Feedback please on Seller Financing.

Jeremy and I have done all of our deals with owner financing. It is a great way to do a deal and start your investing. There are some things you should be careful for though. We for instance have a balloon payment due now into it's first extension and the banks have balked at a conventional mortgage which has prompted us to search for private money. The 4 fam is a great cash flow prop but we bought this just prior to the global melt down and you can guess the rest.
Here are some tips though

Make sure you do a very thorough walk thru on the prop. don't be afraid to mention items that need attention, because if you do the deal, what ever needs to be repaired now comes out of your cash flow

Free and clear props are great to deal for. If the owner is elderly, the thought of earning 5, 6, or 7 % is a very attractive avenue for them to earn more money on their investment.

Do be afraid to make a low offer even if they will finance you. We have learned through trial and error that you can always counter up higher but you have only 1 shot to offer low.

Ask if they will help with the closing costs, which can run as high as 5-6% of the selling price

Remember, ask all your questions prior to making an offer and write everything down that the seller will agree to.

Feel free to PM me with any other questions. Good luck with your deal...Jan

Jan,

Thanks so much for the prompt response. I will keep your tips in the back of my mind.

These are the deals I'm BEGGING to get. With owner financing you have SO MUCH LEVERAGE! Boy, let me tell you a little (BIG) secret I learned! When you negotiate with the seller, NEVER mention interest rate. Don't even BRING IT UP!

Instead, approach it with the 'how much cash would you need upfront to consider financing the purchase price?' Then ask, how much do you want me to pay you every month. Say the purchase price is 100,000, they want 10K down, and $900 a month. Then, say, ok, so how about I pay you the $100,000 price, give you the $10,000 down, and $900 a month, would that be good? Then, divide the remaining $90,000 by the $900/month, to get 100. Ok, I will give you the full $100,000, with the 10K down, and give you $900 for 100 months. Is that good? They may say, well..... what about interest?

Well, how about I give you $900 a month for 110 months? Would that be satisfactory to you? May respond "WEll... how about for 120 months?" You "well, sure, I think that will work out fine" You just got a house that you will be paying towards principal every month instead of interest like the banks that you will own outright in 10 years. Think a little differently and it =s profits! You end up paying 118K with interest. If you had a regular amortized loan over 30 years, you'll end up paying 215K for it, or amortized over 10 years at 6%, 133K. Not bad, huh?

If I find one of those, you bet I am JUMPING on it! In fact, I have a lead right now on an elderly gentleman in my in laws tract that may want to sell, and its paid off, and I'm thinking, wow, what an opportunity! My concern however is, what if he passes and I have a loan with him? Does it become due immediately, or can the note be sold to someone at a fraction of the cost of the loan by the family? Does anyone know the answer to this?

Tammy,

Thanks for your post. We went to see the house. Here's the scoop. The home is owned free and clear by an gentleman in his 70's. We also met with an investor whom I received this lead from. We found out that the investor is 30yrs old, a realtor and also was a mortgage broker. The 3 family is in VERY GOOD condition. The house was built in 1910 and the original owner that built it was a carpenter. The current owner has owned it for 14 years. It's been all updated with new roof, siding, windows, machanicals etc. The issue is he's looking to get over 225K for the house. I checked Total View and it's estimate was 158,027 but Zillow had it at 204,000. This house is definitely turn key and nothing really needs to be done. However, the rental income is only $2,000/month the yearly property taxes are $6,500 so minus that your at 1400+ per month and you still have to subtract the house insurance from the monthly rent, and utilities. So far, it's not looking like there will be a whole lot of possible cash flow when you subtract all expenses. We are thinking on passing on this and looking for a REAL killer deal as not to kill us with all those expenses. Any thoughts?????

1. Find comps for the property within a mile and 500 sq ft, with about the same beds/baths and lot size. Get as many as you can and take pics of them if you can. Show them to him so he can see what is going on in the market right now and explain how its a tough market right now.

2a. (does not apply as he owns it outright) Ask him if he has a loan on the property and how much he owes. If he does, ask if its assumable. If its assumable, you will probably want to assume it. The way a mortgage is structured, you pay mostly interest on a property until the 22nd year, when you finally are starting to pay 1/2 of the principal and 1/2 of the interest. Then see if you can to the owner financing for the rest of the property. Most likely he owns it outright

3. If he wont budge ask how much cash upfront he wants for the property.

4. Then, ask how much he wants you to pay each month, do the calculation I explained above and ask if that would be good with him. If he wants 10K up front, and 225 is the LOWEST he will go, and he wants 1500/month, tell him that would be too high of a monthly payment, could you go down to 1200/month with 10K up front? Keep on dealing until you come up with something that works for both of you. If it ends up at 1200/mo, tell him that would be for 179 months, or 15 years.

