Seller Financing

[Simcha Davidman]

Good day!

I've been thinking more about seller financing and am trying to work through some of its details. Let's say, for example, I'm looking at a SFR with a market value of $300,000, but my numbers don't work above $250,000.

Now, a $250,000 30 year mortgage at 4% would run a little less than $1,200/month, with total payments of almost $430,000!

So, my thought is, maybe I can buy the property for well above market value, let's say $350,000, spread over a number of years (tbd, whatever works), which would equal significantly less than I'd be paying on a conventional mortgage, and would also allow the buyer to feel great about getting a good price.

My questions, I guess, are as follows:

1. How would this type of sale effect the seller in terms of taxes?

2. What effect would this have on my taxes?  I assume that my tax basis would be high (and beneficial for depreciation and upon sale), but i would not have the interest deduction.  But would that essentially be a wash, because I'm putting the money toward the purchase?

3. What difference would it make if we structure it with a lower sale price and interest?

4. What is the (un)likelihood of success?

5. All comments/advice/criticism is greatly appreciated.

Thanks!

[Sam LLoyd]

Taxes?  I'm not sure, but I don't think this is one of the bigger concerns. Like you said, it might just be a wash. 

Here's the biggest issue, which affects the rest of your questions.  How long is the seller willing to hold the note?  The longest seller financing I've seen personally is 10 years.  So, your plan is only good if the seller is willing to carry it back for the whole 30 year term.  So, unless you find a seller willing to finance for 30 years, you'll end up with a refinance at some point with a property that is way underwater, loosing way more than you'll ever get with a hundred or two/month in cash flow.

2 thoughts:  First, find out how much you can rent the place for, add in all your expenses like vacancy and maintenance, figure out how much money you want to make (I'd start with $200/unit where I am), and come up with the a payment you are willing to make. It's just a matter of finding the right price and interest rate at that point.  This means you can't have a balloon payment though unless you are willing to gamble on appreciation.

2nd, you could make an offer for 250 with a clause saying that the seller will get their other 50 when you sell the property, or some variation on this.  This is going to be very hard to work through with a bank involved, if not impossible.

Lastly... In my market, there are SFRs in that price range, and it's just impossible to make them cash flow without huge equity, at which point you return on investment is almost nothing.  You are probably in a market where the only returns to be  had are plexes.

Hope this helps.