuring your terms to get the principal paid down quickly in 3~5 years, with a balloon payment at the end of the term.  That will typically allow a 5~10% down payment plus principal paydown of another 10%.  When you go to refinance at the end of the term, you shouldn't have to come up with much capital.

Creative seller terms, am I doing it right?

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