HOW TO STRUCTURE SELLER / OWNER FINANCING

Question

ALOHA,How would you pitch an offer to purchase a deal directly from an owner? Hypothetically, the owner is 70 years old and inherited the house from his parents.1. Conservative ARV 200K2. Seller offers to sell house for 150K3. Rehab costs about 50k on high end4. Market Rent $1,400/moWhat are some benefits for the owner if he provides owner financing? Taxes? Passive Income? No Realtor Fees?How would you structure such a deal?What is the highest purchase price you would offer?Thanks in advance.

Andrew Kiel · Answer

It's all about discovering the needs and wants of the seller and then working to make a win-win for both of you. We recently received 30-year fixed rate financing from an 85-year-old couple who's intent was to leave their kids a monthly payment (they didn't want them to receive a large lump sum). One question I always like to ask a seller is "Do you mind if I ask what you plan on doing with the proceeds?" - if the answer is "I don't know" or "put it in the bank" you can make a GREAT case for owner financing, after all, you can offer a much higher rate of return than the bank. There are of course a bunch of reasons that a seller finance deal could be beneficial for the seller, not getting hit with big capital gains being one of them. As you mention, realtor fees another.As far as the offer goes, make sure the numbers work for you. We always look for a certain "spread" between the monthly payment out and in. If it doesn't meet our requirements, we pass. There is an infinite number of ways to structure a deal like that just make sure the numbers work for everyone.

Tom S. · Answer

@Gary Ahu As mentioned by Andrew above, depends a lot on the sellers needs, and what they want out of the deal.For my purchases of owner financing properties, I usually offer 10-20% down, 30 year amortization, 5 year balloon, 5-6% interest rate. The 5 year balloon because most sellers aren't interested in holding it for the full 30 years of course. Sometimes it happens but in my experience, rare.Use a good attorney with experience in these transactions.

Dennis M. · Answer

150k and 50k in rehab with the hopes it’ll be worth 200k arv which is exactly what you have in it seems like a bad investment to me already .. then on top of that your only getting 1400 market rent . Sorry but deal sucks . Unless your getting atleast 2 grand in rent I see no point in going through with this because your numbers are bad . I’m not sure why anyone would even consider such a “ deal” . The financing is the least of your problems on this one

James Galla · Answer

Unless they have some prior experience in real estate, they are probably better off with just a plain jane conventional deal. They are 70-years-old, so I wouldn't expect them to remain diligent on servicing a loan when they are 100. Theoretically, if they die off in 8 years (life expectancy and all), that note can pass to their family member and then their family member is stuck with servicing the loan after that. We don't know who that family member is or what their experiences are. By that same token, the family member is also set to enjoy payments for the next 22 years, absent the need to go through the entire foreclosure process. Additionally, for those 22 years, they would recover fantastic interest payments above and beyond what a conventional sale would provide.

Dennis M. · Answer

You can’t have more than 140k in the deal total if your only getting 1400 in rent . There’s no point in Persuing this further in my estimation

Gary Ahu · Answer

@Dennis M. yah I agree with you on the numbers. The $150K is what the owner is asking. What would you offer on the property and how would you structure an owner finance terms?

Gary Ahu · Answer

@Tom S. that seems like very reasonable terms!!! Thanks for your input. @Mark Sewell I’m not sure on that one. Sry

Mark Sewell · Answer

So in the example above by @Gary Ahu the seller will have a first lien position, correct?What if there is still a mortgage balance left? Say that the seller didn't inherit it but is still paying it off. Maybe he is a tired landlord, and is just done with the whole tenant thing. The mortgage balance is still large enough that really wouldn't want to pay it off if you didn't have to.How would you structure that kind of deal, where you have essentially a seller finance as well as the subject-to-existing portion? I guess the seller get a second lien position, right?

Gary Ahu · Answer

@Andrew Kiel @James Galla Thanks for your insight. I appreciate it.