Structuring a seller financed offer between a lower rate and a lower price with a 5 year balloon

Who pays the taxes and insurance in either version? You didn't say, and that's the number that ate a guy I know. If the buyer is writing you 1,957 and handling his own tax bill, you find out about the delinquency from the county, not from him.

Ask him straight whether he is living in it or renting it out. Owners who sell on seller paper at 15 percent down to a landlord buyer see the roof go more often, because the buyer's cash in the deal is less than one turn plus a water heater. If he is occupying, the default risk looks very different than if he has a tenant paying his note.

Three levers are in play and you're only negotiating two of them. Price and rate are on the table. Amortization term is the one he set at 30 years without discussion, and it's doing more work than either. A 20 or 25 year schedule raises his payment, builds your principal faster, and lowers the balloon you're exposed to at month 60. If you want to give ground on rate, take it back there.

The price versus rate question doesn't resolve without an assumption about how long the note actually lives. A higher price with a lower coupon front-loads your recovery, so it looks better across a short window ending in a paid balloon. A higher coupon compounds, so it wins if the loan runs long or gets extended. You are effectively picking which outcome you want to be right about.

On structure, name yourself as mortgagee on his insurance policy with a notice requirement, escrow taxes and insurance through a servicer rather than trusting an annual receipt, and include acceleration on any further encumbrance of the property. Whether you secure with a deed of trust or a mortgage depends on your state, and so does how long a judicial foreclosure takes, so get a real timeline from a local attorney before you decide 15% is enough equity to sit behind.

On taxes, installment reporting spreads gain over the years payments are received, and depreciation recapture is generally treated differently from the rest of the gain. That distinction depends on the property's history and how the sale is structured, so confirm the treatment with your CPA in writing before you agree to a price. The extra 20k of price is only worth what it nets you.

15% is thin. I've sold two houses on paper in the last three years and both times I held at 20% and both times the buyer found it. If he genuinely can't, price it in, don't discount it in.

I ran your two options out because the ranking flips depending on one thing.

Option A, five years, balloon paid: 53,250 down + 60 payments of about 1,957 (117,420) + 280,900 balloon = roughly 451,600. Option B, five years, balloon paid: 50,250 down + 60 payments of about 2,139 (128,340) + 269,100 balloon = roughly 447,700.

So the higher price at the lower rate is ahead by about 4,000 nominal if he actually refinances on schedule. Price dominates over a short window. Now run them full term instead.

A over 360 payments: 704,500 plus down, about 757,800. B over 360 payments: 770,000 plus down, about 820,300.

B wins by roughly 62,500 if the note lives its life. That's your whole decision. If you believe the balloon gets paid in 2030, take A. If you think there's a real chance he extends, defaults, or just keeps paying you for a decade because refinancing never gets cheap enough to bother, take B. Given that he's self employed with two years of returns and 15% down, I would not underwrite a clean 2030 refinance as the base case, and I'd rather be holding 8.25% if I'm still holding it in 2033.

Separately, the fact that he built the menu with the low-rate version attached to the high price tells you he's solving for monthly payment, and he's willing to pay 20k more of price to get it. Buyers who solve for payment don't have room for a tax escrow surprise. Escrow it, get proof of income beyond the returns, and hold at 20% down or take B and add 25 year amortization. Anything you soften on rate, take back on term.

The tax character of the extra 20k of price is a question for your CPA, not for this thread.

Nobody has mentioned the house. Get an inspection into the file before you close, at his cost, and read it yourself. A large share of seller-carried defaults start with a mechanical failure the buyer cannot fund in year one. If the furnace is 19 years old you are financing a furnace whether you meant to or not.

Basic question since I've never seen one of these close: does the buyer own the house from day one in this setup, or does tender keep the deed until it's paid off?

@nataliehsu in the normal version title transfers at closing and the seller holds a recorded lien against it, a deed of trust in some states and a mortgage in others. There are contract for deed structures where the seller keeps title, and some states treat those close to a mortgage anyway when it comes to getting the property back, which is why everyone here keeps saying attorney. @sonia_alvarez, whatever you sign, make sure it gets recorded and that you hold the stamped copy rather than the escrow draft.

Reading this next to thicket's thread about the buyer who couldn't refinance in 24 months and I'm surprised anyone writes a balloon at all. Is five years long enough to be safe or is it the same problem with more runway?

A payment of 1,957 a month with no tenant calls is the whole appeal of the note over the rental, and it is why so many free and clear owners end up carrying. @monica_tran3, is 22 a month all in or is there a setup fee on top?

@marcus_hale41's split is convincing and it changes the answer here. The first instinct is to take the price, and yet the world where he sits at 8.25 percent for eleven years and never refinances is the more likely one. Take B, put it on 25 years, escrow the taxes, and tell him the 15 percent is the concession.

The point about who watches the insurance policy is the one most sellers carrying paper never plan for, and it belongs on the checklist of anyone financing a house they own free and clear. @sonia_alvarez, if you do go back Friday, would you post what he said to the escrow requirement? That is the piece a buyer in his position is most likely to push back on, and the answer would help every seller reading this thread.