Thoughts on this seller finance deal?

Question

My realtor turned me on to a property with seller financing.

The seller wants $465,000 and a 20% down payment. It sound like the terms are wildly flexible and I could potentially structure a deal where I cashflow $1200.00 a month after expenses. This would be amortized over 40 years at 5% interest and interested only payments with a 20 year balloon. I would be sacrificing the long term paydown of the loan for cashflow upfront.

The returns seem good and this deal would leave me with just enough money to buy another home conventionally in the following 6-12 months if I can find the right houseback on the market.

This is the first time I considered or been approached with this kind of deal, any input would be greatly appreciated!

Joe Villeneuve · Answer

Excellent use of seller financing.  Lack of paydown isn't a sacrifice.  If I could get 50 year mortgages on all my deals, with 10% DP, and they would cash flow like this one, I'd agree to those terms faster than it took me to write this.  Mortgage paydown means little to me since it gains me very little.  Equity gained from appreciation is faster and in larger chunks, and is based on property value.  You could buy a property all cash and have the same equity gained from appreciation as you would from a 100% financed deal.  They both would have the same PV.

Chris Davidson · Answer

The numbers see almost a bit too good to be true, but I can't say they are wrong. He wanted to know what we thought, and if it is what he says it is. He's appears to have a good deal.

Nicholas L. · Answer

@Chris Davidson

we really don't know much about this deal.

OP is saying he'd cashflow $1200 a month after expenses

!

I only see that being realistic if this is a Short Term Rental

and i'm still skeptical

Chris Davidson · Answer

@Robert Fowler sounds like it could be a solid deal. As long as you aren't way over market value you should be fine. Detail out what happens with prepayment, and if you pay principle down during the interest only period.

That cashflow sounds like a good opportunity for amount down, and setting you up.

Keep up the good work!

Nicholas L. · Answer

@Robert Fowler

i don't think the DP makes any sense

you're going to have closing costs so you're putting over 100K into this?  why?

Gino Barbaro · Answer

@Robert Fowler

Looks like a great opportunity. Is this a property that you are willing to hold for a while, and are you paying around Fair Market Value?

Cash upfront is much better, especially with how we keep printing money. You cost segregate this deal, and you will get even more of your money quicker.

good lcuk

Gino

Josh Young · Answer

These terms sound great, 5% is a better rate than you get anywhere else right now and yes you aren’t getting the principal pay down, but you are getting extra cash flow instead, I’d much rather have cash than equity, equity is usually expensive to turn into cash. Is there a pre-payment penalty? That could limit your ability to pivot if circumstances change, but otherwise 5% interest only sounds like terms I’d take on literally every deal I could buy, if it’s interest only then there is no amortization. Obviously don’t over pay to get those terms.

Wale Lawal · Answer

@Robert Fowler

As with any real estate agreement, Seller financing arrangements should be detailed in writing to ensure that both buyers and sellers understand their responsibilities under the contract. Be sure to include these common terms in your owner financing agreement:Purchase price. When drafting seller financing documents, always include the total purchase price for the property. This will help involved parties calculate the total loan amount.Down payment. Likewise, an owner financing agreement should list how much the buyer is contributing as a down payment at closing. If there was an earnest money deposit, this amount should also be included in the agreement.Loan amount. Subtract the down payment, earnest money and other upfront payments from the purchase price to get your loan amount.Interest rate. An owner financing agreement should also include the loan’s interest rate. In general, seller financing rates are higher than on traditional government-backed mortgages but can be negotiated by the parties.Loan term and amortization schedule. The loan term is the amount of time a buyer has to pay back the loan. Stated another way, it’s the number of monthly payments the buyer will make. The amortization schedule, on the other hand, reflects the period of time over which the loan is amortized—a number that determines the monthly payment amount.Monthly payment. Make sure your owner financing terms include the number of monthly payments, due date, what constitutes late payment and whether there is a grace period.Balloon payment details. Many seller financing arrangements are amortized for 20 or 30 years but have a term that’s much shorter. This results in a balloon payment—or lump sum—that must be paid at the end of the loan term. Keep in mind, however, that these may be restricted by federal law.Tax and insurance payment. Although taxes and insurance payments are often rolled into traditional mortgages, buyers with owner financing often make those payments to governments and insurance companies directly. Either way, the owner financing agreement should describe who will be responsible for these payments.Additional terms. Every real estate deal is different so make sure your owner financing agreement spells out anything that’s unique to your deal. For example, if you’re selling a historic home, you may include a requirement that the buyers not remove or otherwise alter certain elements of the home without your prior written approval.

All the best!

Eliott Elias · Answer

Decrease the down payment, all other terms are solid.

Thoughts on this seller finance deal?

Most Popular Reply