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by Michael Morrongiello

Savvy investors understand that they can often put together more deals through
incremental negotiations over the actual repayment terms of the property sale as
opposed to focusing solely on the property’s sale price.

Take a look at an example

You have located a wonderful multi-unit income property that you would like to
acquire for your burgeoning real estate portfolio. Unfortunately, you find
yourself not having much cash to use as a down payment to entice the seller.

The sellers have owned and managed this complex for quite some time, but they
want to wind down their involvement with their properties and would love to be
free to travel and pursue other activities.

They are asking $900,000 for the property. The market value based upon sales of
similar properties seems to suggest a value in the $780,000 +/- range, so this
is a high asking price for this property by the sellers.

Since the owners were not looking to exchange into or acquire more real estate,
they are perfectly willing to provide owner financed repayment terms at 7% or
$6,977.69 per month installment payments to be amortized over 20 years (or 240
months).

The interest income on the note from this owner financed sale would provide the
sellers with the supplemental monthly income they desire to support their
lifestyle.

You are concerned about paying an inflated sales price for the property. You
know that you have good existing cash flow from your other properties and, if
need be, could handle the monthly installment payments the sellers want.

You recognize that your down payment funds are limited, thus you may have to
consider other issues in your “give and take” negotiations with the property
sellers if you are to make this transaction come together.

Here is what you propose

You offer to purchase the property from the sellers for its market value
$780,000, but at the same time propose to pay the sellers at a higher interest
rate than they’d sought. With the higher interest rate of 8.92%, the monthly
installment to the sellers would be identical. See how the two scenarios would
affect the final cost of the complex:

Even though the property’s actual sales price is lower, because of the higher
interest rate you are willing to pay, your installment payments to the sellers
holding the note is the same. You point out to them that they will collect the
same $1,674,645.70 total amount under either scenario ($6,977.90 x 240 months).

Being a focused real estate investor, you attempt to negotiate a provision that
would allow you to pay off the owner financed note balance at any time you wish
without being penalized. In other words–no prepayment penalty in the financing.

The property sellers naturally see that if their owner financed note were to be
paid off early, they would not collect all of the income they were counting on
to support their lifestyle.

Further negotiations establish that the note could not be paid off during its
initial ten years, and thereafter during the last ten years, there would be a
prepayment penalty which would decrease over time.

Structuring the transaction in this way benefits all parties involved. As a
buyer, you purchased the property at a fair price, with a low down payment,
obtained owner-financed repayment terms, and will benefit from increased tax
deductions as a result of the higher interest rate you agreed to pay the sellers
on their owner financed note.

The property sellers received close to their asking price (actually 13% less),
but also recognized that because of the way the note was set up they would
collect the predictable income they sought over time.

About the author…
Michael T. Morrongiello is an active investor who specializes in real estate and
real estate paper. He has bought, sold, or held for investment thousands of
mortgages secured by all types of real estate, including residential and
commercial properties, apartments, mobile home parks, and development land in
every state. Michael strongly believes in the powerful unity that generates
solutions when real estate is creatively coupled with paper.

Michael shares his wealth-building concepts and techniques that work in any
market in his comprehensive home study course: The Unity of Real Estate & Paper

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