Seller Financed Deal Analysis

[Jeff Bridges]

I am a Buy and hold Prince georges County, Maryland investor looking for help with this possible seller financed deal. I am scheduled an appt to view a unit this sunday 3/2 after speaking to a seller who is offering seller financing on a vacant rental SFR. Would appreciate recommendations on what I should offer during or after my visit to view the place.

5BR/2.5BA

Asking- $124,500

ARV- 120-180k

Repairs 20k- Kitchen and Bathroom cosmetics, roof, replace some stolen copper (These are subject to my inspection and contractor estimates)

Rent-1600-1800

Cashflow- $170-270/ month depending on rent

Cash on cash return- 10-15%

actual annual expenses- $3400 (tax, water/sewer/repair/insurance/license)

It's in a less desireable part of prince georges (capitol Heights) and definitely more prone to crime and lower income neighborhoods.

Seller Financing Terms Offered by Seller:

124500 asking/25k down/ 100k loan @ 10 year term/ interest free/

want $1000/month payment

Offer I'm Considering offering:

60k Cash offer (just low cash offer in case they want the quick cash)

OR

100000 seller financed/ 20k repair fund in escrow/ interest free for 10 year term/ first payment delayed by 2 months to perform renovation and place tenants(i'll ask;) )

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I'm not sure why they need the 25k yet, but will instead offer to put the 20k in escrow that will be used for repairs in lieu of down payment and show I have skin in the game.

The seller financing asking price is still somewhat high relative to value, but at a 10 year interest free loan, I'd be earning a little cashflow for 10 years, then at the 10 year mark, monthly cashflow will be 1000. Only requirement would be the 20k downpayment into the escrow repair fund. Is the initial low cashflow worth the 20k initial investment that really starts paying off at the 10 year mark?

Should I try to negotiate a lower purchase cost or is that not important because of the no interest financing? If I financed 80k at the bank, the payments with interest would be almost as much ....

Finally, I realize I'm not looking at very little appreciation but long term cashflow is most important as I plan to hold this for at least 10 years.... I just like to know if this looks like a worthwhile deal.

Thanks in advance for your thoughts!

[Erik Larson]

What I liked hearing about this transaction is the 0% interest owner financing. :) The rapid equity growth you'd get from that alone makes this an attractive investment based upon your numbers.

If you have the credit available on your ELOC, it's probably easiest to take a draw against that for your down payment/repairs. The interest only payback on HELOCS helps with cashflow, and you'd have your remaining balance to the seller paid off in around 8 years. I personally don't rely upon appreciation (the real estate bubble taught many real estate investors that lesson--the hard way).

If I were in your situation, I would show them 3 offers: your cash offer (and if you can swing it, just pay cash for it), then one with $10,000 down at a price of $111,392, and $20,000 down at a price of $101,574. Stress the fact that you're going to improve the property as well. The reason for the odd purchase prices? I do that because it makes it look like you really crunched the numbers, and that you have a formula that you stick to when buying (it's great when selling, too, as I doubled the amount of traffic of buyers when I advertised using an odd number vs. a round figure--I tested it on two different weekends, and sold it at the odd number).

I always show them three offers so they can pick the one they like best.

The higher the cash down, the lower the purchase price I offer. My general rule of thumb is for every dollar down, I want two taken off the price.

I hope this has given you some ideas on structuring your transaction, it sounds like a great opportunity. The nice thing about the seller financing is the rapid paydown, so you can offer a higher price rather than interest. I'd run your idea of "sweat equity" as a down payment as well. You never know what a seller will accept, and you'd have your property paid off a LOT sooner at that zero interest rate. You'd be surprised how many people do want a certain amount monthly (as in this case) and don't really care about the interest rate, meaning more dollars in your pocket sooner.

Make them a couple different offers, and see what makes them happiest. Let me know how this goes for you!

(The way I do transactions is I borrow from private lenders on a first mortgage, take out about $20-30,000 extra up front for fix up, vacancies, and part of my profit), and have the seller take back a note at the lowest interest rate possible for rapid equity paydown. Using my numbers for your situation, you'd get a chunk up front, cash flow during the ownership period, and a big payday when you sell (or a paid off property spinning off lots of cashflow).