Owner financing-how do I bring it up to seller
Investor · Northwest, PA · Member since 2013 · 107 posts · 24 votes
Hi BP
I just made a cold call on a turnkey duplex in my market. Owner loves the property. Said its been a great money maker over the 17 years she's had it. But sounds like she would be willing to sell at the right number. She wants 85k which would be fine with me...as long I could get her to hold the note. I don't have the 25% to put down for a conventional mortgage....
How do I bring up the idea of owner financing without scaring her off. Not sure how to approach her. I really think she may entertain the idea if I convey it to her the right way...benefits and such.
Thanks for any and all advice
I ask if they are interested in replacing their rental income with a note secured by a deed of trust. I point out the benefit of monthly income, no expenses, with no land lording. It's really not more complicated than that. We talk about their current gross rents minus expenses (the real expenses, not the ones they tell potential buyers) and I offer to make a payment that matches that income. I like 3-5 year balloon notes, no prepayment penalty. You can play with the interest rate and loan term to make the payment desirable.
Many land lords who have had the property for awhile are used to monthly income and usually like it, especially with a decent interest rate. They 're easier to work with. Sellers who think they need to cash out often have limited (or non existent) financial sense and planning. skills.
Ask... yet do it in a bartering way because no seller wants to feel like they're giving more than they are getting. So make them feel as if they are getting the most of the deal. Use your skilled marketing technique in a subtle way. Perhaps you can work in a lease/option deal with seller's assistance. Run the numbers and providing the property in rent-ready so long as the NOI is positively in your favor make it happen.
Kudos,
Mary
I have had my eye on a couple educational products that talk about these negotiations. Jay P DeCima wrote a (book?) about this topic, but that has a $200 price tag (I think). Bill Tan teaches a course on negotiating owner finance. That one goes for about $900/seat. I've been eying them but I haven't sprung for either one yet :) I will be watching this thread to see what others have to say, either tips on negotiating or good sources to learn from.
If you can make it work with your investment plan, offer the seller a higher bid. If the property is $85k and the bank will finance you 75%, then that's a loan of about $64k. If you don't have $21k + closing costs, let's call it $24k, and can only put down $16k, as the seller to take back a 2nd, ask the seller to carry that $8k shortage + an extra $8k to be added to the purchase price.
So you'll buy the property for $93k, get financed by 1st mortgage for $64k, have seller carry $16k at some reasonable rate for, i don't know, 3-5 years, and you put down $13k + closing costs.
You get the idea. A lot of times banks don't like a subordinate mortgage because it increases the risk of defaulting on the first mortgage due to cash flow issues. It helps if your market is on the rise because it will naturally inflate your equity and you will be less likely to walk away from it easily. Still, 16k down on a $93k purchase isn't terrible.
Bottom line - seller financed properties usually go for a little bit more because the seller defers his chance to be fully cashed out at the market value of his property.
Geeez, gotta disagree with everything Lupe said, other than asking the seller to carry a second, but absolutely not like that. His bottom line statement is predatory lending, never go there.
Financing NEVER adds value to the property, except to the extent that other financing would cost! You pay much more with a balloon payment early on it won't appraise out to refi it. So you need to nail down the real value, look at the amortization and ensure equity will be there to meet any future obligation.
Landlords may want out, SF is a great way to get out of the ownership responsibilities of repairs, maintenance, screening tenants, collection of rents, clean ups, advertising and all the phone calls. SF gives her less income but less headaches too. She still has an investment and can earn above market rates than she would otherwise get. Could be close to the same if she were to get a manager. Her down side is no more appreciation but she can make more on the interest as regular income.
Questions to ask....what is her reason to sell, does she have to buy another property? If so, that means she may need a down payment. You could pay for the discount, but again, look to the value as I mentioned above. Usually, a LL doesn't need cash for another property, but could be the case.
Next, you may need to devise some way for there to be sufficient cash up front.....she could sell part of her note.
If she doesn't need cash, then stress the note as a better investment for her than any other she could deposit funds into after taxes.
Sell the tax aspects, pays on the gain of the sale, if any, as it is paid, not all up front as required if she got cash. So she earns interest on Uncle Sam's money.