5. If he asks about interest, remind him you are paying full asking price for the property and it is actually above market cost to you, so he is getting the benefit that way.

6. If he doesn't like this, compromise and make it 15 1/2 years instead of 15 years. The interest you are saving more that makes up for 25K above market. If you were to get a 30 year loan, you'd pay a majority of interest on the property and hardly anything on the principal. The payment you are making to him is going all towards principal.

7. To your renter, you could always do a lease option, and add a couple of hundred to the rent each month and say it will be applied towards the principal if they pay on time. Guess what? The % of lease options that actually go through to sale are very low. This means, you keep the initial option fee and the extra rents paid each month if they opt not to go through with buying the property. Also, you could do a net lease (that means they are responsible for all costs and you just pay the principal and interest... (taxes, insurance, maintenance)

IT seems like you are overpaying, but look at the numbers. Assuming the 10K
was put down for all these examples and 215K was financed:
30 year loan at 6% fully amortized, total cost of house = 464,052.11 +10K dep
15 year loan at 6% fully amortized, total cost of house = 326,572.59 +10K dep
15 year cost of house giving him 1200 per month and and extra 6 months = 223200 + 10K deposit.

Anything can be worked out if you keep reinforcing that you want the best for both him and you and you handle it with compassion.

Before the banks got greedy and started amortizing loans, there use to be simple interest loans. If you aren't comfortable just added some payments on the end you can do a very simple interest loan [(loan amt * 1.##%)/payment] with him for 5%, 6% or 7%, but then tell him you can only pay 200K (or FMV) Even with simple interest you'll pay much less. Paying 200K for it, giving him 10K up front, will give you a loan amount of 201400, at $1200/month principal and interest for 14 years. Total cost of home will be 211400 with very simple interest.

The whole point is that you want to get the amount for your monthly payment that makes sense for you and your situation.

How can I find out.how much insurance and taxes and other expenses are. Is what the seller tells me generally valid?

Can you assign a deal like that....( owner financing, rented..etc) ?

For insurance, call your agent, or several companies for quotes on insurance and if you are going to rent it out make sure its a LANDLORD'S policy. Tell them the property will be vacant for the months you need to fix it (if fixing is needed), and after that it will be rented out. (When its vacant its a lot more expensive)

For taxes, check with the county the property is in. Usually its a percentage of the buying price, sometimes its a % of a % of the assessed value. It depends on the county and state. In Los Angeles county, its 1.1% of the sales price. In Lehman Township, PA, its 10% of 25% of the assessed value.

make the loan assumable and assign it with the loan, or you could have the loan paid off by the end buyer; but IMHO, if you can get seller financing its a good idea to keep it!

1. Its an inexpensive way to finance
2. You have financing and your credit doesn't matter
3. It doesn't show up on your credit report.

Still wanting to know if anyone knows what happens if you have seller financing and the person who has the loan passes away?

Tammy,

Thanks so much. You are a WEALTH of information!!!!

i was just looking for some quick cash. the owner owns the property frre and clear and just doesnt want to deal with it anymore. how do i lock it up with \out being obligated to make payments??

I would do a contract with and/or assigns. First ask if they are willing to do any kind of seller financing. If they are, this can be a GIANT selling point for your assignment. Biggest thing is to find out the ABSOLUTE lowest they will take, regardless if you can find another buyer willing to pay more, ask what his bottom line is if an all cash offer came through, and/or and offer where he gets monthly income and cash upfront (you need to find that out too). Then from there you can work it out that you will get the difference between his bottom line and what you are able to assign it for. Make sure you are transparent with everything you do, don't try to hide things from anyone.

If the homeowner is willing to do seller financing, it means the person you assign it to will need to come up with the amount the selling financer wants in cash + your assignment fee (the diff in price).

thanks again..its crazy what can be accomplished when we all work together

I asked my mentor for my private money training and the answer was to keep paying the lender as agreed because it will go in the estate of the person that passed. The beneficiaries of the one doing the financing's estate basically take over that note and receiving the payments. So, nothing should change from
the lenders standpoint if the lender passes away.

Anyone have experience with that?