Using Seller Financing to Buy a Single Fam Home and Rent Out

[James Africano]

Hi guys! I'm new to this site but have been soaking up what I can for the last few weeks. I'm looking to purchase a single family home but am looking into some advice as to possibly approaching seller financing to purchase a home. The reason I'm looking into seller financing is because although I qualify for both VA and FHA loans, I don't want to get stuck with occupancy loan regulations as I am wanting to make it a rental immediately instead of having to wait. Additionally, I would not have enough capital to make a down payment to use a traditional loan.

Here's the scenario:

The seller has not advertised seller financing, but is currently trying to sell or rent out the property which makes me curious as to the possibility of soliciting owner financing.

Here's what I'm thinking about presenting:

- $162,000 loan amount, 30 year amortization,  Balloon payment at the 5 year mark. This will be shown as a lease with an option to purchase.

- $1,000 down payment (consideration)

- Buyer would assume property taxes and rental upkeep.

- Interest rate of 4.5% (Not sure if this is realistic. Bank is offering me 3.75% if I obtained it through VA)

- No PM as I only live 10 minutes away from the house

This comes to about $816 a month to be paid to the seller. Rent goes for about $1350 in that area. I could use the excess $534 a month to pay for any repairs and let it accumulate.  With this accumulation, I could have 20% for a downpayment for a traditional loan sometime between year two and year three. Once I can get the rest of the downpayment for the loan, I can pay off the seller and start receiving full rent with a lower monthly payment than what I was paying with the seller.

Vacancy - I've considered a scenario in which I could not find renters. Here are my thoughts:

- I receive $1300 in BAH which I currently only use approximately $500 for a place I'm living currently (currently renting with 2 other friends)

- I have no qualms about moving into the place and living there until I can find renters. Plus a promotion that's going to net me an extra $1000 a month (Guaranteed pay grade promotion) is set to happen in May.

Risk - I believe both the seller and buyer receive low risk with this arrangement

- The Seller maintains low risk with their mortgage and taxes being covered with added extra income. Were the buyer to pull out, the buyer would get to keep the added equity and the possible acquisition of renters. Worst case scenario the buyer puts the house up for sale or to rent on the market again.

- The buyer maintains low-medium risk as if some situation were to arise, I could pull out and keep the saved up excess rent.

Of course this is all contingent on if the owner is open to this idea, if it could be worked out legally, and if both parties could mutually benefit from this arrangement. I'm just trying to see if there's any blatant flaws that would make this a bad idea.