Negotiating an Owner-Financed Deal

From an investment point of view, purchasing an owner-financed property requires careful number crunching and consideration so the deal will be attractive to both sides.

From the seller's point of view, they may be looking at it from two different angles - - one is that they will make more money on the sale because of the interest accumulated. However, some might want their equity out of the house quickly to make other investments/purchases.

I am currently negotiating an owner-financed deal. This is a house that was advertised as "for sale by owner" for $132,500 but by the time I contacted her, she had already listed it with an agent for $2,500 more. This is a sign that she is getting tired of trying to sell the house herself and has decided she needs help. Hence I would consider her to be a motivated seller.

She has the house priced a bit on the high side for fair market value (FMV) for the area. Keep in mind that with most investment strategies, you want to maximize the amount of equity you have in the house when you purchase it. However, you can be more lenient with owner financed properties, and as long as your monthly expenses are covered by rent and the house is getting paid for as you go, there's no reason not to pay FMV for a house.

I have additional incentive to be comfortable with FMV in this instance, as the house is a 2 bedroom/1 bath home with an undeveloped attic space, which means that I can convert it to be a 3 bedroom/2 bath to add forced equity to the property and gain a higher rent, or higher after repair value (ARV) than might otherwise be expected.

I have created three possible mortgage schedules for her approval. The basic premise of her choices are in how quickly she wants her money. They are structured so that the sooner she gets her money, the less money she will get.

For instance, the first offer is for $115,000 purchase price with a $10,000 down payment. 5% amortized over 35 years - This plan includes a balloon payment of the remaining principal after 3 years. With this option she will make a total of $120,839.15 in the sale of her house when you include purchase price + interest paid over the three years.

Second option is a purchase price of $120,000 with a $10,000 down payment - 4% amortized over 30 years. This plan includes a balloon payment of the remaining principal after 5 years. With this option she makes a bit more on her house ($130,493.92) but has to wait longer for her money.

Third option is a purchase price of $$125,000 with a $10,000 down payment - 3% amortized over 30 years. This plan includes a balloon payment of the remaining principal after 10 years. This is the offer that will give her full asking price for her home when she adds purchase price and interest ($135,059.07) but she has to wait the longest to get her money.

All of the above situations give her a $10,000 down payment which I am offering because she has listed her house which means she will have realtor fees to pay

In this instance I have been e-mailing with the owner, so have found out what her monthly mortgage payments are. So I have designed these options so she has her mortgage payments covered plus some cash flow each month ($91,78, $87.02 and $78.26 are the cashflow variables for the different options), while at the same time, keeping my payments low enough to allow me to cover all my expenses from the rent I'll receive.

I have kept exit strategies in mind as well. I have added clauses for early payment on the principal as follows:

1. I can make $5,000 payments towards principal on the anniversary of the loan with no penalty

2 I can make full payout of the principal owing at any time with only $1,500 penalty

These two strategies ensure that I can

1. reduce the amount of my interest paid by making a contribution to the principal each year

2. sell the property and pay out the loan with very little penalty

Remember that the key is to develop a deal that has advantages to both sides. Designing options that allow you to meet your budget and still give choices to the seller is a strategy that will give you a higher chance of having an offer accepted and you will soon be on your way to having renters purchasing your property for you with very little of your own money invested.