What terms would you negotiate for a seller financing package?
Mukwonago, WI · Member since 2015 · 15 posts · 2 votes
Hello BP!
I have an opportunity to purchase an 8 family apartment building in Wisconsin from a family friend. The owner owns the property free and clear and is looking to retire from the business.
The owner said he is willing to offer seller financing to help me purchase the property and help him defer taxes on the sale.
My question to the BP family out there is what are typical terms of a seller finance package?
The asking price for the property is $425k. Rents range from $650-$625 per month. It is well maintained in a B/C neighborhood. All of the units are currently rented. The units are in very good shape, but dated. I know this market very well, and the rents are at market rate.
I could give the seller a 10% downpayment. But this is where I get stuck. What are typical terms in a situation like this? I have always purchased properties with bank financing or paid in cash.
Thank you for your input in advance!
Hi @Eric Huebner Step 1: FIND OUT WHAT THE SELLER WANTS. Sometimes people care deeply about the interest rate; sometimes they want a certain amount of income to supplement their retirement - very possible since he's retirement age. Once you know that, I would approach it this way:
$425,000 Purchase price
-$42,500 You didn't mention a down payment but I'm assuming 10%
$382,500 Amount you're financing
Go here and play with the numbers to see how to get him what he wants. http://www.amortization-calc.com/
At 5.5% and a 30 year term, your monthly PI is $2,172
At 7%, your monthly PI is $2,545
Both are very manageable on gross rents of $625 x 8 = $5000
As far as a balloon, if he doesn't want a big taxable event NOW, he isn't going to want one in a few years either. Listen to people - find out what THEY want and build the deal around that. That's the key.
And further, I'll share something I learned last weekend at Pete Fortunato's seminar in Tampa. If this guy never wants a lump sum, you could refinance this property and take the money and go buy something else - in essence, put the mortgage you owe this gentleman onto another property. See what I mean?
I have only done one owner finance so far but mine was for $150k. Put $20k down, 5 year balloon at 5% with a 15 year am. Deed transferred in to my llc and owner was listed as the lien holder. Believe it will be what ever you can both agree on for terms though.
When I hold notes/ finance, I will not go below 10% on my interest rate. Risk has to equal reward. So anything sub 10% is a great deal in my eyes.
Hi @Eric Huebner Step 1: FIND OUT WHAT THE SELLER WANTS. Sometimes people care deeply about the interest rate; sometimes they want a certain amount of income to supplement their retirement - very possible since he's retirement age. Once you know that, I would approach it this way:
$425,000 Purchase price
-$42,500 You didn't mention a down payment but I'm assuming 10%
$382,500 Amount you're financing
Go here and play with the numbers to see how to get him what he wants. http://www.amortization-calc.com/
At 5.5% and a 30 year term, your monthly PI is $2,172
At 7%, your monthly PI is $2,545
Both are very manageable on gross rents of $625 x 8 = $5000
As far as a balloon, if he doesn't want a big taxable event NOW, he isn't going to want one in a few years either. Listen to people - find out what THEY want and build the deal around that. That's the key.
And further, I'll share something I learned last weekend at Pete Fortunato's seminar in Tampa. If this guy never wants a lump sum, you could refinance this property and take the money and go buy something else - in essence, put the mortgage you owe this gentleman onto another property. See what I mean?
When I hold notes/ finance, I will not go below 10% on my interest rate. Risk has to equal reward. So anything sub 10% is a great deal in my eyes.
First, thank you for your response to my post. I agree, I need at least 10% down to have enough skin in the game, but how would this view of risk change, if at all, if the buyer had a perfect FICO score? My credit is perfect, and I have known the seller for many years, so hopefully the seller will be comfortable with the deal.
I’m in agreement with Pete. Having a shorter term balloon with a higher than Bank rate avg with a longer amortization on payment is a solid deal. I would recommend a long enough term on the balloon for you to be able to get some improvements done so that when your note is de you can get some solid cash out refi terms and be sure to have your llc showing some decent earnings for the 2 years before you plan on qualifying for a loan.
