All Forum Posts by: Marco Bario

@Rick Albert -

In a state like California (I live in Los Angeles as well), a moderate earner who realizes a significant capital gain in a single year due to the sale of real estate could be faced with 40% or more in state and federal taxes on the profit. For that reason, installment sales are attractive.

The reason you don't see as many seller-financed transactions in our market now is that interest rates have been so low. 

Ideally, seller-financed interest rates are at least 4% above institutional, and the ideal terms are closer to 15 years. Given the size of loans here, the difference in payment vs. a 30-year institutional loan is significant. 

As interest rates rise, and credit tightens, I believe there will be an uptick in seller financing, even in markets like Los Angeles.

The best question to ask a seller who is on the fence about seller financing is to ask what they're going to do with the money. Goldman Sachs' Marcus money market accounts are currently paying 6/10 of a percent. A seller might be motivated to seek monthly income and a fair interest rate rather than hand 40% to the government and watch the rest shrivel and die in a money market account. 

@Marc S.

Property and Paper are different sides of the same real estate coin. 

The more you understand paper - which can include seller financing as well as strategies like options, buying subject-to, acquiring property through foreclosure, etc - the better equipped you'll be.

Keep soaking it all up. Try different things. 

@Josef Hardi -

A "lease option" is actually two separate deals/documents that are often created in tandem.

1 - The Lease functions like most any other lease. It grants use of the property so long as the lease is in effect. In this instance, a portion of the lease payments may also be credited toward purchasing the property. 

2 - The Option grants the right but not the obligation to purchase the property. An Option Agreement may define the strike price (purchase price) specifically, or it may define the method by which the strike price would be calculated if exercised. It will also define a term after which time the option would expire.

@Austin Gabriel - Bill Cook (https://billandkimcook.com/the...) has an options course coming up. Anything he or Peter Fortunato teaches regarding options or creative financing, in general, is gold.

@Matt McElravy -

Interesting one.

I understand not wanting partners in the business but perhaps the property? 

Maybe split the property and the business - an investor buys all or a portion of the property and at closing creates a note or sells an option to you. 

You mention gross revenues for the business. What would you say its valuation is without the real estate?

Where I'm going with this... perhaps your friend carries back a note for the business and an investor helps to acquire the property. 

@Charles Hannah -

I'm not a fan of balloon payments because they back you into a corner. If they won't let it go, try to negotiate a reasonable fee for an extension option or worst case a bump in interest rate if you extend. 

Your seller probably won't blink if you add a first right of refusal to match a purchase offer should they decide to sell the loan. 

Example: 

They receive an offer to sell the remaining payments at 75% of the unpaid balance. You'd have 30 days (or whatever you negotiate) to match that offer and X number of days to close beyond that. In reality, most note buyers will see that language and walk away from the deal. That also places you in a good position. 

I looked at a seller-financed loan yesterday which I'd feel okay purchasing at 10%. That's my low threshold. Why so low on this asset? 

- LTV is 54%

- Very large down payment

- Borrower credit is almost 800 (the highest I've ever seen for seller financed)

- I like the property

- Third-party serviced

- Existing lender's title policy

- Borrower is on title of several other properties

@Mia Crampton -

First - be sure to learn the financial calculator. Bill Tan from LAREIA teaches a course that I've taken and recommend. 

Second - I also recommend Tracy Z and Fred Rewey's group. Their education also includes the financial calculator. You might also check out the Note Inc Podcast that Czarina Harris created. Start with episode #1 and work your way through. The first set of episodes is laid out like a notes course. Good education, and entertaining.

Third - I recommend to everyone that they purchase one performing whole note or partial before they dive into other pursuits. It's a great way to learn while you earn. You can use a platform like Paperstac to practice underwriting.  

Finally - Attend a conference for the networking and the education. Paper Source is happening next month. There will be others later this year. 

@Austin Cooke -

It sounds like what your landlord really needs is income. A sale will trigger a tax event, and his cash will shrivel and die in a savings account earning less than 0.01% with inflation over 8%. 

I'd consider offering a lease with an option to purchase, and the purchase can include seller financing terms so that he'll continue to receive income after the sale. 

A few points:

- Your lease agreement should give you the ability to sub-lease either or both units if you choose (a master lease).

- Your lease payments should be enough to cover his PITI payments plus provide income. This deal really hinges on those numbers penciling out.

- Your option strike price can be set in advance so that you capture appreciation and mortgage paydown

- Upon exercising your option, you can purchase subject to his existing mortgage (assuming you like the terms)

- You can offer to make his mortgage payment for him each month while you lease which makes things passive for him.

- You may need to find a private investor for the remodeling funds. I don't think that will be difficult. You could offer a portion of the deal (equity), or an interest rate. 

@Albert Velasquez -

I second everything in @Nathan Gesner's reply except that I'm not a fan of balloons because they paint you into a corner.

A mentor of mine teaches - "your price, my terms." 

What if you offered over asking but 0% interest? Even 3% interest? I'd test the waters. In its current state, I'm not sure this is a good deal. 

It could be that! 

I notice the Bigger Pockets crowd refers to seller financing as "creative financing." It's really just the tip of the iceberg of creative dealmaking, but it's at the core.