What's a good interest rate to offer on a seller finance deal?

Question

I am interested in offering on a multifamily home in Grand Rapids, MI.  The owner doesn't have a mortgage on it.  The property needs a lot of work and would not qualify for a convention loan in its current condition.  What would be a good interest rate to offer on this for seller financing?  Also, what is the amount I should put down?  I don't know as to what is good for both parties for each?  Thanks!!!

Thomas S. · Answer

I would never sit down with the buyer and talk it out. That for me is extremely unprofessional and likely to back fire on you. Unless he is stupid he will come out the winner with that approach. Go in with a definite offer or offers and take control of the negotiations. Unfortunately people tend to have feelings but money does not. Offer only exactly what you are willing to do and don't worry what the seller thinks going in. If he does not like the offer he will open the discussion.

Defiantly go for interest only.

Jeff Rabinowitz · Answer

I absolutely agree. If you only offer terrible terms you may alienate a seller who would otherwise be willing to finance for you. That would have been the case for the deal I referred to. I recall one of the offers was a no interest deal--I believe it was at or above my asking price. One was a cash offer below my asking price. The other was a hybrid--price below asking but reasonable interest. Had that hybrid offer not been included my response would have been simply NO. I had conversations with the buyer for over a couple weeks prior to his offers so I had a good idea of what he wanted/needed but the 3 offers helped me nail it down. I countered and then we came up with a very interesting deal. It was 2 land contracts on the same property. The down payment was less than I wished and the rest of the down payment was financed over 1 year at an interest rate of 9.5%. The balance of the purchase was financed on a 3 year land contract (I believe at 9% interest) with a balloon. The investor/buyer only needed 2 years to refinance at bank rates and cash me out.

Justin Workman · Answer

I would just sit down and talk to the seller.  Find out what they deam reasonable.  Making a low or unreasonable  offer may turn the seller off and kill the deal.  Typically comercial loans have an interest rate 1% higher then a standard mortgage.  If the property is listed the selling agent will often advise them to get around 7% or more.  Also if it is listed make sure the down payment is large enough to cover the commissions and closing cost.  The best option is to talk through it, and then run the numbers after the discussion to make sure it works.  If you need any help please let me know.

Art G. · Answer

@Jeff Rabinowitz made excellent points. Saved me the time of writing them out lol!

To add to his thoughts, on a situation like this, try offering a balloon payment in 3-5 years or even 1 year. Tell them that you cant finance the house in its current state and that you need to fix it up so that you can refinance the house (or sell it).  So you need to do seller financing during this time.

I always offer 3% to start and feel them out.  Already do your calculations and let them know how much EXTRA money they will make with the seller finance option because of the interest that is added to the sale. If you are going to pay them out in a year then a low rate is reasonable. Before agreeing to a higher rate make sure to run it through the calculator and be sure the monthly payments are in your budget for the rehab.

I offer no money down to start and say that I need the money to get the house repaired so I can get them the full payout.  Also along with what Jeff said, just ask them, sometimes all they want is moving expenses and first and last on new place.  Also by not offering a down to start you can use the down as leverage to get interest only.  "I can give you $5-10k down (what ever works in that market) but then I need to do interest only payments until the balloon payout.  You will make even more money as the interest level will stay the same."  The benefit of this is that it makes your payments during the rehab VERY low, and gives you more room on the interest rate.

Start low, no down, 3% interest, 30 year term... then if they counter, use that as a way to get other things you really want, like interest only, low interest, or what ever makes the deal better for you.

Thats why its good to have a few offers ready, so that you seem flexible.

Good luck

Jeff Rabinowitz · Answer

The best way I have found to find out what a seller needs is to ask them. Sometimes they will tell you. If you can offer what is most important to them you will have a deal. If they will not tell you or what they say they need is not what you are willing to offer then make a proposal with multiple offers, 3 often works well. The first is a low cash offer, the others are different combinations of down payment and financing at different rates and fro different terms. Make sure that all will be acceptable to you. I was approached this way on one of my favorite deals. None of the buyer's offers worked for me but one was fairly close. By making the offers I could tell what was most important to the buyer and we were able to come up with a plan that differed from any of the offers presented and, in fact, is different than any deal I had ever done or have done since. Both of us got most of what we were looking for. A good deal.

Art G. · Answer

both @Jeff Rabinowitz and Thomas S. make excellent counter points to the issue. I have seen both sides to the equation and tend to think Jeff is more correct. I have done Greg's method and just told them how it would be and they shut down. Flexibility seems to show the seller you are willing to consider their terms and needs. Just like every deal, there is no one right way.  You never know what someone's needs are till you ask, they could be lower than you thought.

Thanks to both Jeff and Greg for raising solid counter arguments.

Stephen Chittenden · Answer

I think it depends upon what your objectives are.  If you're looking to fix-up the property and the refinance into more conventional financing, you only need a short-term loan of 1-year or maybe 2-years.  That would require a lower interest rate.  We purchased a three-unit a year ago.  We bought for $130k with $15k down (each side pays their own commissions).  We avoided real estate transfer taxes by having the owner transfer the property into an LLC and then buying the shares of the LLC from him.  (This also avoided the need to record a mortgage on the property.)  The loan was a one-year balloon with 20-year amortization at 5.5%.  We refinanced with the seller this year into a 10-year balloon with 25-year amortization at 6.25%.  That represents a drop in our payments on the note of about $80 per month.  We made an additional payment of principal of about $3,000 at the time of refinance.  To our way of thinking, this was far better then paying thousands to a bank in closing costs, surveys, appraisals, other loan charges, and recordation fees.  We probably could have gotten a slightly better rate from a local bank or credit union, but this way our up-front costs actually reduced the amount owed on the loan.

Bryan Sandera · Answer

Thank you all for your insight on this question!  Very much appreciated!

What's a good interest rate to offer on a seller finance deal?

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