up to how many years can you negotiate to amorize a loan over?

Question

suppose a seller will finance and doesnt want to budge on price or interest, can you just increase the amortization period til the payments get low enough to cash flow?

I think Ive heard of 50 years but nothing beyond that. suppose you'd need it to be 100-300 to work. Assuming there would be a balloon payment, does it matter? Any reason why it wouldnt work or are there other strategies im missing that would normally solve this problem?

Would offering interest only payments for a period of time be a common strategy overcome this challenge? Sounds more costly over a 300 yr amortized loan but I just have never seen anything like that.

Art G. · Answer

You have just brought up a scenario that invokes one the most rarely used and most often misunderstood laws in the nation. It is so complex that courts have ruled attorneys are not liable in a law suit regarding it, bc no one understands it. But, in the terms you just stated it clearly is a violation.

The Rule Against Perpetuities states, an obligation by its terms must be able to be completed within a life in being plus 25 years.

This is one of the most complex things to explain in the law. Look at a new born baby this morning, imagine it living to be 115 years old, add 25 years to it. Can a 200 year mortgage be completed in that time frame? Nope... you just violated one of the most difficult rules in the law to violate.  Just means the promissory note would be unenforceable.  But here is the catch... it must be able to be completed by its terms within that time period. So if you include a no prepayment penalty clause, then by its terms it could be completed inside of a life in being plus 25 years.

Its so rare to actually see this law come up, thanks for the unusual chance to point it out ;)

George Despotopoulos · Answer

Every market is different and every investor's preference is different regarding cashflow.  Most of the investors I follow on here won't do deals that don't cashflow, but it's possible to have positive returns on a deal where there's negative cashflow, as long as the home price appreciation covers it. Personally I would want cashflow unless you're really bullish on home prices in the market you're looking at and are confident enough to speculate on them.

I'm not sure if a seller will be sympathetic to you trying to negotiate over cashflow. Some markets where price increases have outpaced rent increases are really tough to get good cashflow in. If there are other interested buyers at this seller's price, then the seller isn't going to care about your cashflow. That said, if their offer price is too high, maybe you can negotiate him down to get a good deal.

All in all, the advice I would give you is don't rush into a bad deal just because you have already started negotiating.  If there are better deals out there, don't be afraid to either walk away or negotiate further until the deal becomes good.

Mike H. · Answer

Here's the thing I would suggest.

1) A bank is rarely going to amortize a home loan over 30 years - portfolio lender or not. Conventional is absolutely 30 years max as far as i know.

A specialty commercial loan for commercial property might go longer than 30 but not much longer.

2) Private lender. A private lender is not likely to go beyond 30 either. They are either going to want to do an interest only loan or they're going to want you to make payments where you're actually making a dent in the principal. Otherwise, its just a big headache to administer.

Amortization over 100 years? Thats basic an interest only loan in terms of the amounts they'd receive and then they'd have to go through the headache of dealing with principal reduction calculations every month.

I would bet that a private lender is either going to do interest only or 30yrs tops.

If they won't budge on rate and they won't budge on price, then its simply not a good deal. You can probably negotiate up to 30 years but thats likely going to be it. Interest only would make way more sense than trying to ask for 100 yr amortization. That might actually get them to question whether you know what you're doing. Nobody does 100 yr amort.

Tom S. · Answer

@Benjamin Cowles  My 2 cents, if you need to amortize it over many years just to make it cash flow, it prob isn't a good deal.

I've been buying and selling for about 15 years now, and the last few deals I've been able to get good CF with a 15 year amortization loan.  As an example, $75k loan @ 15 years = $575 monthly payment, and the rental income = $1400.  The deals are out there; you just have to search and be patient.

Good luck!

- Tom

Account Closed · Answer

From the investment side of things I think if you're going to try to lengthen the amortization in order to increase cash flow, your maturity or balloon date becomes much more important. In my opinion, you want it to be as long as possible. Otherwise you are susceptible to some relatively short term market risk where you could find yourself with an out of whack Loan to Value ratio at balloon because your principal loan balance is virtually the same (long amortization) and your asset has depreciated. This is a pessimistic scenario but one I think is worth consideration as an additional risk arising from lengthening your amortization.

