Welcome to my first favorite technique to use when buying with seller financing! This is the first part of a 3-part series of strategies. (You can visit the introduction to seller financing post here>> https://www.arkansaswholesalehomes.com/blog/seller-financing-series-introduction/ )
What if you could avoid high loan cost fees such as originations, appraisals, extra closing costs, etc… AND, get a much better interest rate with better terms? AND, have many other benefits built into your loan in your favor?
Seller carry back financing is the ultimate form of debt service. Let me share some examples:
A great win-win situation where I have been able to utilize seller financing is with tired landlords. They want the cashflow, but not the headaches that come with it. However they are also very proud of their property (because most of the time they have taken very good care of it) and want a good fair price for it. Understandably so.
Would you pay full price for a property?
Most of the time your answer is a ‘no’.
When you take into consideration the normal loan fees and amortization, as well as the interest rate and balloon due date, paying full retail can be difficult, especially for properties that are class A-B…
What if you paid full retail, perhaps even 10% over retail for it? How would you feel about that ?
What if I told you that the note was 0%? Or 1.5%? And it was fixed for 20 years… and the property really didnt need many repairs at all… how would that sound? Oh, and the only closing fees are the title company fees… there are no loan costs. How do you like that debt service? Take a look at “normal” loan service amortization : (not taking into consideration the loan origination fees of $1000 or more) I am using a 5 year balloon on this, with an interest rate of 5.5%, amortized over 20 years.
The payment is $687.89 and the balance owed after 60 months is 84,187.97, with at that time needing to refinance at a more than likely higher interest rate.
And now compare that to this: An awesome loan structure:
Here at 1% interest, I used the same 20 year amortization and balloon term of 5 years. The payment is 459.89 and the balance owed after 60 months is 76,150.87.
BUT… CHECK OUT the interest paid out in the yellow column. Thats HUGE. And the cashflow is $220 positive with the 1% interest. $220 X 60 months is $13,200.
**What if you bought the home and got 20% equity… and used your normal bank loan terms?? Well, run your own numbers, but basically you will be a little better on the balance owed after 60 months, BUT with a higher payment (about 109 per month) and still having to refinance at that time, which will kill your amortization schedule by “starting it all over” . Thats what sucks about refinancing.
So back to the strategy. I like to offer full price, or, something close to it, and just divide it by 240 months at 0%. Thats my offer. This leaves plenty of room to cashflow and even though the equity position isn’t strong in the first few years, it catches up really fast and looks really really good once that initial hump is up.
But remember, this isn’t on your credit or business credit. So it won’t hurt your financial statement and frankly, who cares at 0% or 1%+ !?! That is lower than inflation… its free money.
The seller will be the lender, and get the same protections a bank gets. (except as the borrower I AM NOT signing personal guarantees and 37 pieces of paper at closing). There is a note payable to the seller and a mortgage is signed which gets recorded at the county. Everything is basically the same as usual and the title company handles the paperwork and recordings. Add the lender/seller as the lien holder on the insurance policy. Nothing to it !
Sometimes I can’t get 20 years on the note, sometimes I settle for 5 or 7 or 10 year balloons.. but I always look at the amortization schedule and take into consideration ALL costs when comparing to buying normally.
Other things can be negotiated as well. You can postpone the first payment to buy time for repairing or occupying the property . I always ask for this. I typically can always get at least 60 days before the first payment is due.
Well, I hope this gives you some ideas. If you want to brainstorm about it, let me know.. I like talking about this kind of stuff.
**If you are interested in buying this way, let me know. I may can sell you some deals structured like this.
P.S. See the other posts in the Seller Finance series:
– Part 2