Favorite amortization schedule for seller-financing

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Favorite amortization schedule for seller-financing

Pat JacksonPro Member
Rental Property Investor · Reno, NV · Member since 2017 · 284 posts · 137 votes

I've heard some say the rule of thumb is "short as possible".  Others just go out to 30 years.  Still others figure out a realistic monthly payment, work back from there, and have a unique schedule like 21.75 years (261 months).  

I'm wanting to get into seller-financing where the focus is the monthly payment, not the purchase price.  The average American is in a house 7-10 years, then either sells or refinances.  Using this average, is it anywhere close to a safe assumption to amortize over 30 years, think the buyer will either pay or things will go sideways sooner than later?

Another way to ask this, "Is there any reason to not amortize over 30 years for seller-finance deals".  These houses market value will be 50-100k, fyi.

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Jake S.
Rental Property Investor · MN · Member since 2017 · 864 posts · 555 votes
7y

Hey @Pat Jackson! 30 years is just fine, it depends on what you are comfortable with as well. You could require a Balloon payment after a set amount of years.

For example, a 30yr amortized loan at 5% interest rate with a balloon payment in year 5

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  • Jake S.
    Rental Property Investor · MN · Member since 2017 · 864 posts · 555 votes
    7y

    Hey @Pat Jackson! 30 years is just fine, it depends on what you are comfortable with as well. You could require a Balloon payment after a set amount of years.

    For example, a 30yr amortized loan at 5% interest rate with a balloon payment in year 5

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y

    depends on what your doing .. if your keeping the paper then its whatever you want.

    with long term amortizations the first half of the loan is pert near all interest.

    if you looking to create seller carry back with the idea of selling off the paper to recoup cash then you want to get close to your real estate calculator and understand PV  which is what note buyers use to determine note value at a given time.

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  • Pat JacksonPro Member
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    Rental Property Investor · Reno, NV · Member since 2017 · 284 posts · 137 votes
    7y

    @Jay Hinrichs

    I’m wanting to do both. If I can get the original owner of the house to seller finance, I’d wrap that mortgage, use a contract for deed, and hold it.

    If I buy the home, I’d do a deed of trust and create a note. I want to sell the front portion of the note to get my money back. I better figure out what PV stands for!

    Any hints?

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y

    Present value .

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  • Pat JacksonPro Member
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    Rental Property Investor · Reno, NV · Member since 2017 · 284 posts · 137 votes
    7y

    @Jay Hinrichs

    If I had a front partial for sale with either a BPO or an appraisal would that do the trick?

    My rule of thumb is to not sell a note for more than 65% of PV

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y

    @Chris Seveney   See if Chris will chime in I Believe he deals with Partials a lot and could in fact be a player for your partials.

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  • Pat JacksonPro Member
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    Rental Property Investor · Reno, NV · Member since 2017 · 284 posts · 137 votes
    7y
    Originally posted by @Jay Hinrichs:

    @Chris Seveney   See if Chris will chime in I Believe he deals with Partials a lot and could in fact be a player for your partials.

    Thanks Jay, you're handier for pockets on a shirt.  For Jay, Chris, or anyone else reading this, here are my thoughts on what I'm wanting to do.

    Let's pretend I'm all into a house for 50k (purchase, rehab, holding) and it's worth 85k, and I seller finance at 85k @10% for 240 payments of $820 (I'm ignoring taxes and insurance for this).  Side note, I'd actually sell for ~93.5k and take a 10% downpayment.

    I would be interested in selling off the front 50k @ 8%, for 94 payments of $720.  This would get me my money back, and provide me $100 a month for the first 94 months of the loan.

    I crunched these numbers for a 20 year amortization, however it wouldn't look substantially different for 360 months.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Pat Jackson:
    Originally posted by @Jay Hinrichs:

    @Chris Seveney   See if Chris will chime in I Believe he deals with Partials a lot and could in fact be a player for your partials.

    Thanks Jay, you're handier for pockets on a shirt.  For Jay, Chris, or anyone else reading this, here are my thoughts on what I'm wanting to do.

    Let's pretend I'm all into a house for 50k (purchase, rehab, holding) and it's worth 85k, and I seller finance at 85k @10% for 240 payments of $820 (I'm ignoring taxes and insurance for this).  Side note, I'd actually sell for ~93.5k and take a 10% downpayment.

    I would be interested in selling off the front 50k @ 8%, for 94 payments of $720.  This would get me my money back, and provide me $100 a month for the first 94 months of the loan.

    I crunched these numbers for a 20 year amortization, however it wouldn't look substantially different for 360 months.

    very common model although some note buyers wont deal with investor held notes they only want more owner occ seller carry back notes.. this model once done you have no skin in the game so to speak.. so talk to Chris is knows better than me on what they like and what their criteria is  

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  • Pat JacksonPro Member
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    Rental Property Investor · Reno, NV · Member since 2017 · 284 posts · 137 votes
    7y

    @Jay Hinrichs

    I would argue my skin is the game is I have a big big interest in the back end. I see this option as superior to the traditional BRRRR, as I don't love dealing with property managers, repairs, what whatever else it is that pops up.

