Early payback with creative financing!?

Question

I am about 6 months away from starting my investment journey meaning starting the process of buying my first property.

My question is this. The seller is asking $340,000 for a property. I offer them 250K at 3% seller financing over 30 years with 25,000 down. This means at the end of 30 years they will have made their total $340,000 asking price. However I am able to pay off the property in 10 years meaning the seller only ends up making $35,000 in interest making it to $260,000 versus $116,500 in interest to get to the $340,000.  Is this a thing? and if so is this simply part of the underwriting of the loan? Has anyone seen this before? Thanks!

Chris Seveney · Answer

@John Magana

Can you walk into a car dealership and say I will give you $35k for the car that’s $50k because after interest payments you get $50k? The answer is no.

Trying to wrap interest into it is a losing battle. That person could put it in a cd and earn 5% today and my guess is sell the house for list price or close to it.

BP has made seller financing like this awesome thing, it’s not to be frank - if you can get conventional financing you are far better getting your loan through this method.

Why? Well it may sound great but how many sellers do you think use a servicer and will send you your tax forms ever year? How many will collect escrow and pay the taxes and insurance?

What happens when you go to sell and it gets held up because the lender cannot provide an accurate payoff - or better yet, how do you know the payoff is correct?

Bill B. · Answer

1) The interest to total is a “non-thing”. You could pay them off after 1 month and they’d only get $600 in interest. (Assuming no pre-payment penalty.) They get their capital back sooner instead of more interest.

2) Be careful if this involves a senior or someone you could be seen “abusing” there isn’t a sane person in the country that would take 10% down, 3% interest, 30 year seller financing for 25% off list price.

If you want your example to be: Pay full price, seller financed at 6% (the amount they could get guaranteed from a bank.), with 20% down (since there will usually be about 10% closing costs most seller wouldn’t want to walk with nothing with 10% down.) for 5 years . And then you paid it off in 3 years instead. As long a your loan paperwork doesn’t say there’s a prepayment penalty, they get their capital back instead of interest.

Jason R. · Answer

Hi John,

Like some of the people mentioned in here most of the time conventional financing will be much better for you down the road. I think what you have to think is why are you wanting to do seller financing? To get them at a lower rate? To the seller, the lower the rate, the higher the purchase price. In this example if you wanted to get 3% interest and I were the seller, I would expect you to be paying OVER asking. Are you looking for seller financing because you dont qualify for conventional financing? If so I would actually just spend some more time planning, saving, and getting the conditions right to be able to qualify. If you do qualify for conventional but just thinking seller financing is your golden ticket, I would say work with an agent who specializes in investors. There are tons and tons of great investments out there that a good agent will find for you and walk you through. Hopefully this helps but I think the first step is just some internal thought / discussion on what your goals / needs are!

Eliott Elias · Answer

You can pay the loan off early if there is no pre payment penalty. Most sellers also want a balloon.

John Magana · Answer

What I didn't mention was that the property in this example isn't worth $340,000 in current condition, I'm not trying to rip anyone off but offering a number more appropriate but over the term of the loan would get them near what they were initially looking for if it did take full term to pay off. But I see now how that looks. I know very little and am learning...

With regard to seller financing, a servicer would be part of the deal, I wouldn't have it any other way in that case...

It's gonna be a struggle, but finding a seller with the motivation that aligns with a creative financing strategy is worthwhile. Current and possibly future interest rates make it incredibly challenging to cashflow...

Thanks everyone for the feedback...

Early payback with creative financing!?

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