Reasonable terms for seller financing

[David Cornett]

Hello,

There is a SFR on the market (1200 sqft, 3b/2ba). Sale price is $78K but the seller wants to finance the deal, requiring 5% down and $850/month for 20 years. This translates into $204K over the life, in addition to the small down payment.

Assuming the title is clear, is this a reasonable amount? It strikes me as too high of a payment considering a conventional loan at 5% APR would be about half that (not even considering the higher down payment). However, advertised seller financing seems rare, and this is probably negotiable.

Thanks for any adice!

[Jason Windholz]

I look at the area and the cash flow on the deal. Its not as important what it costs over the life of the loan, whats important is the return on your 5% down and that its has a positive cashflow. If you get your money (5%) back quickly say less than 2,3 or 5 years and also make money on the deal from cashflow, then its worth it. 

Many landlords sell with owner financing when they want to retire from rentals. Some are good deals and some are not. You still analyse the deal to make sure youhave some room in it and a decent return on your 5%.

One of my friends just bought 16 homes from a landlord who financed them. Both parties make money. The landlord got the sweetest deal, he bought most of them at the tax sale for $3-4K and fixed them up and rented them for about 5 years. He got all his money back (purchase and repairs) from the rent. He has over 200 but is getting close to 70 years old and wants to finance them to another investor. The ARV is $50,000 and my friend bought them for $40K with 10% down and 15 year notes. He put the down payment on credit cards and closed in May 2016. His cards will pay off in 5 years, the houses in 15 years and he still has a couple hundred a month per house for repiars and maintenance. He is in his mid 30's and they will be paid off when he's 50 so these are his retirement plan. In fact he is putting another 12 under contract from the same investor.

Its really no different from rehabbers using hard money loans, the interest rates are higher, I 've paid as high as 18% but its just another expense. If the deal makes money with all the expenses involved, then its a good deal. The cost of the money is no different than the cost of a new kitchen or bathroom,etc. When you account for all the expenses and can still make money then that is what a good deal is.

One more bit of feedback, Make sure you have some room by buying for less than its worth. 70% of ARV is most common for cash purchases on buy and hold properties,but you can go a little higher when financing is involved. Make sure you have cash flow, $200 a month is usually what is needed to break even over time (in my area), roofs, ac, and other big ticket items only need replaced every 15-20 years, but you need to build a cusion for it. Divide the cost of those items over 15 or 20 years so its not a suprise when it eventually needs replaced. I have found about $200 a month averages out their cost over time for big ticket items and even for smaller more frequent repairs. But thats in Oklahoma. Other areas may have different amounts.