Quote from @Sam DiNicola:
My neighbor is ready to sell his home. He is older and does not have a mortgage and there is a lot of deferred maintenance on the property. ARV $450k. Thinking of offering seller financing deal to him. Repair costs would be $150k. He is hoping to get $200k but current value of the home is more like $160-$170. We would likely take 2 years to rehab since this is our first one. But I'm not sure everything I need to consider when underwriting a seller financing fix and flip to see if this deal would even make sense. I tried the BP Fix & Flip calculator but it's not really geared toward seller financing. Would love any advice or insights. This could be a great opportunity but I'm not so eager that I would do it if the numbers don't make sense.
That could be a good opportunity, but underwriting of a seller-financed fix-and-flip deal requires careful analysis. For this being your first project and it being around two years, you want to underwrite in a way that minimizes your risk and maximizes your cash flow.
Key Considerations for Underwriting This Deal
1. Purchase Price & Seller Financing TermsYour neighbor wants $200K, but the current value of the home is closer to $160K-$170K. With the deferred maintenance and your $150K rehab budget, offering $200K out of the gate would not make financial sense. You could structure the deal with seller financing to bridge the gap.
Possible offer structure:-Purchase Price: $170K - closer to actual value
-Down Payment: Low or zero down to conserve cash
-Interest Rate: 3%-5% - or better yet, 0% if the seller will agree
-Monthly Payments: Interest-only or deferred until the sale
-Balloon Payment: Full payoff in two years when you sell
If he wants $200K, you can still make an offer of:
-$170K purchase price + $30K as a second lien due at closing
-Seller carries $170K at a low interest rate
He would feel closer to his number, but you still keep within reasonable investment limits.
2. All-In Costs & Profitability-ARV: $450K
-Purchase Price (financed): $170K
-Repairs: $150K
-Holding Costs & Financing: ~$20K–$30K (insurance, taxes, utilities, interest, etc.)
-Selling Costs (Agent, Closing, etc.): ~$35K (assuming 8%)
Total Cost: ~$375K–$385K
Projected Profit: $65K–$75K before taxes
That is a decent margin, but this being a two-year project, you need to be sure the market doesn't shift downward, and that you have a buffer for unexpected costs.
3. Exit Strategy & Risks
-Market Volatility: You might have to hold longer or sell for less if the market goes down.
-Rehab Timeline: This is your first flip, so be prepared for some delays. You need to pad both time and cost contingencies.
-Seller Expectations: Ensure the seller knows and understands what to expect regarding terms and timeline-many sellers are unfamiliar with seller financing.
-Legal Protection: A real estate attorney should draft the seller financing agreement to make sure your interests are protected.
Final ThoughtsThis might be a pretty awesome first project if you can work out some sort of low-down, seller-financed deal with sweet terms. If the seller is insisting on a high price with not-so-hot financing terms, though, this may be a riskier project than it's worth. Negotiate closer to $170K with creative financing is your best bet.
