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Good morning Everyone,
I’m working with a seller who is open to carrying for 15 years with the option to extend the term for another 5 years.
Townhouse: 3/2 1,104sqft
Payment: $925 plus the taxes, and insurance, and HOA.. The total is about $1,200. It should be able to rent for $1,389
Mortgage: Free & Clear
Repairs: No repairs needed
Asking Price: $165,000
Down: 10% – $10k to him, 6k to the agent
Listed: On the MLS until January 31st.
Term: Owner Carry for 15 yrs with the option to extend another 5
The seller has a due on sale clause in his contract that will not allow me to transfer title to my tenant buyer. There is also a pre-payment penalty of 5% if I pay it off within the 15 years. I’m not worried about that part. What is a good way to exit this potential deal. Since, I can’t sell on Seller finance to my tenant buyer. Would a Lease Purchase be better or an option? If I’m missing anything I apologize in advance.
First I would check your state law. In Illinois it is statutory law to have prepayment penlities. Think it out is it worth 16K to make a profit of $200 a month?
Would the seller be okay if you were transparent about your intentions someday to sell the house to a tenant buyer? In such a case, you’d wrap the note and you’d still be making the payments which sounds like what he wants. The pre-payment penalty suggests to me that he wants the note to go to term.
It’s been a long day, I’m probably not thinking straight, but I’d say continue talking to the seller and see if you can figure out the intent of those restrictions.
I have been thinking on this a bit. I agree with Bill. I think I would be transparent with the owner and explain your intentions on the property. Also if you have a tenant buyer and can get all some or more of your down stroke back makes it much better.
Kenneth, some more things to consider:
1. How does that $165k asking price compare with current market price in the state and local area of that house?
2. How badly did real estate values tank in that area when the 2008 crash took over? I ask because all indicators are that the crash we’re headed into today will be far worse than back then.
3. Is that due-on-sale in seller’s contract built into his/her listing agreement (that soon expires), or is that in a separate seller-created contract?
4. For negotiating reasons, do you know if the seller has ever made a valid declaration of being an investor with the IRS (which gives him/her some great tax reduction benefits), or if s/he is stuck with the default IRS designation as a dealer (which clobbers him/her up front on carrying paper for you)?
5. What interest rate would you be paying to the seller?
6. Are you comfortable with walking away from the deal if all the right stars don’t line up in this deal for you? If yes, your negotiating position is a lot stronger.
Dee great point I was going to address and forgot about it in my post. Interest rate is important
Wouldn’t the interest rate be about 1%?
N = 180
PV = $165,000 – $10,000 = $155,000
PMT = $925
According to my math, yes – just under 1% annual interest rate if the term is 15 years.
If the term is 30 years, then the interest rate is 5.96%.
Again, read the loan docs. No loan docs = NO DEAL.
If the loan docs say its a 15 year note – then read the following:
Because (at 1%) that’s WAY under the current market — it brings up more questions.
Is that a fixed rate? If so, how long?
If and when the lender finds out, what do the docs say the lender can change the interest rate to?
When the interest rate changes, typically so does the payment.
If that happens, be prepared for payment shock!!
Like Jack Miller would say, “Do you really want to play footsie with a lender for the next 15 years?”
You did not mention what the house is worth. Is $165,000 a retail price of a discounted price?
I would not do this deal if it is a retail price.
Just because you can buy with seller financing, it does not make it a good deal.
This could make a good master lease IF you can get the monthly payment down.
It’s a lot to take on for MAYBE getting $189 a month in cash flow.
One month of a vacancy would wipe out all cash flow.
A master lease would be much less risky.
Good evening All,
First off let me say thank you for all the responses. All of you have been very helpful.
Bill Eisenhauer: I explained to the seller, what I would like to do. I was totally open with the seller. That is how I found out about the due-on-sale clause. You are correct about going the distance. He likes the cash flow from this property. He will not allow a second note.
Don Wede: I haven’t had the time to check the laws on pre-payment penalties. I will do that this week for future reference. I’m leaning more towards walking away. I’m prepared to walk away. I will continue to follow up with the seller.
Dee L Graber: 1. The seller lowered his price to $158K, the $165K is where the price should be for a townhome in this zip code.
2. The market is Vegas was hit pretty bad during the crash. So, we can expect some of the same thing to happen when the market corrects itself.
3. The due on sale clause is in his contract.
4. I do not know if the seller has made any valid declaration of being an investor with the IRS.
5. I’m assuming that it is principle only. We didn’t discuss any interest. I wasn’t gonna mention anything about an interest rate unless he brought it up.
6. I’m prepared to walk away, if the stars are not aligning.
Mike Weiss: You might be correct about the 1%. However, we didn’t discuss an interest rate. So I.m assuming it’s principle only payments. I wasn’t going to mention an interest rate unless he brought it up.
Jackie Lange: The ARV is between 200K-211K. I was trying to get the down payment lower, but since the home is listed on the MLS, the agent will get the $6K. I’m gonna keep my eyes open to see how much attention he is receiving on the MLS. If the house doesn’t sell before the listing expires. The seller might be open to coming down; on the down payment as well as the monthly payment.
I’ll keep you posted
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