Buying STR (Vacation Rental) with owner financing
Real Estate Agent · Fort Walton Beach, FL · Member since 2018 · 219 posts · 275 votes
I'm considering making an offer on a vacant, absentee-owner unit in Destin to use as a vacation rental. It's in a complex that is mostly used for STR/vacation rentals. I'd like to get owner financing (and am told that might be a viable option with this particular seller). Has anyone done this before? If so, what terms did you offer? Down payment size? Term length? Special stipulations, etc? Looking for feedback and/or advise. Thank you!
Smart, following this
Thanks for the input @Eric A. Definitely some useful stuff. I am talking to the agent and have no access to the owner. I am an agent myself, so have to be very careful to not violate agent rules, lol. The owner is elderly and lives very far away. I don't think she's familiar with owner financing at all, so I need to rely on the listing agent to explain to her. The agent seems to know some about owner-financing, so that may be ok. I really like your point about the sellers focusing on the price. That might be a good angle to use. The property needs some work so they have not been able to get good price offers. There is no mortgage on it and it's been on the market for 200+ days.
@Villy Ellinger, I would love to know how this turns out. It's an option we may want to explore in the future. If you are comfortable with it, would you mind posting how it goes and what you ended up doing? Thanks!!
We've done several, we usually approach it by asking if they are willing to owner finance and then get them to give us intial terms.
We always push back on those terms but I won't go too much into detail except to say don't ever pay more than retail rates commercially available, even then I wouldn't necessarily consider it a good deal but no sense paying more than you would at a bank unless the purchase price is just insane in a good way.
Sometimes we personally guarantee, sometimes we don't, depends if the seller's agent/lawyer catches it or not, we never offer. 1 of 4 deals we've done are guaranteed personally.
If I can get away with it I always use a contract drafted by my lawyer, if I can't, I'll use the standard FARBAR (Florida Association of Realtors/Bar Association of Florida) contract. I am the one buying, I get to draft the contract and if they object to that, we use an off the shelf, they don't get to draft one.
Terms vary but usually we do NN years with a balloon at year N. Depending on the situation of the seller they usually don't really care what the amortization is, all of our deals are amortized over 30 years. I highly, highly suggest your minimum balloon is at 7 years, 10 is super nice, 15 is amazing. If you can get someone to do a full 30 year? Incredible!
I get to choose the closing agent. I dislike closers I don't know, this is mostly a personal thing.
Down payment varies wildly. I've done as low as 10% and as high as 25%. I've heard tales of people doing 5% but have yet to reach that.
And always, if something pops up, it NEVER hurts to ask about owner financing.
@Peter R.
How does the paperwork/payment work with the two realtors? I'm looking at an owner finance deal right now as well. Property offered at $350k. Sellers agent insists we make a written offer first. I'm thinking $20k down, 4% interest, 30 year amortization, 5 year balloon as opening offer. Agent says roof needs replacing in 2-3 years ($12-14k estimate), which is why "it's appraised at $380k". Seller is older and doesn't want to do any improvements.
So, do agent fees get paid from the down payment? What about closing costs? Just attorney fees to write up document? Seller pays for that? Split? Negotiable (along with everything else)? How much out of pocket for buyer (me) at close, assuming $20k down payment?
I already have a lender that says after 6 months of seasoning they will refinance at appraised value. Before 6 months, refinance at purchase price. I'm thinking I could do a cash out refinance for roof repair when needed, and still have 20% equity in appraised value at that point.
I'm obviously trying this route to avoid the 20% down payment for traditional lending. I'm sure I'm missing some info here. Any information anybody can supply is greatly appreciated.
When it comes to most fees to sell the property, I've never encountered a situation where the buyer paid them @Anthony Wick
Agent commissions are the seller's responsibility, if it's 5% split, for example, it should be a line item on your closing statement paid from the seller. In my experience it should never be sourced from either earnest money or down payment.
I pay my own lawyer fees, seller pays his. You could include this at closing or just do a direct bill for yours, up to you.
Out of pocket for you should be minimal, inspection fees, doc stamps, taxes (prorated) and perhaps a survey fee or other misc costs.
Overall it sounds like the terms are a good deal, I'm not a huge fan of a 5 year balloon but if you've already got a lender willing to take out the previous owner I wouldn't be too concerned with that balloon timeframe. 4% is lower than most commercial lending rates.