BRRR via Seller Financing

[Michael Germano]

I am looking at my first BRRR and I got my first live Motivated Seller offering up Seller finance terms for a 3bed 1 bath SFH in NC. The terms they proposed are as follows...$165k PP, $18k down, Interest only payment at $720 per month with 5% interest with a balloon at 5 years. Currently, has a tenant paying $800 month to month (local rental comps with some rehab (going to say 15k), I could get $1300). What am I missing to understand the numbers for this or what follow-up questions should I be asking to get the best terms possible? Wondering how I would negotiate back. Also does anyone have a seller finance deal calculators they could recommend?

[Wale Lawal]

@Michael Germano

This is one of the most popular financing tools for folks who are looking to make a foray into real estate investing with no or little money down. When you resort to seller financing, you are essentially cutting out the middleman, and buying the property directly from the seller. The seller acts as the bank – you sign a promissory note with them and you pay them a mortgage instead of to the bank.

A promissory note is a legally binding document that contains all the particulars of a seller financing including the repayment schedule. A five-year payment plan with a balloon payment towards the end is the most common arrangement.

Pros
Using this creative financing tool has many benefits. The most obvious one, of course, is that the buyer can go ahead with their investment plans even if they do not have funds set aside for the down payment.
Another significant advantage is that the buyer can save on traditional bank closing costs, which often range from 2%-5% of the purchase price.
From the seller’s perspective, this financing mechanism will make it easier to make a sale in difficult market conditions. The seller can also transfer the promissory note to another investor, albeit at a discounted rate, and immediately cash out. Sounds too good to be true?
Another big benefit for sellers is avoiding the big tax hit that comes in the form of capital gains tax if they sell a property. In this financing arrangement, this impact is quite a bit less as the seller will be collecting monthly payments instead of realizing a big capital gain event from the sale.
Before we get too far ahead, let us look at some of the cons of this creative financing solution.

Cons
As a buyer, you will lose your entire investment if you fail to adhere to the repayment schedule just as you would with a traditional mortgage. In this scenario, the seller might have to go through a foreclosure which could be a cumbersome and lengthy process.
If the seller has an existing mortgage, he/she will need approval from the lender if the terms of his or her loan prevent this type of transaction.
Because this process is less structured than a traditional loan, you will need the help of attorneys and knowledgeable professionals to make sure all documentation is in order. Set aside a budget of $1,000-$1,500 before going ahead with this option.

All the best!