Portland OR · Member since 2014 · 14 posts · 5 votes
Hey guys,
So I am trying to figure out seller financing and interest rates, and I'm having trouble with the interest part. I am not trying to figure out at what rate one should charge or pay interest, but more along the lines of how that interest is accrued.
Is the interest on a seller finance deal typically based on an APR or a flat rate for the amount carried??
example: If I was to purchase a house for $500,000 and the seller carried the whole amount at 10% for 30 years, that would end up equaling a total to the seller of $550,000 to the seller. However, if that was 10% APR the seller would probably almost double their money. I guess no one would pay 10% a year and keep that loan for 30 years tho..
I sell some of my flips with Seller Financing and always try to get 20% down and charge 10.0% APR, usually on a 10 year note with no pre-payment penalty, but have negotiated on the down payment amount a few times but not the interest rate. From my view of it, I can make more then that not having the money tied up and am doing them a favor. If the buyer has good enough credit to negotiate a better rate, they don't need seller financing. My guess is it will be difficult to find anyone willing to offer seller financing below around 6-7% APR especially if they know you're going to use it as an investment property.
I'm no expert, but I'm in the process of doing an owner-finance of a rental property, so I've been doing some research... Backstory: This is actually a transaction I started a year and a half ago that fell through, but the family stayed as very good renters. Fast forward, and now they're ready and in the meantime they were taking care of the place like it was theirs.
The property is a SFR and the price was $150k. Now, the price is $160k and my underlying loan balance is about $96k. I'm doing a wraparound mortgage and the interest rate is more a function of my desired monthly profit above the cost of my monthly mortgage payment (I have insurance and taxes escrowed and plan on keeping them that way). There is a 'normal' range that I've seen for owner-finance, and 10%+/- doesn't seem too unreasonable, but I solved for the interest rate based on desired profit and not the other way around.
I still need to clarify a few things regarding depreciation recapture and other tax issues, but right now I just want to cash out the equity to fund other projects.
I don't know if that helped a bit, but best of luck.
@Jarred DeArmas - I've never seen a loan that did not base the rate on APR. Maybe some exist, but I would think it's safe to assume any discussion of interest rates is based on APR.
@Jarred DeArmas Thought I'd throw something in here to keep this topic active as I am looking at a seller financed deal as well. I'd love to see other people weigh in here, but you can write your offer any way you'd like. I've heard of some very creative seller finance offers and would love to see some people share theirs.
Obviously, the flat rate would be highly beneficial to you as the buyer, but I can't imagine anyone taking you up on that. You would most likely have to structure it in the same fashion as a bank or other major lender (APR) to have your offer taken seriously.
When structuring my potential offer for a seller financed property, I'm using an online mortgage calculator to determine the payments and offer that I am making. Just as an example with made up numbers: Seller with house at $120,000. The price is too high for me to cash flow so I plug in different offer prices, downpayments, and interest rates into a mortgage calculator until I get numbers that I can live with and that could be fair to the seller. For example in this scenario, I could offer $90,000 with a $9000 down payment and 3.5% fixed interest on a 30 year amortization. With those numbers, I could make the property cash flow, but also, the seller would get monthly payments for 30 years eventually totaling around $135,000. Not necessarily the best example but hopefully, that makes sense?
I'm currently operating under a seller financed deal. It was a $69K purchase price, 10% down, at 7% interest paid over 4 years. I can pay it off anytime with no prepayment penalty. When the seller and I worked out the payment schedule we used the online calculator at Bankrate.com that spelled out what the payment was each month, how much would go towards principal and how much would go towards interest. Keep it simple.
A more direct answer to your question is the interest is calculated on the average outstanding balance over a period of time, usually daily or monthly. It doesn't make sense for a lender to make a loan and give someone a flat interest amount on the total unless it's a crazy high percentage (25-50%?). If a lender loans someone $100K over 10 years and charge a flat 10%, they are making $10K in total interest or $1K per year. Looking at that as an annual return, the lender is only making 1% per year. 1% APR is a terrible return for the lender.
Reading the responses I realized that it's important whether you're buying or selling. Generally, a knowledgeable seller or someone with an underlying mortgage is going to be getting closer to 10%, while you make be able to convince un unsophisticated seller to buy off on 4% or even some type of flat rate.
Obviously, you want a deal that works for you - no matter which way the transaction goes. Banks have rules for lending, but my primary rule is profitability, and thus I try and figure what I want or need to earn, and then work the math backwards. Then you need to sell it...
I sell some of my flips with Seller Financing and always try to get 20% down and charge 10.0% APR, usually on a 10 year note with no pre-payment penalty, but have negotiated on the down payment amount a few times but not the interest rate. From my view of it, I can make more then that not having the money tied up and am doing them a favor. If the buyer has good enough credit to negotiate a better rate, they don't need seller financing. My guess is it will be difficult to find anyone willing to offer seller financing below around 6-7% APR especially if they know you're going to use it as an investment property.
Can you charge an above market interest rate if selling a property using seller financing? I thought Dodd-Frank prevented this? Or are all of the above references deals to investor buyers?
I read that article, which is what confused me about the previous posts on this topic. I'm looking at selling a property using seller financing, but I would need to use a 7% interest rate or so for it to work. It's still a good deal for tenant buyers because it's below market rent (before taxes and insurance). I just want to be sure everything I'm doing is legal.
Very interesting article., thank you. I have this question, in today's Seller's market, does it make sense to sell with Seller's finance and wait 7 years? This is my brother's case. He owns a rental house, not mortgage. Right now the house needs approximatelly $15,000 repairs, excluding the roof. The house is rented for $925.00 monthly. He has recouped his original investment of $54,000.00 already. He proposed to his tenant to purchase the house AS Is for $150 K with 10% down, 5% interest for 7 years. Seller is offering Seller's finance. I think if my brother fix the house, and put it in the market, he can make now in the lower side, $185 K. So, does it make sense for him to ahead and sell it to his tenant