Do you ever get 0% interest on owner financing?

Question

I guess it woul n't hurt to ask the seller for this but was just wondering if ya'll ever got 0% financing on rental property? Say something like 25% down and )interest on a 10 year note.

Jay Hinrichs · Answer

I have sold many a property this way... a note paid off in 30 months at zero % has the same present value as a 15% interest note at 7 years.. something many sellers miss out on.. its how I sold most of my OREO..

We have been doing this on land deals since the early 80s.. did not invent it..

but we followed the auto industry.

and the other reason I did it is I had some Saudi clients that were prohibited from paying interest so I just backed into PV values and they were good with it.

We paid our imputed interest.. but you usually get a nice price for the asset.

and I can tell U the investors I sold these property to are happy campers as well. the houses did not cash flow and were maybe negative but now 3 to 7 years later they are free and clear and they paid NO interest which is money they cant get back.. I think its a win win if you know how to  Splain it to your seller.. and it does not hurt if you can use a financial calculator and do PV assumptions and such... same thing note investor use ..

Jeff Bridges · Answer

IRS charges the lender imputed interest even if there is no interest offered on a note. So seller/ lender are on the hook for the taxes of the prevailing interest rate at the time the loan originated. They will want to charge at least this minimum prevailing rate and you would likely want to offer the same as a floor for your seller finance offer since they will end up paying income on this whether they collect or not. You can ask for 0 but it would not be fair or the seller may not be aware of this IRS rule.

"Imputed Interest refers to interest that is considered by the IRS  to have been paid for tax purposes, even if no interest payment was  made. The IRS uses imputed interest as a tool to collect tax revenues on loans that don't pay interest, or stated interest is very low."

source:

http://www.investinganswers.com/financial-dictiona...

IRS list of applicable rates (current AFR rate is between 2.55 and 2.58% depending on the term of the loan):

https://apps.irs.gov/app/picklist/list/federalRate...

Anthony Dooley · Answer

If you are willing to pay them the full asking price, that is a good offer.

Jay Hinrichs · Answer

Account Closed  it was interesting working with my Saudi clients.. all of them were small business owners in SF..  Deli  Halah meat market  and other small enterprises... they were good clients and rock solid on repayment..  Trying to get in front of the wife to sign papers was a chore though !!!!

Account Closed · Answer

@Brandon Turner   What I have seen most often is the owner simply raising the price to cover the profit they would make in interest.  It is basically interest with a 100% prepayment penalty by another name.  Anyone that has a "Cash Price" that is lower than the financed one is doing that.

@Jay Hinrichs  did raise a great issue.  Many Muslims do not use standard American mortgage loans.  They are trying to avoid Riba Qard (Standard Interest) and Riba Jahiliyyah (Late Fees).  There are a few banks that use complicated rent to own or other systems to avoid interest being paid.  Many of the Muslims I know do not use banks and use community financing.  They do not pay interest but they are expected to help others finance things for no interest later.

Brandon Turner · Answer

Thanks for all the great replies just to tell you my motivation believe seller owns house free and clear and just wanted to go for a owner finance scenario first to avoid some closing costs. Funny story went on you tube one day looking for info on real estate and the first one i come across is a video by a guy named Brandon Turner. Freaked me out was wondering when someone would comment on that.

Brent Coombs · Answer

I agree that "It is basically interest with a 100% prepayment penalty by another name.  Anyone that has a 'Cash Price' that is lower than the financed one is doing that".

ie. If you DO have 25% deposit, you MAY be better off / equally placed just financing it conventionally?

Hmmm, around here at BiggerPockets, anyone else familiar with the name "Brandon Turner"? Just askin'...

Willie Morales · Answer

HI Jeff,

Thank you,

I didn't know about the "imputed interest" , I agree, not fair for the seller. So no matter what, we need to offer some type of interest to the seller .

Do you ever get 0% interest on owner financing?

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