help structuring an owner financed deal

[DJ Cummins]

Hello Everyone,

So…my wife and I bought a 4 unit property about six months ago, using conventional financing(20% down).We have added some value, and are making pretty good money(finally…took a few months).The people we bought the property from was an older couple who own about 5-7 other rental properties.They retired and sold their farm, and rolled the proceeds into rental properties.Our apartment building was the first thing that they had sold.This week we received a phone call from them, asking if we were interested in buying any of their other properties.They also mentioned that they would be open to owner financing with as little as $1,000.00 down, simply because they liked us, we gave full asking price for the apartments, and we remind them of a younger version of themselves.I don’t really want to try and buy ALL of their properties, as all but 2 are located an hour from my home.One of the properties is a good deal.It is a duplex, and they want 66k for it.Rent is around $1050.00 per month.It is two houses on one lot.(I’ve talked to my banker, and I won’t have a problem refinancing the property even being a non-conforming duplex.

So…how do you structure a deal like this?I have read quite a bit about it, and I bought @Brandon Turner and @Ben Leybovich’s books on creative finance just to learn more about how to do this.  What types of terms should I try and negotiate?  I would appreciate any advice, as we have only invested with the boring ole 20% down before, so this is uncharted water for us.  I really like the idea of only putting the 1k down, as we can try and buy another property in the next few months with conventional financing.  This would be a great kickstarter towards us purchasing more units over the next few years.

Much appreciated, Y’all!

DJ

@Brandon Turnerundefined

@Ben Leybovichundefined

[Piet Strydom]

What this older couple are probably looking for is the regular cashflow that they are used to from their properties, but without the hassles of tenants and maintenance, hence the willingness to go with a low deposit.

The bigger deposit they get, the more they have to invest in CD's getting around 1% per year. 

I was trained to always leave something on the table - you do not want the other [arty to grumble and complain, but rather willing to do further deals, or more important, recommend you as a fair business partner.

My suggestion would be to do a deal that is fair to everybody, something like this - 

  - Property price, get an appraiser to do a fair value calculation for the property, and make that the purchase price.

 - Period: You could probably get as long term as you want from them as they are probably more interested in the income than the capital.

  - Rate - I suggest a rate commensurate with what you would be paying to a commercial bank. The advantage you have is twofold - you don't need to some up with a deposit, and the loan(s) will also not be reported on your credit score, leaving you free to do other conventional financing deals once you have absorbed what you have taken over from the couple.

  - Refi - I would not do this, unless the couple want their cash out for some or other reason. Because as soon as you refi with an institution, it is going to appear on your credit score, impinging on your ability to do further deals.

Some icing on the cake, depending on how well you know the couple, and how old they are - You could ask them to take out a life policy on their lives, that will cover the capital on the loans should they die - The surviving spouse is guaranteed of getting the capital back, and you will have a windfall that can be used as a nice deposit for something else.