Seller Financing Question on SFH Possible Opportunity

[Andy Albrecht]

Hello,

I am going to look at a house tomorrow that is listed For Sale By Owner and just by talking to the person today, ironically found out that it is one of my good friends from high school's dad who is selling this house. Before I found this out though I gathered from our phone conversation that this was a gentleman and his wife that are retired and no longer are living in this house and I believe they are free and clear from the mortgage, although I will find this out tomorrow. I am in the process of saving capital for a down payment for my first investment property in a very good real estate market right now where I am from. This isn't the city I was focusing on where the house is located but it is in my hometown where my family and I own our home which would make it very convenient. It also is a great school system and people move into the area just because of that, with home values constantly on the rise. I worked the numbers today and if I can talk him down to $85,000 from $95,000, I believe I can get this 2 Bedroom, with the possibility of a 3rd bedroom downstairs, 2 Ba. Ranch home rented for $1100 and make the numbers work where I would cash flow $275/mo. after expenses and debts owed. This house needs very little with the roof being good, new water heater, high eff. furnace, a/c, appliances are all less than 7 years old and according to the owner, just needs paint and flooring in the bedrooms because the carpet is worn out.

My question is how would someone structure the seller financing or land contract for this home. I would like to see if I can get it for 5k down but I am stuck about approaching him on a 5-7 year balloon/ 30 yr. amortization and refinancing the property in 5 years traditionally or seeing if he will do no balloon with a 30 yr. amortization. He is my father's age around 65-66 so I am thinking it will probably make more sense to do the balloon but that is what I want everyone's opinion on? I plan on having my real estate attorney drafting all the paperwork if he is ok with whatever option, getting an inspection and appraisal done, pest inspection and having a local title company handle the closing and other related items. I also plan on having an escrow company handle the payments so I am not paying him directly. Any advice would be much appreciated. When I ran the numbers, I based them off of $5000 down and 20% down with a 30 yr. amortization schedule and 5% interest. Thanks everyone!

Andy

[Bill Gulley]

First find the motivation of selling, then meet that need, suggest seller financing up front, if they absolutely cannot then you'll be wasting your time and theirs. Then look to how to structure the loan that meets the seller's needs, then if that fits your needs, if you take that approach you can have a win-win. 

When devising a balloon payment you need to look first at the agreed terms, amortization and rate, this gives you a schedule for the principal remaining at the end of each year. From that determine your loan to value needed for new financing. If you don't establish enough equity you'll be reaching in your pocket to buy down the loan amount required. 

I suggest you not go 30  years with a note going to an estate, your high school buddy may very well look you up with an unpleasant attitude messing up his parent's estate in their elder years, but check with an attorney familiar with estate requirements.......you can also address such issues with a conditional demand feature, if this happens then they can demand full payment in 6 months for example. See your attorney.

While many may think trying to simply cover the buying/borrowing side, the terms can back fire on you later on as a borrower, you might not be dealing with that original lender, so think ahead and long term before going more than 10 years. Good luck :)