Sounds like a great deal! Nice job man!
Thank you for your response! The amount of time to owner finance was one of my concerns. I want it to work out for both the buyer and seller, so that it is a win-win for both of us.
Hi @Eric Huebner Step 1: FIND OUT WHAT THE SELLER WANTS. Sometimes people care deeply about the interest rate; sometimes they want a certain amount of income to supplement their retirement - very possible since he's retirement age. Once you know that, I would approach it this way:
$425,000 Purchase price
-$42,500 You didn't mention a down payment but I'm assuming 10%
$382,500 Amount you're financing
Go here and play with the numbers to see how to get him what he wants. http://www.amortization-calc.com/
At 5.5% and a 30 year term, your monthly PI is $2,172
At 7%, your monthly PI is $2,545
Both are very manageable on gross rents of $625 x 8 = $5000
As far as a balloon, if he doesn't want a big taxable event NOW, he isn't going to want one in a few years either. Listen to people - find out what THEY want and build the deal around that. That's the key.
And further, I'll share something I learned last weekend at Pete Fortunato's seminar in Tampa. If this guy never wants a lump sum, you could refinance this property and take the money and go buy something else - in essence, put the mortgage you owe this gentleman onto another property. See what I mean?
@Gail Greenberg - THANK YOU for this breakdown!!!! You have brought up many good points that I didn't really think of in terms of the balloon payment/refi in the eyes of the seller.
When I hold notes/ finance, I will not go below 10% on my interest rate. Risk has to equal reward. So anything sub 10% is a great deal in my eyes.
First, thank you for your response to my post. I agree, I need at least 10% down to have enough skin in the game, but how would this view of risk change, if at all, if the buyer had a perfect FICO score? My credit is perfect, and I have known the seller for many years, so hopefully the seller will be comfortable with the deal.
I think you misunderstood me. I CHARGE 10 % interest when I loan out money. Not I get a 10 % down payment on deal.
If you have the great credit etc and I was the seller. Every seller has a different reason for owner finance. Alot of times the market does not bear the current ask price/ repairs needed and owner finance is the only way. Other times it may be a tax strategy on the sellers part.
And further, I'll share something I learned last weekend at Pete Fortunato's seminar in Tampa. If this guy never wants a lump sum, you could refinance this property and take the money and go buy something else - in essence, put the mortgage you owe this gentleman onto another property. See what I mean?
Of course, you would "move" the mortgage only after he agrees to it. But a note is "currency" and you can spend it in a lot of ways.
Hi Gail - Could you expand on this further? This is very interesting for my seller financing strategy I plan on deploying and could be of benefit to the OP (My strategy is to buy free and clear properties with 100% seller financing with prepayment lockout for 15-20 years with a market interest rate). I thought the best I could do was take out a line of credit during the lockout period in order to access equity, but a cashout refi would be even better. If I understand you correctly:
1. Buy Property A with seller financing. Seller holds a note secured by a mortgage on Property A
2. Build Equity on Property A
3a. Refinance Property A and instead of paying off the Seller's note, use for down payment on new Property B
3b. Seller would of had to of agreed to transfer mortgage from first position on Property A to second position on Property B (if Property B is worth more than Property A and additional bank debt is used to fund difference of Property B and refi funds)
4. Seller is still paid the same principal and interest he would have received if Property A was not refinanced.
Is this correct? Also, is this something that can be negotiated with the seller say in the fifth year of owning Property A or would there have to be certain language in the original mortgage?
Thanks!
Hey @Michael Opdyke, I would say at Pete's very reasonably priced weekend seminar in sunny Tampa, he showed probably 10 ways to create notes and use them to do other real estate deals. He even gives copies of all his simple plain language contracts he uses to do unusual deals that none of us have ever thought of. Your steps sound correct but if I were you and you're buying free and clear or high-equity properties with seller financing, you absolutely should go and learn from him yourself. He will blow your mind. You also live pretty near me - we should get together ;)