# Is this the place to ask???

Hi numbers people…

I have received an offer on the sale of my mult-unit property from people who specialize in buying such homes… locals, not a firm…

I am making a chart to see if I want to accept their offer. They offered a large sum as a down payment and then asked me to take back a loan of \$230,000 for ten years, but said that they would most likely pay it back within two years.

I have two places that I can’t find the right numbers to fill out my chart to see if I want to take this offer: With amortization on a \$230,000 loan at 7% for 5 years, what would the interest in dollars be; what amount of principle would have been paid? With amortization on a \$230,0000 loan at 7% for 10 years, what would the interest in dollars be; what amount of principle would have been paid?

Does someone here have a handy dandy excel or other macro that can figure this out easily and let me know?

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You may want to post on the tax board for the impact of doing this.

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I have two places that I can’t find the right numbers to fill out my chart to see if I want to take this offer: With amortization on a \$230,000 loan at 7% for 5 years, what would the interest in dollars be; what amount of principle would have been paid? With amortization on a \$230,0000 loan at 7% for 10 years, what would the interest in dollars be; what amount of principle would have been paid?

Does someone here have a handy dandy excel or other macro that can figure this out easily and let me know?

While you have already gotten a calculator, I would point out that it’s not too difficult to set up an amortization table in Excel. Here’s how I do mine:

Line 1 is the titles for the columns:

Column A: Payment #
Column B: Beginning Principal
Column C: Payment Amount
Column D: Interest Rate
Column E: Interest Paid
Column F: Principal Paid
Column G: Ending Principal

If you would like to see month/year, you can also add in a column for that, or replace the Payment # column with month/year. If you do add a column, be sure to adjust the cell references.

Line 2 shows the first payment for a 10 year (120 month) 7% loan:
Cell A2: 1
Cell B2: \$230,000.00
Cell C2: =ROUNDUP(PMT(D2/12,120,-B2),2) - this calculates the monthly payment, where D2 is the annual interest rate, 120 is the number of monthly payments to pay off the loan and B2 is the principal amount
Cell D2: 7%
Cell E2: =ROUND(B2*D2/12,2) - this calculates the part of this payment that is applied to interest
Cell F2: =C2-E2 - this calculates the part of this payment that is applied to principal
Cell G2: =B2-F2 - this calculates the ending balance

Line 3 shows the 2nd payment:

Cell A3: =A2+1
Cell B3: =G2
Cell C3: =C2
Cell D3: 7%
Cell E3: =ROUND(B2*D2/12,2) - this calculates the part of this payment that is applied to interest
Cell F3: =C2-E2 - this calculates the part of this payment that is applied to principal
Cell G3: =B2-F2 - this calculates the ending balance

Then you copy Line 3 for the next 118 lines, to line 121

On line 121, the monthly payment amount will slightly different because of the rounding that has occurred over the course of the loan, so you need to make this change:

Cell C121: =B121+E121

You will now have a complete amortization table for a \$230,000 loan for 10 years at 7% If you want to change the term of the loan, you can change the number of months to 60 (or 360), and change the number of lines in the table.

You can determine the total amount of the payments, interest and principal over the course of the loan by summing up columns C, E and F

If your buyer is making payments that are more than the monthly payment amount, you can adjust the table as you go along to correctly calculate the interest and principal for the following months.

AJ

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comptche: "I have received an offer on the sale of my multi-unit property from people who specialize in buying such homes… locals, not a firm…

I am making a chart to see if I want to accept their offer. They offered a large sum as a down payment and then asked me to take back a loan of \$230,000 for ten years, but said that they would most likely pay it back within two years."

I assume that you \$230k mortgage will be secured by a first lien mortgage?

You do not mention how large the down payment is in relation to the \$230k mortgage, but commercial lenders often do not loan more than 70 - 75 - 80% of the FMV of the property. If it were me I would want more like 50% down payment.

Also, 7% seems like a higher than market rate, to entice you, but why can the buyer not get commercial financing at a less expensive interest rate? Especially if the LTV is low (assumed because of the reference to large down payment.

Do you plan to do any underwriting? Review Buyer’s balance sheet, income statement, credit report and operating experience.

Will there be a parent guarantor? I ask because I assume the Buyer will form a new special purpose entity to do the acquisition.

Are you familiar with the foreclosure laws in your jurisdiction? Are you familiar with bankruptcy law and the automatic stay? Do you have counsel to help you document the loan properly and to assist if Buyer files B/R or you need to foreclose? Have you factored your legal expenses into your analysis? Borrowers often pay commercial Lender’s counsel fees to make and close the loan, but collecting fees for B/R or foreclosure is often more difficult.

Back in the 80s I saw a number of Owner financiers who were surprised that it was not as simple as collecting a monthly payment and who were unprepared for costs and time spent if Borrower defaulted.

Food for thought. Good luck.

