Breaking up Note with Owner Financing

Financing, Hard Money Lenders, Private Money
1

Hey Guys…

I may be way behind some curve, but I just heard of a technique to propose when a seller is trying to sell their property for too much money.

Example 1: Owner holds 20-yr note for $500K at 8% = monthly payment of $4182.

Proposed financing: Owner holds 20 1-yr notes that run one after another for 20 years for $25K each ($500K total) at 10% = monthly payment of $2197.

It makes a HUGE difference in the cashflow, as you can see.

I know there has to be something wrong with this.

Can you do this? Anyone ever done it?

Thanks!

Kip

2

I don’t know where to start with this one, the author of this scheme has either a lack of basic finance knowledge or is hoping to find homeowners or students of similar stature. They are playing with numbers here to make the deal sound feasible, it’s not unless you can find a property owner willing to finance at less than 1/2% per year.

Your example of the 20 1-year notes equates to paying 10% on $25k and 0% on $475k for the first year and so on. Do you think anyone would accept those terms?

If you rewrite the two options in appropriate form here is how they compare:

Example 1) $500k, 20yr, 8%, Payment = $4,182
Example 2) $500k, 20yr, 0.0445%, Payment = $2,197

3

Sorry, just one more point. To put the response into terms of the original post. If the property owner is asking too much ie. $500k for their property and you offer this deal as originally presented you are effectively offering the property owner $263k for their property.

Asking: 8%, 20yr, $4,182pmt = $500k PV
Offer: 8%, 20yr, $2,197pmt = $263k PV