    I realize this could go sideways, but not as often as a rental. Maybe.

    Another question to throw out, is there any sort of agreement I can form with the front end of the note buyer stating I’m responsible for the foreclosure/rehab/new buyer if this is needed. I’m on the hook if I have a rental get trashed, so why not here?

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  • Lynn Burson
    Real Estate Investor · Houston, TX · Member since 2014 · 75 posts · 22 votes
    7y

    @Pat Jackson I would ask @Chris Seveney ...  I have spoken with him in the past and he is very knowledgeable and willing to help.

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  • Chris SeveneyBusiness Member
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    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    7y

    @Pat Jackson - You are on the right path in your scenario that if in it for $50k, sell the front end of it etc. Some things I like to get people to think about is:

    A. If you are in it for $50k, sell a partial for $55k. I do not know what your partial agreement will say, but if you are managing the note for the partial owner (which I recommend) and it defaults etc. you have $ to foreclose or continue paying the partial buyer depending on how you structure your agreement - that is important.

    B. Like others said, I would not sell a partial for more than 50-60% of property value. That way if you have to foreclose etc. you can make sure they are completely covered.

    C. What if you did a balloon. Lets say you did a loan for $90k over 15 years at 9.9% ($961/month) and you sold a $60k partial at 8% to at $900/month. This would be 89 of 180 months, but you could then balloon the payment at that time which would be $61k (remaining UPB) instead of collecting the next 91 payments. The borrower could refinance before then which would still be a nice take for you but if the loan played out then you could do this. Or you could turn around and sell another partial to the original investor as well who probably would not mind especially if the payments were consistent pay stream. Many ways to skin this cat. Whatever path you go down, I look at time value of money and try and get my $ out of deal the fastest and any profit in as fast as possible as well.

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  • Pat JacksonPro Member
    OP
    Rental Property Investor · Reno, NV · Member since 2017 · 284 posts · 137 votes
    7y

    @Chris Seveney

    A. Great idea! What about doing that AND saving the downpayment? I figure I could hard money lend my rainy day fund till the rainy day comes.

    B. Totally agree.

    C. Are there any issues with balloon payments, residential properties, and Dodd Frank?

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  • Jorie Aulston
    Real Estate Broker · Miami, FL · Member since 2015 · 59 posts · 37 votes
    7y

    @Pat Jackson to me it just depends on what type of return I want and what they can afford. There is no base amortization. Some may be 24 months, I have one right now that is 76 months and some may be 15 years.

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  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y

    If the interest rate is reasonable (4-6%) I’d get the seller to hold the note for as long as they’ll agree to

    I’d Avoid balloons at all costs . Be sure to include in your wording the ability to pay off the property early

    As a buyer I can’t think of why anybody would want a balloon or a short term . As long as you have the ability to get out of the loan why would you be desirous of such an arrangement

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  • Jason Dillard
    Real Estate Broker · Greer, SC · Member since 2013 · 548 posts · 271 votes
    7y

    @Pat Jackson we try to get a zero interest loan from seller when we buy. Term makes no difference. Payment needs to be less than the payment we create when we seller finance out. Dodd Frank requirements have to be met when you lend to an owner occupant. It's very hard to sell paper that is a wrap. If you can create your paper with your cash, then you can trade it with no discount. This strategy gets all your equity into next deal. I have even paid off debt with created paper. If you understand paper, it can snowball your investments.

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  • Pat JacksonPro Member
    OP
    Rental Property Investor · Reno, NV · Member since 2017 · 284 posts · 137 votes
    7y
    Originally posted by @Jason Dillard:

    @Pat Jackson we try to get a zero interest loan from seller when we buy. Term makes no difference. Payment needs to be less than the payment we create when we seller finance out. Dodd Frank requirements have to be met when you lend to an owner occupant. It's very hard to sell paper that is a wrap. If you can create your paper with your cash, then you can trade it with no discount. This strategy gets all your equity into next deal. I have even paid off debt with created paper. If you understand paper, it can snowball your investments.

    Thanks Jason.  Exciting stuff.  Care to share any examples of how notes snowballed your investments?

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  • Jason Dillard
    Real Estate Broker · Greer, SC · Member since 2013 · 548 posts · 271 votes
    7y

    @Pat Jackson we took 5 notes created on houses for twice what we paid for them and traded them as down payment on an office building.

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  • Pat JacksonPro Member
    OP
    Rental Property Investor · Reno, NV · Member since 2017 · 284 posts · 137 votes
    7y

    @Jason Dillard

    Wow that’s awesome! Did the bank accept those, or did the seller of the office want them?

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  • Jason Dillard
    Real Estate Broker · Greer, SC · Member since 2013 · 548 posts · 271 votes
    7y

    @Pat Jackson seller took them.

    0Reply
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