Also, keep in mind most creditors are not inclined to finance assets longer than their "economic life". I am sure you and the large majority of investors make adequate capital expenditures in order to maintain their asset's physical condition for much longer than 30 years but creditors do not like to count on that as a given. They would rather you build some quality equity every payment so both parties are safer. On the flip side Banks & Creditors do like generating revenue so those that are credit-worthy will likely always be able to cash out refinance. But at that point the collateral is generally assessed for its condition, value, etc. and the Loan to Value is deemed appropriate.

The range of creditors out there is endless so I'm sure you can find aggressive terms (long amortization, interest-only, etc.) but I just wanted to give my 2 cents.

Lonniel Ingram · Answer

I would agree with George, many investors look for different benefits, cash flow, appreciation, depreciation for tax purposes.....etc. I think its a matter of how to adjust strategy to turn bad terms into good terms for your situation.

Since cash flow (cf) is most important to you, you have to decide based on the propertys' financials at what price will it cf for you and  based on what terms. If the seller won't budge on price but is willing to seller finance....there has to be some motivating factors that will help with price or terms and if not then move on. (Including referring lead/deal to another investor that may be a better fit for their strategy or situation.)

Benjamin Cowles · Answer

Thanks for all the replies.  So it looks like I'm just getting a taste of the resistance I'll be facing between myself and GOOD DEALS.  So it's gonna be a tight wiggle between price and reasonable terms which with what I'm currently considering doesn't look like any room for a deal.

Which makes me wonder if it's common to negotiate over cashflow, like 'mr. seller, I'll seriously consider whatever price and terms you have in mind so long as it allows me a certain amount of cashflow, so we can sit down and have a beer together 10 years down the road to talk business...' as a starting point.

With my zero experience I'm clueless as to what happens on the next step, in general.  Like, out of the next 100 investment properties sold in a given area, how many are sold at a price and terms that cashflows for the buyer/investor?  Who are my competition?  For duplexes would the majority be similar investors, or are there a lot of more casual investors with more cash to spend?  So it's like I'm shooting in the dark.  Kinda fun, a little.  Won't miss it though once I get some light.

I'll be interested in any further replies but I think I'll try that starting point, especially with anyone that identifies themselves at all as an investor.  Cashflow is what it's all going to boil down to anyway right?

Benjamin Cowles · Answer

Thanks.  Another thing I'm wondering about, is when working out a deal with another investor  offering financing especially, shouldn't it be in their best to help come up with something that will ultimately work out for the buyer.. -unless of course they were expecting you to default at some point then recover the property?

And if indeed that is the case most of the time, should the negotiations revolve in most part around buyer's ability to one, cashflow, then most importantly refinance down the road to avoid the potential to default?

Stephanie Medellin · Answer

Yes when I said"they" I was referring to traditional banks and lenders offering your standard conventional loans. The consumer financial protection bureau introduced new regulations that gave lenders incentives to make"safer" loans without risky features. That meant no more interest only loans, no more terms over 30 years, no balloon payments, and no negative amortization.

Lenders also need to verify that borrowers have the ability to repay.

Loans that meet these standards are known as qualified mortgages.

As far as I know, commercial loans and business purpose loans don't have to meet these same standards.

George Despotopoulos · Answer

A loan amortized over a huge period of time isn't the same as interest-only.  Both are methods of reducing the monthly payment, but in different ways.  Interest-only means exactly what it sounds like - you make only interest payments for a certain amount of time (generally 10 years on a typical IO mortgage), and then you pay principal and interest for the remainder of the loan (usually there is no balloon).  A longer amortization period means you pay principal and interest every month, but over a longer period, so the monthly payments are lower. There may or may not be balloon period at some point (such as the 30-year point).

I don't know if there are rules on private lenders, but if this seller won't budge on price or interest rate, I can't see them being willing to amortize the loan over 50+ years. If they are willing, maybe check with a real estate attorney on whether there are any regulations against it.  I don't think there should be in a private financing situation, but I don't specialize in this field.

One thing to be careful about - most lenders are going to charge you a higher interest rate for an interest-only loan or a longer amortization loan.  Depending on how much higher the rate is, you might not even be saving much on your monthly payment.  Just be sure to figure out exactly what you're saving and if it's worth it.

I agree with @Stephanie Irto that mortgage lenders used to have 40-year loans, but those have been gone since around 2007.

up to how many years can you negotiate to amorize a loan over?

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