Buying the house next door (Seller Finance Deal)

[Axel Norvell]

Hi BP Community.

I closed on my first property back in April 2020 and I’m currently house-hacking the property with all bills being paid.

The property next door is vacant and being held by an investor who bought it back in 2017 and is just sitting on it, hoping to sell it. It’s a 4bd 2 ba house sitting on 7k sqft of land.

The property I’m living in now is 10k a lot in an up and coming area of town (property and land values are rising with new houses/people moving in - even during this COVID situation).

Here’s roughly my financial scenario:

- $100k+ in savings that I will not touch as it's in a ROTH IRA
- I have about $15k cash on hand that’s liquid
- I could comfortably liquidate around $10k if needed (although I really don’t want to)
- My Debt to Income Ratio: ~15% (includes current mortgage/bills/expenses to live)

The Property I’m Trying to buy:

Rents: $2,250 (as Duplex)
Expense: $2,100 (Mortgages, Taxes, Bills, Maintenance, Vacancy)

Cashflow: $150 / month
ROI: 18% w/ $10k cash down

Here are the terms I’m negotiating with so far:

Purchase Price: $220,000
Down Payment: $10,000

Owner Finance Loan: $210,000 @ 8% for 2 years
Monthly Interest Only Payment: $700

Balloon Payment @ Year 2: $200,000 (I refinance into conventional)

Questions:

1. Is there a way I can guarantee a refinance for the balloon payment at the end of 2 years? I’m worried I’d be in a situation where I’m denied a refinance for some reason and I’m stuck with a $220k balloon payment. How do people minimize risk here?

2. I’m wanting to do owner financing because I don’t want to spend the 20-25% $45k down payment a bank would require right now. Is that a good idea, or should I liquidate some of my stocks and just do conventional financing with a downpayment at a lower interest rate today?

3. Is purchasing the property next door to combine my lots into 16k sqft total worth it? I’m thinking long term it’s better to have two lots next to each other which I can sell at a premium, vs 2 properties that are disconnected I’d have to sell individually.

[Axel Norvell]

@Brian Ellwood thanks for your thoughts. The owner is actually asking for 20% down and a $230k sale price as a counter which is a bit crazy. I might as well do a conventional loan at that point.

He expressed that he's not too excited about "being the bank" so I can understand why - he wants to see some cash up front. The problem is banks offer much better terms.

I'm also worried about the Interest only payment because I won't be paying down the principal balance. That means the property absolutely needs to appraise 20% higher than my balloon payment to hit that 80% LTV when I refinance.

I'm going to continue to negotiate and see where I can land and hopefully come out with terms we're both happy with.