Show the total she will receive with interest.
Offer to pay for a loan servicer to administer the note so she has no duties, just pick up her monthly payments or have it deposited to her account.
How motivated is she to sell? You need to show the deal as a win-win. She can have full price if the value is really there. Show the difference between what a cash offer might bring after taxes, if any, compared to your deal as an investment for her.
Seller financing is not always possible, so you need to do some digging into her financial needs from the sale, if you can overcome the requirement for cash, then SF is possible. If not, then it's not a deal for you. Don't get personally tied up with a property, it has to be a deal or you need to move on.
Landlords are usually receptive to SF as they have been collecting rents and working the property, many like to sell as their retirement income, probably the easier owners to get involved in seller financing.
BTW, as a non-owner occupied residential deal, the SAFE Act may apply, so see an attorney to protect both of you really, her problems could become your problem too. :)
I think there are a few ways to approach this kind of conversation.
If the seller doesn't need to be cashed-out at closing, you can usually explain your offer in such a way that actually sounds more compelling than selling for cash.
Note: One thing to keep in mind is that as the investor - your #1 priority is to buy a property that will cash flow (and ideally, one that will cash flow very well). In a sense, this means that the price and interest rate you pay is only relevant to the point that the property will still have positive cash flow after all revenue & expenses are factored in.
Given this, it's important to know what your maximum monthly payment can be - because this will give you the parameters that you offer needs to fit within. As long as the monthly payment doesn't exceed your known limit, you can pay any price and/or any interest rate that will get the deal done.
One way to negotiate this is to help the seller understand that if they are willing to accept payment for their property over an extended period of time, you can pay them a price above market value. You can use phrases like, "You can add these payments to your long term retirement plan" or something to that effect.
You can get away with offering a higher price IF you're able to stretch out the amortization of the loan and/or negotiate a 0% interest rate.
"With this offer, I am calculating your interest into my offer price. This way, you won’t need to report any part of your payments as "interest income" to the IRS."
If a seller is willing to finance the property, there are all kinds of innovative ways you can make the deal work for both parties. Again, at the end of the day, the main concern to YOU is whether or not the property will cash flow (which is all contingent on what those monthly payment ends up being).
I ask if they are interested in replacing their rental income with a note secured by a deed of trust. I point out the benefit of monthly income, no expenses, with no land lording. It's really not more complicated than that. We talk about their current gross rents minus expenses (the real expenses, not the ones they tell potential buyers) and I offer to make a payment that matches that income. I like 3-5 year balloon notes, no prepayment penalty. You can play with the interest rate and loan term to make the payment desirable.
Many land lords who have had the property for awhile are used to monthly income and usually like it, especially with a decent interest rate. They 're easier to work with. Sellers who think they need to cash out often have limited (or non existent) financial sense and planning. skills.
Bill Gulley, please explain what you think the predatory aspect is.
Putting the note amount higher than LTV of the property value, suggesting that the loan can't be refinanced early, it puts the lender at risk with the SAFE Act and the CFPB, they can get involved due to unforeseen occurrences (even if unwanted by both parties).
You all need to get the ideas of zero interest out of mind as well, that's a tax issue and a refinancing issue. Just because you get crazy ideas that sound like a good deal for you, you also have no idea what you're doing, so stay out of devising financing terms if you are not a broker, with a license or an attorney. Rates can be as low as the T-Bill, darn near nothing, just go at it as customary.
People die, stuff happens, get out of these ideas of paying more, you're momma may end up having to pay it off. If the deal isn't safe 6 months down the road, it's not a safe deal. :)
Seth Williams I'm pretty sure the IRS imputes a minimum interest rate on an installment sale, even if the note says zero. It used to be 9%, but I don't know what it is today.
Bill Gulley, I still don't see the problematic issue here. Not trying to argue, but I don't think I 'get it.'
Original scenario: Buyer will buy for $85k, bank will give conventional if buyer puts 25% down. Bank carries 64k. Seller gets $85k - closing costs. Problem: Buyer doesn't have the 21k+closing costs and the deal falls apart.