Regards, JAFO

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Thanks IP for the calculator link; AJ for the Excell Calculator plan, reallyalldone for the tax referral; and JAFO for the questions that bring up many thoughts to chase down…

The offer was \$500,000 down plus that I take back the rest, \$230,000 for ten years at 6% interest… My son has looked at interest rates for investment property now and finds an interest rate of 6 3/4% with two to three points to get that… so we are thinking of countering with 7%… I am guessing that you think that is too high. They say that they usually would pay back the loan, that I would give, in two years time. I was told that this is a business model that this group of four people have used over and over to now own about 40 rentals in a small town… Being a small place, these four are well known and respected, but that doesn’t mean, to me, that I should just accept their good business dealings by word of mouth…

I have two experiences with foreclosure: The first one was on a house that we bid on about 30 years ago; we lost out, but got called to show proof of ability to buy and meet lawyers on the court house steps three times. The buyer who was accepted was a scam guy with workers he hired, payments not being made, logging the whole property before he finally returned it to the seller stripped of all saleable trees; The second is that a friend of mine took back a loan on a property that she hopes they default on so she could get it back and build on it now… I definitely do not know how to foreclose and what it would cost, but the realtor believes that with a down payment of 68.49% of the value, there would not be a default…

You have pointed out a lot that I didn’t know how to access or do and questions I should get answers for… Thanks. Is there anything else that comes to your minds that I should think about?

My incentive to do this is that I would generate income that I can use in my retiring years…not that I relish taking a chance on foreclosure.

Anne

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The offer was \$500,000 down plus that I take back the rest, \$230,000 for ten years at 6% interest… My son has looked at interest rates for investment property now and finds an interest rate of 6 3/4% with two to three points to get that… so we are thinking of countering with 7%… I am guessing that you think that is too high.

I actually would probably counter at 8% With a seller-financed mortgage, you should be getting a premium because you are holding a single loan (which is a very small portfolio) and if they don’t want to borrow from a bank, your competition is hard money lenders, at 8%+ rates.

They say that they usually would pay back the loan, that I would give, in two years time.

Is there any type of a pre-payment penalty for paying off early? Especially if they are only offering 6% - that’s lower than rates that I can currently get on preferred stocks issued by some of the big banks that are trading below par, like WFC-Y, BAC-K or JPM-D. If that’s the case, I’d rather have the money in a preferred stock that will be paying the same for as long as I hold it, unless it’s called and I get a capital gain.

AJ

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so we are thinking of countering with 7%… I am guessing that you think that is too high.

I think that’s too low. By a lot.

Inflation is running at 8% right now. The Fed is taking steps to reduce inflation, but those will take time to have an affect - perhaps a year or two.

If you’re talking about a 7% rate, you’re getting less than inflation on your money. You’d be better off taking the cash and burying it in your backyard. Preferably not the backyard you’re selling!!

I’m thinking 10% - 12% as a minimum.

They say that they usually would pay back the loan, that I would give, in two years time.

What they say is irrelevant. What will they sign? If they sign a two year note, then they WILL pay back the loan in two years. If they sign a 10 year note, there is no reason at all for them to pay back the loan in less than 10 years, particularly if the loan is at a rate less than inflation.

I was told that this is a business model that this group of four people have used over and over to now own about 40 rentals in a small town…

That’s a lot of property in a small area. Their risk is pretty concentrated in the real estate market in that town. What are the prospects for that town? Are people moving there and the town growing? Are businesses moving out and the town dying? If things are so good for real estate in that town, why would you want to sell at all? Why not enjoy the growing profits of continuing to own?

–Peter

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Thanks, Anne…

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Hi Peter,
Both you and AJ think that 7% is too low… and with good reason…I’m going to run with that idea of “less than inflation”…
I am selling because people are coming here from the big cities now that they can work from home… but the locals are being priced out of the money and the town is NOT growing, very little being built, construction very expensive. I am afraid that I can’t trust that the locals will be able to afford the rents that are sky rocketing. People who come to work at the local hospital leave because they can’t find a rental…

I think if I was selling a single three bedroom house, I would have more showings, etc… Being a landlord is good and bad… good that there is little vacancy, but bad because there is a limit to what you can charge for rent… Even the hospital workers are not very well paid…

The city is not going to cave in and fall apart, but the locals that keep it running may do that and it may become a bedroom community for the work from home crowd or the retirees… and they can buy that three bedroom house at an inflated price for the area…

It sounds confusing, but right now I am a little confused myself… I’m just trying to get through the next years before the final sunset…

Good questions and things I have not thought about… I am in an upheaval time and I need these questions that make me think better in the long run…

Thanks, Anne

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comptche: “The offer was \$500,000 down plus that I take back the rest, \$230,000 for ten years at 6% interest… My son has looked at interest rates for investment property now and finds an interest rate of 6 3/4% with two to three points to get that… so we are thinking of countering with 7%… I am guessing that you think that is too high.”

With \$68% + plus down, the Buyer’s do not seem likely to walk away, so on that I agree with your realtor.

I have not priced a commercial loan for several months, so I may be behind the rising rates.

