Sellers financing - who propose initial terms?

Question

Hi everybody!,

tomorrow I will be sending in my offer for an investment five-unit property with a seller's financing. Even though I bought a few properties already, never with a sellers financing.

I know how big down payment I can afford (20-40%) and I have also done my real estate analysis to calculate what would be the best terms for me (interest, amortization period, down payment) - which had the highest NPV.

However my real estate agent told me, that I shouldn't be putting these options in the initial offer, instead I should let the seller to come up with his terms first and then negotiate those.

Is this normal strategy? Or do you you propose your financing terms in the offer?

Account Closed · Answer

i would see what terms the seller was open to first...then you can negotiate fom there....most sellers won't ask for more than 20-25% down, so there's no need for you to offer 40% or let him know you have that capability....save that money for rehab or another property

Loc R. · Answer

John,

It sounds like your realtor is looking for a sale.

In terms of negotiating and offers, here are few tricks:

1.  You should always gather as much information as possible, and make an offer from there.  If the person is looking for a large down (to pay something off or to move into another investment), then offer a small down is pointless.  If the person is looking for a shorter payoff period, then offering a long amortization schedule is pointless as well.

2.  You can always start with a lowball offer, one that's a "dummy" offer.  Meaning, you'll get them to react/tip their hand on a offer that you weren't really expecting them to take.  You have to be careful with this one, and be sure not to tick them off too much.

3.  Gather as much information as possible.  I can not stress this enough.

Brian Levredge · Answer

I think it's a smarter idea to get the property under contract with a subject to acceptable seller financing to buyer clause, as Bill  mentioned.  This makes it easier for you to focus on one aspect of the sale at a time.  When you've come to terms on the price, the seller is going to think they are that much closer to unloading which puts you in a better position to negotiate on the next stage: the terms.

If the property is listed on the MLS, that is a retail price.  Offering 20% below list may not be getting that great of a deal.  Of course, that's something you need to determine for yourself.  I would also be more conservative with your interest rate as well.  6% is fairly low for an owner financed deal.  You would probably be looking at a similar rate for conventional, NOO financing through a bank.

Bill Gulley · Answer

Never pay more for a property because of seller financing! You can look at it as a loan premium for a small amount, but never pay significantly more for a property for the financing. This is the basis to be scammed, especially with a loan with a short fuse!

You'll need to refinance that place you paid too much for, your loan will not provide contributions to prinipal to reduce the loan sufficiently to be refinanced and your deal will be a no go......

In doing over a thousand deals, I would say that less than 10% were successful when the buyer paid more than the property was worth, it's a part of the scam of selling, taking the down payment and a few years of payments, then putting a borrower in a position to defualt, take the property and do it again!

You need to follow Anlenly's advice, don't let the Realtor or seller know what you have for the down, or they will want it! 20% is customary for a good down on a seller financed deal.

With that much down, you should be in the driver's seat, unless the property is marketable conventionally....if the seller advertised seller financing or it is ojn the listing, they expect to see such deals.
I would not be afraid to walk away if your terms were not met, let the seller think about and lose sleep, then go back, maybe a little lower and come back up later on...whatever.
If you don't have any credit issues that loan should go out at least three years, in fact a few months over might be better, like 40 months. This will give you 3 full years to show for the refinance.

If you make an offer without loan terms, but subject to favorable financing to be agreed, you might hit on price first as Bryan H mentioned. While it can be a wash, financing terms and price, do not go up in price unless your loan term reduces the principal to a point as a true market price would be reduced with current financing terms...hope that made sence....at some point, it will be refinanced and you want to know your equity will be there....and BTW, I wouldn't count on more than 1 or 2 per cent appreciation to get there, if any at all!

Bill Gulley · Answer

LOL, yes, anything is possible, but not probable. If it were 50 units, there would be a better chance of convincing the bank that it was a real commercial deal, with 5 units, being one over the SFD limit, underwriting will likely be closer to conventional requirements, but sloted in commercial loans. Even now, 100% financing for 50 or 500 units would require a hefty financial statement.

I was just trying to think of a "yardstick" that was appropriate for the very slim to none chance, afterall, she might be able to cast a spell with more practice. LOL!

John K. · Answer

Thanks everybody again! I already send in my offer last week and in the end I didn't propose my terms - instead I am waiting for the seller to come up with the terms.
The terms I was counting with were pretty generous and so it is possible that the seller will come up with actually lower expectations. I will see and I will let you know guys - hopefully this week!  :D

Dale Osborn · Answer

Put your terms out there and let Seller counter. Start as low as possible with down payment, interest rate and ask for a longer fix - 10-years. Having a 5-year balloon sounds like bank financing. You are negotiating seller financing - go for what you can get. Someone mentions the safe act which states that if making loans for this is their primary business then a license is required. An individual can still offer financing on their own property without so called licensed practitioners who are looking for job security getting their hands in your pie.

Bryan Hancock · Answer

He who proposes first generally loses.  If you and/or your Realtor thinks it will work try to work out the price and then decide who gets the better terms based on the price that is set.

If the seller finances the deal you should expect to pay more for the property UNLESS there is some form of distress so that you have the upper hand in both the price and terms.

Bill Gulley · Answer

Hi, either party can propose loan terms. If you follow the Realtor's advice (remember, he wants a sale) you need to make your offer subject to acceptable terms, otherwise you'll have a contract to buy at what ever the selkler wants to give you an backing out could cost you your down/earnest money or even a larger amount under the default provisions.

You can also make the offer with better loan terms than you would actually accept and horse trade from there. When I purchased with seller financing, I always set the terms in the contract!

I can't say that advice is not good only because the Realtor may know the seller and what they will do, otherwise, it sounds like they will have a contract regardless of what you work out.....with 20%/25% down, that should be a strong offer for the seller.

Good luck...

Account Closed · Answer

thanks bill, but it's Alenky   :D

Sellers financing - who propose initial terms?

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