Chris Prefontaine and Rusty break down owner-financing negotiation using a real deal: $135,000 property, $20,000 down, 6% interest, 5-year balloon. They show how to balance down payment, rate, and term so you're not locked into the seller's terms, introducing the 5-5-5 rule as a counteroffer benchmark and laddering interest rates to match the tenant's lease cycle.
Chapters
Bare minimum, if he's dictating his price and is down, you have to get a longer term, right? You got to talk to him about the seesaw. You got these 3 variables here and you're asking for all 3. I just can't give you all 3. That wouldn't be fair. We have to make this fair so we're both happy in 3 or 4 or 5, 6 years.
I had a follow-up call with this seller probably about 6 months ago. He would like to sell his house and he was okay selling it on owner financing. But the terms that he wanted didn't work for us. He wanted— the monthly payment was too high. And when I call him back to say, hey, the numbers don't make sense on our end, he quickly hung up on me. But I call him back this time and he's got a new tenant in there with a higher rent. And if he is going to sell, he is expecting the buyer to take over the tenant.
Right.
And the lease doesn't end until June of next year. So he's open to a 5-year balloon. The price has gone up. He bought the lot right next to this house for $5,000. So he wants $135,000, $20,000 down, 6% interest. And he told me, I didn't do the calculation, but he told me with a 6% interest, the monthly payment is probably around $600.
$600.
$600 to $700 a month, and right now he's getting about $1,200 a month. So he said, hey, you still— you can still get pretty decent cash flow.
What are the taxes? That's the only thing that would come off that insurance.
Oh, taxes are awfully, awfully low. Um, he told me it's about $500 a year.
Okay, and plus you pass them on, insurance is minimal. Okay, so what's the question on this one?
Um, well, the question is he wants his price. He wants $20,000. $20K down, which is more than 10%, and he wants 6% interest. So I didn't know how to— Well, you gotta go back.
You gotta set boundaries, right? I think, Chris, you might agree with what Zach told us, the chairman's, the 555. I don't know if you wanna disclose that or bring that up. Yeah.
Yeah. You can hit that, Rusty, as a guide because 6 is only one over, but go ahead. And then I have another thought.
Yeah. So Wendy, Zach brought this up at our chairman's. He says he has a 5-5-5 rule, which is 5% interest rate, 5 or longer years on a term, and then 5% down. So what you would say to this guy is, hey, this is where I'm at. I'm at 5% down, 5% interest, and 5 or more years on the term.
Okay. And see what he says.
You set that boundary.
See what he says.
Okay.
I like that counter, especially if he dictated the offer and that's how he started his room. And then you got to decide. My general comment is going to be you got to decide if those numbers work, Wendy. There's nothing in there that's awful, but I would reset it to Rusty's point first. Okay. In worst case— go ahead, Rusty.
I was going to say we can get him to 6%. Chris has always done this. He ladders it, right? First year is Or maybe you could do 6 months of principal only, and then you ladder it to maybe 2% the next year, and then we get them to 6% in year 3 or whatever that is.
But, and you might be cashing out by year 4, so that works great. Like, there's no— there's never a set thing you have to get. I like that piece too. That would be your next one after he comes back to you. So stay with Rusty and I on this so we can keep countering with you. First one is when he set the 555. Second one is that because he's not going to accept it. All right. So then you go back with that tweak that Rusty just did. And third, bare minimum, if he's dictating his price and his down, you have to get a longer term, right? You got to talk to him about the seesaw. You got, you got these 3 variables here and you're asking for all 3. I just can't give you all 3. That wouldn't be fair. We have to make this fair so we're both happy in 3 or 4 or 5, 6 years. I don't know many sellers that—
Yeah, if I did give you a down and interest, then it might affect the price. So you got to, you got to Go that way too.
And/or term. Yeah.
Okay.
There's not too many sellers when I've said that, that they sort of come back at me in a negative sense when I go, that just wouldn't be fair to give you all of them. And/or they're not motivated to think they're getting all of those.
I mean, he's not super motivated because it's rented.
Yeah.
Is he expecting you to take on the tenant if that happens?
Yeah, he is. If he were to sell now, yes, he's expecting the buyer to take over the tenant.
My term usually stops when the tenant's out too, side note, but you can play with that because it's just all your term. But when I've done, uh, did a lease purchase, I turned to a sub-2, but didn't start till she left, the tenant. Then it was a 3-year lease, which again, I converted it. I kept it longer, but I started with, oh, my term will start when she's out. I don't know when she's going to be out.
Okay.
So you have some ammo there, right? You can go back and start with that first.
