Seller Financing

Susan20148August 7, 2012

We are considering buying a vacation home which is owned outright by the seller. He is offering seller financing and I'm trying to figure out if it might be smart to leverage that in some way, or if we should steer clear. Here are the details:

Purchase Price = $130,000. We have been pre-qualified for more than this.

We have $35,000 in our savings account so we *could* put down 20%, but aren't too thrilled about wiping out our rainy day fund completely.

We are considering just putting 10%, keeping $22,000 in savings and living with PMI for a while. That's a simple option.

I'm wondering, though, if there might be a creative way to utilize seller financing to get us to where we could put 20% down without actually draining our savings account. Maybe we offer $150,000 (although it might not appraise for that which would be a problem), actually put down $30,000, get our mortgage for $120k and no PMI an have the seller reimburse us $20k after the fact. At the end of the day, he gets his $130k, we actually only put down $10k and still have $25k in savings.

Our main goal is to buy this house (which has been on the market 10 months and has dropped in price 2x during that period) in a creative way that doesn't end up draining our savings account. Any creative minds out there with seller-financing experience? This house is in a very slow market where things just aren't selling.

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Why would you have to have PMI if the seller will finance? Usually only a bank would require that. Or are you still considering going through a bank for your mortgage?You might be able to cut a deal with the seller and put less down and go from there. Have you discussed this with him? I see nothing wrong with seller financing and it was pretty common way back when mortgage interest rates were in the mid teens years ago. The other way to avoid paying PMI monthly is pay it upfront at closing; either outright or included in the loan amount. Of course if you pay it up front, you can't cancel it later down the road when your equity has increased.

    Bookmark   August 7, 2012 at 1:56PM
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I'd look at getting a 80-10-10 loan. See if you can get a 10% second loan.

1. Will the house appraise for $150K? No one will loan for what the house won't appraise for.

2. How exactly are the sellers going to reimburse you for $20K? I had less than that in seller paid closing costs ($6K) on my recent purchase for about this amount and it ended up being right on the edge of what was allowed. (They were scrambling to find legal ways to spend the money in the contract)

    Bookmark   August 7, 2012 at 1:57PM
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Not to be the jerk that points out the obvious, but if you are struggling to put down 20%, you aren't in a great position to buy a second, vacation home. Vacation home are like fancy cars, lavish vacations and other luxury items. If you can't buy them with cash, you are probably overextending yourself.

    Bookmark   August 7, 2012 at 3:32PM
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I figured someone would say that, but hey... you can't negotiate what you don't ask for, and in this buyer's market I'm trying to get a sweet deal. Maybe the seller would tell me to take a long walk off a short pier, who knows. But I'd like to have some creative options in my head. We absolutely could put down 20% and we have plenty of money to cover the monthly costs as we have no other debt but our primary residence. But if I can get a gallon of milk for $1.50, why would I pay $1.99? Maybe I can't get it for $1.50 but I'm sure gonna try!

    Bookmark   August 7, 2012 at 3:51PM
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You aren't getting a deal though. The place has been on the market for 10 months with multiple price drops. All that means is that nobody was willing to pay the higher price, not that it is now a bargain.

    Bookmark   August 7, 2012 at 4:09PM
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What billl says.

OTH, if the vacation house has rental potential, you may be able to justify the stretch. Even with 10% down and $22,000 left in savings, you aren't leaving yourself a sufficient buffer against the unforeseen. If the house can carry itself and even generate a little income through rentals, then it may be a feasible purchase. Otherwise, be careful.

    Bookmark   August 7, 2012 at 5:03PM
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Not to pile on, but I'm with billl too. If you've only got $35K in the bank, you don't have enough cushion to buy a vacation home. A job loss or disability and you'd be in a world of hurt pretty quickly. Borrowing more to make up for your lack of cash doesn't change that. It just increases your leverage = increases your risk.

How quickly could you save up $20K if you buckled down and cut your lifestyle for a short period of time?

BTW, seller financing implies to me that the seller is carrying the note. If he's willing to do that, then you could negotiate for no PMI and eliminate the concern.

I still wouldn't buy on credit if I were in your financial position.

    Bookmark   August 7, 2012 at 5:25PM
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Agree with the last two posters. If you only have $35,000 in savings, you probably can't afford a vacation home. Put the money you would spend on a mortgage towards building your savings.

    Bookmark   August 7, 2012 at 5:27PM
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In your highly illegal scenario, seller giving you the money back after closing, the house only needs to appraise for the loan amount-$120,000. Note, I said your scheme is illegal. Sellers cannot give back tens of thousands of dollars back to the buyer. They can pay closing costs and prepaid expenses, but they cannot just give you money.

    Bookmark   August 7, 2012 at 7:34PM
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You can negotiate any terms you can agree on with seller financing (and PMI is NOT an issue).

10% down, decent interest rate.

It should not make a whole lot of difference to you who OWNs the note.

For seller financing you will need to keep a copy of EVERY payment check you make to the owner.
Believe me the banks do also.

Leaving you with inadequate cash reserves is another matter, and subject to your judgement and risk you are wiling to take.

A long time ago I started out using my residence as security for investment properties.

Now I have enough cash to operate pretty much as I please.

Banks do not ask a lot of questions when you hand them $200,000 cash on a $400,000 place.

My notes rarely even get sold.
I generally pay a point above market, and at least a one point 'origination fee' so the bank makes some money.
It is a cost of doing business.

    Bookmark   August 8, 2012 at 11:06AM
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The first thing I thought, reading your post, and before reading any replies, was that with only $35,000 in the bank, you don't have enough for a minor emergency, let alone buying a second home. I know right now, you're looking at it that you have adequate monthly income to cover things, but what if one of you loses their job or is injured and cannot work on TOP of having serious medical bills (not everything is covered by insurance, even good insurance). What if your car dies? Or you have family members who need your help--meaning you might have to take a leave of absence to help an aging, ill parent?

I wouldn't even think, given your financial situation, buying a first home would be a great idea.

Look, we did buy a second home 4 years ago. Not a vacation home, but a retirement place, that we weren't planning on living in for a few years (we just moved this spring). We bought it with 20% down, and had a 5 year balloon mortgage. Balloon, because that was the cheapest monthly payment we could get, and because we knew we'd be selling our other home within the 5 year term. However,--we knew that in a pinch we COULD pay off that mortgage if the worst happened (it would have depleted our savings, but it was doable). How would you pay off this house, if something happened? How would you access cash in case of an emergency? It's not that easy or quick to sell a vacation home--your seller has already found that out, apparently.

    Bookmark   August 11, 2012 at 11:42AM
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