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Selling a house on terms
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THE SCENARIO
I was talking with friends recently who are selling a house they own in another state. They had a couple of offers on the table, but were strongly leaning toward taking the one that involved taking payments over time instead of getting a huge pile of money on the close of escrow. (This is called 'seller carry', 'selling on terms', and 'seller financing', among other terms.)
The house is being sold for $85,000 with $5,000 down, and the balance is being financed at 10% for 154 months, at which point the buyer will own it outright. The question, then, is 'How much money is the buyer going to give the seller every month for those 154 months?'
THE SOLUTION
First things first, make sure the calculator is using 12 Payments per Year.
N: 154
I/YR: 10
PV: -80,000 (this is negative because this is the amount of
value the seller is giving the buyer in exchange for payments over time)
PMT: (this is what I'm trying to find)
FV: 0
The answer to the question is that the buyer will pay the seller $924.12 per month until the house is paid off.
You may ask yourself 'Why would the buyer want to do this? Current rates from a bank are in the neighborhood of 5%, so why would they want to accept 10% financing?' Think about that question, and also think about why the seller would want to do this deal instead of just taking a pile of money today. Feel free to leave your ideas in the comments below!