SOFR rate today at 1.45%, and with a 300-400 basis point spread that would put a floating rate at 4.\$5% - 5.55%. 10-year treasury rate today is 3.25%; with the same spread that would make a 10-year fixed rate loan 6.25% - 7.25%. You should get a premium to that rate.

“They say that they usually would pay back the loan, that I would give, in two years time.”

If they really intend to pay back in two years, I would probably counter with a 5-year term, monthly payments based on 10-year amortization, and a balloon payment in 5 years.

I was told that this is a business model that this group of four people have used over and over to now own about 40 rentals in a small town… Being a small place, these four are well known and respected, but that doesn’t mean, to me, that I should just accept their good business dealings by word of mouth…"

I would probably also counter with guarantees for all 4, joint and several, unless they are buying in their individual names, but if they have bought 40 my hunch is that they use an special purpose entity for each how, probably an LLC.

“You have pointed out a lot that I didn’t know how to access or do and questions I should get answers for… Thanks. Is there anything else that comes to your minds that I should think about?”

You are welcome. See above. Non of the foregoing is legal advice, hire a knowledgeable local lawyer to assist you.

“My incentive to do this is that I would generate income that I can use in my retiring years…not that I relish taking a chance on foreclosure.”

Would not keeping it and continuing to rent generate income? Or do you believe that you can generate more income by liquidating and deploying the capital elsewhere, other than the financed amount, which will generate interest income and some return of capital.

Regards, JAFO

I use www.quantumonline.com to start my research on various preferred issues. The bonds and fixed income board here https://discussion.fool.com/bonds-fixed-income-investments-10013… may also provide you some information

For the 3 issues I mentioned (which I haven’t researched other than looking at the current yield and the issuer, and do not own), here are some specifics:

WFC-Y Coupon 5.625% Par \$25 Current Price \$23.23 Current Yield 6.05%
BAC-K Coupon 5.875% Par \$25 Current Price \$24.39 Current Yield 6.02%
JPM-D Coupon 5.75% Par \$25 Current Price \$24.24 Current Yield 5.93%

I will point out that all 3 have gone up in price today, so their yields are slightly lower than they were yesterday, but all 3 are still trading below par.

AJ

Hi JAFO,

Would not keeping it and continuing to rent generate income? Or do you believe that you can generate more income by liquidating and deploying the capital elsewhere, other than the financed amount, which will generate interest income and some return of capital.

In order to obtain current market rates on rentals, I would need to remodel and then raise rents to market rates. That would mean an investment that would take a while to earn back… I can raise rates now by 10%, the amount of inflation, but that would not do more than pay the expenses with very little gain for the work put in. I think I can earn more by liquidating and deploying the capital elsewhere…

I have not kept up with current rental rates because I raised the rents only once for all of the tenants and always raised the rents when new tenants moved in. The availability of rentals in the area is EXTREMELY scarce, so my tenants stay a long time…

I appreciate your thoughts, questions and information greatly… Why didn’t I come here and talk to you earlier???

Thanks, Anne

comptche: “Why didn’t I come here and talk to you earlier???”

I do not know. I have been around these boards for a very long time; also, there are any number of thoughtful and useful posters (though TMF seems to have lost some with the recent paring of Boards).

Regards, JAFO

Personally, I would ask for higher rate. While not knowing full details, lets say 230k loan is based on 75LTV (307k purchase price), and it’s a 4 unit property: A conventional rate today with excellent credit is 7% with zero points. (I’m in mortgage biz).

So this leads me to believe buyers cannot obtain conventional financing. I would ask them why seller financing: do they have bad credit, high DTI, or they simply could already have reached maximum financed properties for conventional guidelines (10 mortgages).

If down payment is less than 25%, I wouldn’t take it. If property is more than 4 units, then would want 30% down payment.

I would pull credit to do your due diligence. Ask them where down payment is coming from? Is it there money or are they borrowing it from private sources?

I would charge them a 1% origination fee. I would also have them cover title closing costs, and recording fees to record the mortgage.

I would counter with a larger interest rate. A Debt-Coverage loan probably close to 10% right now. So depending on down payment percentage, minimum 8% is what i would request.

I would not do a 10 year amortization…don’t see how that would give buyers positive cash flow. If you like the idea of getting paid back fully in 10 years, I would then structure it as a 30 year amortization with 10 year balloon. This means you would receive lower payments as based on 30 years but after 10 years, they must pay lump sum. They shouldn’t balk if there plans are to pay it off earlier. But in structuring with 30 yr amortization, you give them flexibility and affordability in payments while you make more money. Win-win for both parties. Last thing you want to do is foreclose on property.

Not sure what state, if get a real estate attorney to review any paperwork.

I’ve acted as the bank on a couple of private transactions. The most recent deal was a small loan (40k) and I charged buyer 2.5 points and title fees associated with 8% interest on a single family at 70LTV. Non-QM lenders charge 2-3 points so not out of the ordinary.

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