What are “Term’s” in Real Estate Investing?

This was a featured article from REAPsWeb.com this week.

Negotiable Real Estate Terms

By Wendy Ceccherelli

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:

Interestrate on seller financing: 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.

Adjustablerate 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 prepayment penalty to discourage the buyer from paying off the note. As the buyer, you may want to insure that there is NO prepayment 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!

About the author …
Wendy Ceccherelli is the volunteer membership coordinator for REAPS. She has been a full-time real estate investor since 2006, and is the designated broker /owner of Home Land Seattle. She is also a developer of Van Gogh Studio Lofts, a transit-oriented development at the Rainier Beach Light Rail Station in Seattle. Prior to her career in real estate, she spent twenty-five years as a government arts funder. More information on real estate topics may be found on her blog at www.WendyWonder.Blogspot.com.

REAPS is the oldest – and largest – Professional Association for the real estate investor this side of the Mississippi. We provide education and networking resources for real estate investors, those who want to be investors and anyone who provides value to our members. Our goals are to motivate and support our members and guests through education, discussion, legislative action and networking. We host over 40 live events a year around Puget Sound and they are all open to the public. If you’ve never attended one of our meetings, just email our office at [email protected] and be our guest for free!”