Suggested terms for contract offer SF home PDX

[John Cava]

Hi all;

We're talking with an owner who seems willing to sell us a small home on contract here in Portland. This is perfect for us, as a conventional loan would be difficult (if not impossible) and it would allow us a little cash for the fix-up.  Using it as a rental, numbers are fine.   Seller doesn't appear to be cash-poor and is happy to have someone maintaining the home instead of tearing it down for the lot.  We hope to toss an offer his way this week.

Question is:  What are reasonable terms, that keep the initial payments down for us without being stingy?  This includes what's a realistic minimal down payment to offer (on $325 sales price), interest rate (we were going to base it on 30 yr), balloon time frame, etc.

We have a good RE attorney, so not worried about the legal end, but for the informal offer, I wondered what people thought the standards were. It's Portland, OR so a pretty hot seller's market and we consider ourselves fortunate to have a shot at this pre-MLS (no realtor involved either side).

Left on my own, I'd probably see if I could get away with $50-60 down (15- 18%), 5% interest rate, 7-10 year balloon (we'd hopefully refi then, though rates will certainly be higher).  As an aside, we think the price is just a bit high - it might be closer to about $325 actual, though he's had realtors tell him $350 (maybe to get the listing, not sure).   But we think $335 is not unreasonable, given the market, location, seller-finance, etc.

Thanks in advance to everyone.   Great site, with lots of common sense good info.  John

[Mike Nuss]

Hi @John Cava 

It sounds like you have a fun one. This must be a good location if there is potential to be torn down at 325-350k. You'll find a lot of owners in Portland that are willing to change terms if it does indeed keep the house from being demolished. 

Every single term in a seller carry deal is negotiable. I've found that more reasoning and clarity behind each term equates to better success for these types of transactions. 

For example, don't just pull an interest rate out of the sky. What makes 5% fair? What makes 6% fair? It makes much more sense to tie the rate to market conditions. 4% makes a heck of a lot of sense right now given what banks are offering. There is no need to pay 5-6% in this market. 

To answer your question, interest only payments are the easiest way to keep your payments more manageable. You can always use an amortization schedule, but this just increases payments, reducing cash flow, and doesn't do much to the principal balance with a 7-10 year balloon window. Interest only versus amortized schedule really comes down to the seller and the income stream. 

My question to you is....what are the sellers real needs? The less you know about their goals, the harder it is to meet their needs in the structure. The more you know, the easier it is to structure a true win win scenario.