Seller financing incentive to sale?

Question

I have a property that I am looking to purchase, the property is fully paid for. The seller is open to seller financing (a portion) but we are about 20K to 25K off on price. I'm at 275K the seller is at 300K. The seller wants their equity back to reinvest in more properties. I was thinking we could offer $280K, plus the seller takes an 80K note at a high rate say 6% to 7%, amortized over 10 years with some type of option on his end, say he could call a big portion in 3YRs or 5YRs. I have the cash to put down 30% to 40% of the purchase price if needed.

Any thoughts or ideas you can suggest is appreciated! Any upside or downsides I'm missing?

Any thoughts or ideas you can suggest is appreciated! Any upside or downsides I'm missing?

Tom S. · Answer

@Steve Puglisi  Likewise, as Jaysen mentions above, why do seller financing if you can put down 40%?  You could buy two places at 20% down each instead.

Also I don't quite follow the math.  $275k and you can put down 40% ($110k) leaves a balance of $165k.  The seller would hold a note for $80k.  Where's the remaining $85k coming from?

Ryan Allison · Answer

@Steve Puglisi do you have a 401k?  My company uses Fidelity and I'm able to borrow up to 50% of the 401K amount (up to $50,000) with a 5 year note with 4.75% interest.  Again, you have to pay this back with bi-weekly equal principal & interest payments otherwise you'll have to declare income tax and pay a penalty.  The best part is that all of the interest goes towards your 401k, basically paying yourself interest.

Some people disagree with me on this, but in my opinion, if your deal has enough cash flow where it covers your payment back to your 401k that you borrowed for your downpayment, in my opinion it's not a bad option.  You may have some opportunity costs with lost investment money, but if you have good cash flow it's something to consider.

This deal in Wethersfield?  I also live in town here.

Tracy Z. Rewey · Answer

You are welcome. I am a big believer in buying property that cash flows with a good margin for maintenance and vacancies.  That becomes even more important when appreciation is flat or in a market that has been appreciating for a long time.  A 0% rate can help get the monthly payment down which in turn can help improve cash flow.  I prefer buying seller financed real estate notes and being the "lienlord" over the "landlord" but believe that owning investment real estate can round out a portfolio.

Logan Hassinger · Answer

@Jaysen Medhurst @Steve Puglisi

While traditional financing is preferred in regards to loan terms that are more beneficial to the borrower, however don’t underestimate the advantages it has long term. Advantages

• Typically unreported on the borrowers credit profile
• Flexible loan terms
• Possibility of a wrap down the road
• Able to acquire more the 10 property limit imposed by traditional underwriting guidelines 
• Less stringent underwriting from the lender

Steve Puglisi · Answer

@Derek Dombeck interesting idea, thank you. If I had an 80k balance in an Roth IRA could I use that somehow,without penalties?

Steve Puglisi · Answer

@Tracy Z. Rewey thank you. Great idea with the 0% note. Prices in CT are pretty flat so with minimal appreciation expectations how does that impact the decision.

Steve Puglisi · Answer

@Jaysen Medhurst, great suggestion! I didn't even think of a 0% note. I have a line with 100k availability, plus 50k savings but am hesitant to invest it all in one property as I would be tapped out. This would be my first rental but I have done extensive research and have a friend who owns the same property, they are indivdual 4plex that are party of a condo community. Banks would lend at max 75 LTV.

Tracy Z. Rewey · Answer

@Steve Puglisi  I love owner financing as both a seller and a buyer - but the terms I want are different depending on my role.

It can make sense to pay a little more on sales price if you get great terms (like the 0% interest rate @Jaysen Medhurst suggested) or pay a higher rate if you get a lower sales price (or some other trade-off).  I'd rather not give on both points though.

Whether it makes sense comes down to cash flow and appreciation.  The market can influence appreciation so I like to look at that as gravy (and not the only reason to do the deal).  In addition to some clarity on the numbers mentioned by @Tom S. it would also be helpful to know the income and expenses on the property to see if paying more or paying higher interest makes sense.

Jaysen Medhurst · Answer

I don't understand why you want to do seller financing, @Steve Puglisi? If you can put down 30-40%, why would you choose to pay a higher interest rate? Will you have some trouble qualifying with a traditional lender? I'm just not following you here.

One idea is to agree to the $300k sales price, if he holds the note at 0% interest. Offer to put $100k down and a balloon, at 10 years maybe. That gives him capital for a new deal and his vanity price. This can be a winning strategy, if you plan to hold long term. You'll need to run the math to understand at which point the appreciation you "give up" breaks even with the additional mortgage pay down and increased cash flow.

Seller financing incentive to sale?

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