Creative Real Estate Financing 101 - Part III - Interest

I know that I told you that I’d show you how $7,500 would make 10,000 about 2 days ago, however, I got sidetracked.  It’s not quite like I have a lesson planner…it’s just how they roll out.  But $7,500 will make $10,000 when the interest over time is applied.   I showed you to negotiate with your seller for the $100,000 property by negotiating a note on the down payment.  The note would be $7,500 over 3 years at 19.8% for a monthly payment of $277.96.  If you take $277.96 and multiply it by 36 (months) you will get $10,006.67.

I was poised to upgrade my family home from where we are to a spacious 3000 sq. foot home on approximately 1 acre inside the city.  Unfortunately, the seller, a very nice doctor, felt as though he was going to be getting the raw deal on it and pulled out.  He listed the house for $178,000 (a price reduction since the house is assessed for taxes at over $250,000.)  Here’s the offer we made him:

$75,000  Owner Financed with an OPTIONAL 3-year balloon.

7.9939%  Interest on property.

$550.00  Monthly Principle/Interest Payment

BALLOON OPTION

Price would be adjusted calculating 100% of payments toward principle price of $170,000.  A loss of only $8,000.

If the seller would have carried the note to term, he would have made $20,000 MORE than asking IF he carried the note to term.  However, if he no longer wanted the note, after 3 years he would be able to call the loan and we’d seek conventional financing.  However, the doctor invoked his right as seller to say “No.”

Why would anyone do a deal like this?

Many reasons:

1. Retention of property.  By the seller acting as the bank for at least 3 years, if we defaulted on payments, he would then turn around and file a foreclosure on us and we would be out a house, but he could then sell it for more if the market’s up, or the original sale price if there’s been no market change.

2. Less in capital gains taxes.  By lowering the PRICE and increasing the Interest, the seller would pay less in capital gains taxes.

3. Net Worth.  The seller would be able to claim the property as his until the sale was finalized in 3 or 30 years.  His net worth would include our home.

Those are a few reasons, and the reasons that I would have made the deal.  I’m sure the good Doctor had his reasons, and I hold no ill feelings toward him in the least.  Remember, buying a house, whether for personal or professional reasons, emotions need not be involved.

Related posts:

1. Creative Real Estate Financing 101
2. Creative Real Estate Financing 101 - Part II
3. 5 Ways to Make Money Investing in Real Estate
4. Avoid Capital Gains Taxes When Selling Your Home