Seller financing scenario: Buyer negotiates seller financing with seller. Buyer will pay $93k, get same loan from bank, and ask seller to carry back $16k with some fair interest rate higher than whatever the bank will give on the 1st position loan since it's riskier. Seller receives $77k - closing costs up front, and will be paid additional $16k + interest over the term of the loan. It seems like a reasonable risk/reward, no?
I'm not sure what you're talking about with zero interest rates, note amount higher than ltv, etc... Interest rate would have to be higher than 1st position, the notes would be 64k + $16k and just say that $85k is the market value. Yeah, it's higher LTV, but isn't that the point of seller taking a second? Buyer doesn't have enough money to make the down payment without the 2nd loan. To my knowledge, most states' adopt a version of the SAFE Act that has a carve out for seller financing, unless you go above a certain amount of transactions.
Okay, seems it changed a bit but yes you can do that, but you're saying it will be a second and the bank will be involved, fine.....the bank will appraise the property, if it appraises out fine. If the value is low, you need to make up the difference between the appraised value and the purchase price in cash, not seller financing and then the seller can carry back the LTV necessary to what the bank's LTV will be. So, you can't just raise a sale price with a lender involved and carry back whatever difference there may be. It has to appraise out.
The zero interest comments were from other posts suggesting zero interest. Yes, there is an imputed rate that is adjusted to the rate on treasury rates. The next lender may also look at only giving the equity established as they do with trying to apply rents toward a purchase as the deal should have had a cost of money and becomes a seller concession.
Yes, there are state carve outs, that's not to say that you assume a deal is exempt, usually exemptions are for owner occupied. Non-owner occupied may or may not be exempt, you need to a legal opinion. I suggest that investors who lack legal experiences and know how to cross reference statutes that may be applicable not read one law and guess or read what they want to hear, kinda human nature, but get a qualified opinion, after all it is a lot of money to be messing with. The SAFE Act is not the only issue. OTH, if a bank is involved, they may look at the total deal too, they won't usually allow something screwy......thank goodness, if there is any sore spot they will usually point it out, but they are not responsible for what you might do either. Good luck! :)
Thanks, as always. Bill :D
Wayne - can you explain this in more detail? I'm not sure I understand what you mean.
Seth. From my understsnding the seller has to charge a base interest, maybe tied toa certain treasury bond as Bill mentioned. So you can do 0% interesr but the ssellerr or financer will be taxed on the income based on that minimum interest requirement regardless if it was collected or not... I did do a 0% interest land contract for a year and have not heard any issues. The value of the loan was quite low and I do not believe the interest would have amounted to much. It was also a wrap with an existing mortgage so it would be difficult to determine that no interest was paid.
Seriously?? Wow. I'll have to call my CPA and ask about that, because that just sounds like a ridiculous rule (not surprising coming from our federal govt - but ridiculous nonetheless).
If that's really true, I guess you can disregard that particular "selling point" I mentioned above. Bummer.
Sometimes I wish I could unlearn the things I hear about in these forums.
If that's really true, I guess you can disregard that particular "selling point" I mentioned above. Bummer.
Sometimes I wish I could unlearn the things I hear about in these forums.
Seth: definitely get with your CPA and get clear on this IRA reg before you write a note with zero interest. The reg is real.
To clarify for everyone, yes the IRS can Impute interest on the deal at the current "applicable federal rate" AFR.
You may want to consider that the IRS put this in line in order to force people to have a financial interest in lending money
to others and to not just "give" money back and forth.
My advice is to be sure you charge interest at the current fed rate or above.; however, on something long-term, High sale price, low interest is ideal.
http://www.irs.gov/taxtopics/tc705.html-Steven
Thanks Steve. The same reasoning can be applied by the lender refinancing that zero % CFD or any installment, so you may not end up with the equity you might think you'll have, especially if they use a higher market rate. It is a seller concession. That applies to the loan and to the LTV, you can still close on the agreement. As I mentioned, much like the mess caused by apply rent credits in a lease-purchase.
Getting creative in financing touches on other aspects of the transaction as well as tax and legal implications, so if you're not aware of the ramifications of what goes on, I'd suggest you get help from someone who is aware, like a mortgage broker or attorney. :)