Motivated Seller is READY! What do I do?

Question

I have an owner occupant/ seller who is willing to carry a note on the property at $20,000. It's worth easily $40,000 fixed up though he pays taxes on $50,000. It needs about $5,000-$6,000 in rehab and will rent for $500/mo easily in the area. I feel like this is a good deal and probably will be my first one but I don't know about notes and how to write up the contract for those. I'm trying to get in touch with my lawyer now but it's the weekend so maybe by Monday I'll talk to him. I just want to know what would be a reasonable down payment and terms to offer him on these numbers? Somebody please help! Any and all advice is appreciated.

Sabrina Baldwin · Answer

What has the discussion been with the owner? Do you know how much the owner wants per month? Why does the owner want to sell? Knowing this will help you in your negotiations. Even though you've agreed on a sale price you have to actually negotiate the terms. Do you have to pay a down payment? Did the owner ask for a down payment? When would the owner like you to begin the payment, within 30, 60 days? These are things you need to know in order to determine if it's a good deal.

Also, be sure to use the property analysis calculator.

Good luck!

Brent Paul · Answer

So you will be doing owner financing.

The very first thing I would do is just do some rental checks on the area and see what you can get for rent.  Make note of those updated and not updated.  In my area it does make a difference, but it may differ in your area.

Also did you run the numbers?

I would offer at least 10% down if not more.  That really depends on what the seller is willing to do.  I don't think the seller will want to do a 20k loan for 30 years.

Maybe stretch it out for 10 or 15 years to keep your payment low.  You could also do something along the lines of X amount of dollars for 5 years then the total amount is due.

500

50 PM

50 Maintenance

50 Vacancy

insurance?

That leaves 350 leftover to pay the mortgage and insurance.  How much will you really cash flow after adding everything up?

Keep in mind you don't want to set yourself up for negative cash flow

You will need to get the seller to agree on something before you have the lawyer draw up the contract.

Rick H. · Answer

@Troy Cole Is the problem that you can't visualize what this would look like?

Start with how you wish to benefit by becoming the owner and accepting the galenges and responsibilities of an owner.

I'd want to know how much this "cash machine" will ultimately throw off and what you'll have to do (and spend in order for that to occur as you've envisioned it).

Your note is simply and IOU that says that you will pay X in installments of Y, starting on Z.

X = $ value of the debt

Y = $ amount of each installment

Z = the start date or circumstances when this payment shall start.

Notice that I did not mention an interest rate. You have no obligation to mention it either.

Your note is merely part of the overall sale agreement and the terms for which you've both agreed will be the consideration.

Steve Vaughan · Answer

To get an idea of how the contract should look, view recorded seller-financed docs online with your local county's recorded docs feature.  Hopefully in your area it is common to do anything other than a land contract.  With those, you don't get title until the thing is paid off.  In the meantime he could run into financial trouble and liens could attach to the house.

So, like @Sabrina Baldwin  points out- get your financial particulars in order and hopefully get  a look at how lawyers in your area record things so you will at  least have an idea what to bring in for your attorney to review.  Great find @Troy Cole!

Troy Cole · Answer

@Brent Paul@Sabrina Baldwin@Steve Vaughan

Thank You all for the advice. I'll let you know how it goes!

Dion DePaoli · Answer

I didn't read everyone's response because I found the OP missing a little in concept and information.A Seller willing to carry a note for $20k is not the same as the Seller will accept $20k for said note for the complete sale.  So this begs the questions asked which influences all of the other information, what Sale Price is the Seller looking for?  That points you in the direction of understanding what down payment you will need.  If the Seller is looking for $40k, you clearly have to put down $20k.  Etc.When a Seller says "I will carry back $20k" that implies the maximum amount of the note will not exceed $20k.  A down payment is not derived from that statement since (a) it does not mean $20k is a sale price and (b) any down payment if that is a sale price means carrying a note for less than $20k.  While I hope for your sake the best outcome is possible, a seller missing 50% of his potential in the market is not all that likely.  Either way, you need clarity on this matter before you spin your wheels.

David Faulkner · Answer

Is it in a decent neighborhood? Would you let your grandma live in the house alone and sleep well at night (that's my litmus test)? I don't know your neck of the woods, but if the house is worth only ~$40,000 and only rents for ~$500, then I'd bet not. If not, and this is your first deal, then I'd be questioning if I'd want to buy it in the first place before worrying about seller financing.

Sometimes houses are cheap for a reason, and those reasons can't be fixed. Just because the price is low, and the numbers look good on paper does NOT mean it is a good deal ... look at the quality of the tenants you'd be getting, and how difficult it would be to keep them in the house and consistently paying rent. I've made this mistake myself, so trust me on this one, start out in a nice neighborhood, even if you have to pay more and the numbers don't look quite as good on paper, because those numbers are achievable and the others may not be. Not the answer you were looking for, and not even the question you asked, but something to consider.

Motivated Seller is READY! What do I do?

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