Owner Finance Opportunity on Multi, What are My Options?

Question

Hi Folks,

I recently looked at an interesting property in one of my main target areas. It is a mixed use building with 5 residential units upstairs, 1 downstairs, plus a couple thousand square feet of commercial space/office. Owner willing to carry with 20% down (about 100k). I've run the numbers and I think the place is a good deal for this market. The 6 units need maybe 20k to all be in nice rentable shape. They would bring 5-6k mnth, maybe more with some creativity. Rental market is very strong. Add in the commercial space after maybe 20-40k and you should see rents up around 7-8k. Not bad for this Ca market.

So, my main question is how to go about tying up this property. What cash I do have is tied up in another escrow right now. I've suggested a master lease option but so far they aren't interested.

Ideas:

- look for soft/private money lender who will loan me the downpayment. Is that likely? I have excellent credit. would an owner finance seller generally allow me to use borrowed money for the down?

- look for hard money to purchase and rehab. I'd need near 100% financing. I've heard this is out there if you do a first and second and accept high rates, but this wouldn't take advantage of the owner finance option.

- find a partner who can bring some or all of the downpayment money. seems like a good option, but haven't found that person yet.

- my agent says I should just make an offer to get the conversation started. I'm not very familiar with some of the finer details on owner finance deals, so I'm a bit unsure on how to structure the offer on price/terms etc.

Any ideas/pointers/suggestions/feedback? Thanks!

Wendell De Guzman · Answer

You need to provide more info:

1) what are the Rent and operating expenses of the building?

- share this so you will get feedback if the expenses are realistic

2) what are the terms of owner financing (or is the seller open to negotiation)?

- this needs to be known so the private lender funding your downpayment will  know if there's enough cashflow left for him to be paid back

3) what are you willing to give in exchange for a private lender to fund the downpayment

- equity/ debt/ preferred shares?

4) do you have another property you can pledge as collateral to get $100K from a private lender?

- what will you do to make the person lending or investing the money with you to feel confident that the money can be repaid back specially since the owner - I assume will be in first position so the private lender lending you the downpayment will be in second position

5) have you done a commercial deal before or not?

I am a private lender and real estate investor also, hence, the questions above.

For the right deal and the right investor, 100% financing is possible.

Orion Walker · Answer

Thanks for the great questions @Wendell De Guzman. Here are some answers:

1. Here's my current projections. Would love feedback:

Monthly Income:Residential income (6 units): $5500Commercial income: $2000 Laundry: $200Total: $7700

Monthly Expenses:Mortgage Payment: $2750Taxes: $500Insurance: $250Utilities (what isn't paid by tenants): $100Water/Sewer: $150Garbage: $150Downpayment/rehab loan: $750 (borrowing 150k)Vacancy deduction on residential (10%): $500

Vacancy deduction on commercial (30%): $600Cap Expense set aside: $700Net: $1,2502. Have not yet discussed terms on owner financing. I would probably need to start that conversation in my offer. Not sure what terms to suggest.3. I'm open to suggestions on what would be most appropriate to offer downpayment lender.4. I own my personal residence outright but cannot use it as collateral because of shared family ownership. I own a triplex (now 4plex) purchased in 2012 that cashflows well and could be used as collateral. Based on informal market valuation of local appraiser I have about 20% or 60k equity in that property. I will likely be closing on a two house property in the next couple weeks that should have significant equity after rehab, within 3-4 months. 5. I have not previously done a commercial deal but I do currently manage 5 doors and have credit above 750.@Arlen Chou, last time I checked 100k is 20% of 500k, not 1M :) I'm a little hesitant to say too much as I don't have it under contract. Ideas on how to structure an offer and/or get it under contract would be much appreciated. I don't live in the 4plex, and probably don't have enough equity yet to get a line of credit on it. Personal residence is off limits due to family co-owners. Thanks for the feedback all!

Eric Z. · Answer

@Orion Walker , I'm not an expert on this, so definitely talk to an RE attorney before doing this. I was talking to a guy last week who does solely seller financing ( he carries back 45% while the buyer borrows another 55% from lender), the buyer defaulted, and he took back the property. I asked him the same question, he mentioned that he put a clause on deed of trust to instruct them transfer the title to him first in case of a default.

I thought it was interesting, but I didn't ask more about it.

Orion Walker · Answer

So @Eric Zou, could you walk me through that a little slower? How is the hard money in first position if seller can take back property before hard money can forclose? Thanks for jumping in on the thread.

Eric Z. · Answer

hard money lender will want to be in the first position, can you convince the seller agree to carry on the second position? It might not necessarily riskier for the seller as long as, in case you default, they can take back the title before first position forecloses.

Owner Finance Opportunity on Multi, What are My Options?

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