Seller financing a Duplex

[Marc Shin]

I found a duplex that is FSBO for $300K. It's been on market for about 180 days. I'm considering reaching out to the owner for a seller finance deal. Any recommendations on how I should structure the seller finance deal? I was thinking about putting down 10-20% in cash and then seller financing the rest at 5.0-6.0% interest rate over 30 years. Does this sound like it would be appealing to the owner? Or would I need to offer a higher interest rate on the seller financed debt?

[Don Konipol]

Quote from @Marc Shin:

I found a duplex that is FSBO for $300K. It's been on market for about 180 days. I'm considering reaching out to the owner for a seller finance deal. Any recommendations on how I should structure the seller finance deal? I was thinking about putting down 10-20% in cash and then seller financing the rest at 5.0-6.0% interest rate over 30 years. Does this sound like it would be appealing to the owner? Or would I need to offer a higher interest rate on the seller financed debt?

@Nathan Gesner is absolutely correct, as usual.

Here’s the basic financial information you will need

1. Amount of current mortgage principal balance

2. Interest rate of mortgage

3. Terms of mortgage

4. Status of mortgage payments

5. Actual value of property

6. Likely rental amount

7. Repairs necessary

8. Age and condition of property operating systems

9. Age and condition of roof, foundation, siding, etc.

10. Legal status of title

Here’s the personal information you’ll need to determine

1. WHY is property owner selling. 
2. Why hasn’t property owner listed with Realtor

3. Does property owner have need/use/desire for cash

4. Property owner’s  overall financial condition

5. Is property owner the sole decision maker 

So, as you can see, all real estate advisors recommend getting the most information possible and then trying to structure the transaction in a way that provides for satisfying at least some of the seller’s needs, wants and desires.  All real estate advisors, EXCEPT me. 

I do want all information on note, but I don’t care about sellers personal info.  WHY?  Because it’s to difficult and time consuming to obtain, and when you do it’s just as likely to be false, or incomplete.  So it would take additional time to ascertain the REAL motivations.

And this is before we even BEGIN negotiation.  So here’s what I do - I make an offer that reflects WHAT I WANT!.  I don’t consider if the seller is going to be insulted, I don’t consider of the seller is going to be disappointed, I don’t consider if the seller is going to be upset, or of the offer meets his needs.  Because his REACTION to my offer is going to tell me more about the possibility of make it a deal than all the prior research as to seller’s motivations, wants, needs, etc.

If I make my offer and never hear back from the seller, I know there was no deal to be made in any case.  If the seller comes back at something like full price cash, again I can say with almost absolute certainty that there’s no deal to be had AT THIS TIME. However, in this case it’s worth circling back in 3 months, 6 months, or a year because this seller wants to sell, he’s just not ready to give up his fantasy deal.

If the seller’s response is acceptance of the outline of my offer but countering on price or terms, it may be worth negotiating because we MAY be able to get to YES.

My biggest profits have occurred when I made offers that were nowhere near what the seller was asking and yet WERE ACCEPTED, or with small modifications. 

This doesn’t occur often, but the deal is so good, just a few of these in the course of your real estate investing career will turbo charge your pathway to large net worth.

Since examples can provide clarity, I’ll provide two examples

A number of years ago (7 years) I was approached about purchasing a note from a property owner who sold his retail center and carried back a $500k note, current principal $476,000.  Based on the interest rate and 139 months of payments left, he determined that he would sell the note for a discount at $450,000.  I offered $250,000 which if paid to maturity would yield me almost 19% annually, and much more if paid early. Incredibly the seller accepted my offer with no counter, and we closed 2 weeks late.

The second example occurred about 4 years ago.  Owner of an office warehouse property wanted $1.8 million as he had appraisal for same.   He owed $650k, so he wanted $1.15 million cash to him.  He also owned a separate warehouse next door worth $600k and owed $400k.  I offered him $300k  cash for 100% of the warehouse and 60% of the office/warehouse property. He accepted then hemmed and hawed at closing, but did sign.  6 months later I sold the warehouse for $1,025,000 to an Amazon contractor, and refied the office warehouse loan to a fixed 20 year 4% interest loan with no personal guarantee.  After selling the warehouse property I received my $300k investment back plus about $250k  net in my pocket, and still owned 60% of an office warehouse .