Wednesday, August 25, 2010

Negotiating Purchase Terms

So, you are preparing your first offer to a seller. What contract terms are negotiable?

For some reason, most buyers only think about purchase price when negotiating with a seller. But virtually all other terms are negotiable, and can make a BIG difference in profitability for an investor. Here are some common terms that might be negotiated:

--Interest rate on seller financing
You did ask about seller financing when you made your offer, right? If your seller has equity in the property, you might discuss the benefits of seller financing. The interest rate that you agree upon is totally up to you and the seller.

--Adjustable rate on seller financing
The seller insists on a higher interest rate, but you want to keep your payments low in the beginning. Or perhaps the seller wants to tie interest rate to an index, such as current FNMA mortgage rate. So adjust the interest rate on your note with the seller to go up or down, depending on your agreement.

--Interest only payments

Payments to the seller may be amortized or not, include principal pay off or not. If the buyer wants to keep payments low, just make interest only payments. By the way, agree that anything you the buyer pays over and above the interest only payment goes towards principal.

--No interest and principal payments only
If the seller insists on a purchase price that the buyer feels is very high, perhaps he would agree to spread those payments over time as installments on the principal.

--Quarterly or yearly payments, rather than monthly
The buyer might prefer this if he is doing a quick flip, paying for improvements, or doing demolition prior to generating a sale or rental income.

--No payments until call period
Same situations as above; might be dependent on an action, such as locating lease-option buyers for the property.

--Amortize over a long period (e.g. 50 years)
This is one way to keep payments low, while making payments toward principal.

--Return down payment for improvements
This makes sense if the buyer is going to have to make some large/major capital improvements. A seller might be motivated to consider this if the property cannot be financed conventionally in its present state.

--Prepayment penalty?
If you are the seller and want to receive a guaranteed income over time, build in a pre-payment penalty to discourage the buyer from paying off the note. As the buyer, you may want to insure that there is NO pre-payment penalty for paying all or part of the note early.

--Release “Due on Sale” clause
Release of this clause allows the maker of the note to secure it with a different piece of collateral upon sale, rather than cashing out the beneficiary (seller).

--Allow loan to be assumed by a qualified person
VA loans often allow this.

--Allow loan to be assumed without qualifying
A seller may be willing to keep the loan in their name, and allow the buyer to take over payments. This is a “subject to” agreement.

--Allow assumption for higher points or rate
Most commercial loans allow for this.

--Split and assume loan (for condos, or multiple units)

--Allow subordination for someone else to be first lien
A buyer may request this when they will need bank financing for capital improvements or development.

--Extend the closing date
This may be useful for a buyer that is trying to raise funds for closing.

--Allow improvements prior to closing
The seller has some liability here; but a buyer may be willing to take the risk that a property may not close, in exchange for making improvements prior to a quick flip or assignment.

--Small or no down payment
The seller may have tax reasons to avoid receiving principal, and may prefer interest only. Benefits to buyer are obvious.

--Pay for some of improvement costs
Ask the seller to pay for some of the improvements.

--Pay for closing costs

Bottom line:
It never hurts to ask! So get ready to make your first offer!

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