Creative financing?

Question

As we are getting into REI I assumed we would do traditional financing but as I am reading and learning, I am more interested in creative financing.

Right now I am looking at an 8plex in Colorado and considering broaching the subject of seller financing with the seller, has anyone done that before? Any tips on how to do that or any other creative financing that has worked for other people?

Bill S. · Answer

Jennifer S. here is a post where I was able to obtain owner financing. I would have several questions.

1) is there an agent involved? If so you have to offer enough cash to make sure they are paid. Also brokers tend to advise against this because there is the risk that you fail as buyers and the seller gets mad at them for allowing them to do that option.

2) Typically sellers don't want long terms. You can do a 5 year with a balloon (know this could hurt you if values go down so you can't refi).

3) you must sell yourself to the seller. It's not just the numbers.

4) there are some tax advantages to the seller for doing owner financing. Make sure the seller is aware of them. In the beginning, most of the payments are interest. For a lot of retired people the interest income is taxed lower than capital gains tax rates. You can negotiate many ways with this. A lower purchase price but higher interest rates can mean the same payment but more money in the owner's pocket.

Absolutely pursue this.

Brian Gibbons · Answer

if you have an 8 plex in Colorado this  is a commercial deal

You say there's not enough equity

You got to look for "pain points" with the seller

If there's been a lot of vacancy there's negative cash flow involved

If you want a creative solution, you need to look at the outgoing mortgage PITI payment

Then maintenance and vacancy

A Master lease option will allow you to control the property and then have  The right to buy the property in the future

You need to learn how to "turn around a nonperforming apartment building"

The value of a commercial property has to do with the net operating income or NOI

Search "Brian Gibbons master lease option apartments" on BiggerPockets

Good luck!

Jennifer Slaughter · Answer

@Joseph Graeve and @Steve Vaughan, helpful input! We kept looking and I'm excited to say we are now under contract on a duplex!

Steve Vaughan · Answer

Low/ no equity + realtors doesn't equal opportunity. It's the opposite: paying full retail with all cash.

A master lease with option is different in that you aren't buying, yet.  You can obtain the option and control the property for less skin, but you can forget that one with the realtors, too.  Their commission is too high for it to make sense and they fear what they do not understand.  They will tell you and the seller not to do it.

For the most part, there's not much creative fun in buying off the MLS.  You are in a get a loan and pay the seller off world there.

I have purchased small seller-carry's that had a listing agent (after educating a lot), but my DP was large enough to give the seller some security and pay the agent.  Commercial can be very fun when dealing with sellers directly.  You have to get it at a significant discount your (the MLS) way Jennifer S..   Your agent is not free.

Steve Vaughan · Answer

In my experience, low equity or high/all equity properties are the best to get creative with.

If this is a quiet, off-market deal without realtors (you didn't answer @Bill S.), a subject-to may be a fit.  If it's on the MLS, forget that.   Listen and find out why the seller is looking to sell.  Their motivation is key Jennifer S..

Aaron Howell · Answer

You may need a large down payment to entice the owner.  He/She probably wants to get rid of the property and doing owner financing may not suffice for them.

Also,  you'll need an exit strategy to finance out of the owner financing when the term is over.

Kevin Manz · Answer

Great post

Peter Mlaguzi · Answer

Thank you all for sharing, some great ideas and insight looking to put them into good use right away.

Jennifer Slaughter · Answer

thanks for all the help guys. @Steve Vaughan and @Bill S., this property is on MLS, and we do have an agent involved.

1. Would someone mind explaining how a low equity situation would make it a good opportunity for seller financing? I was thinking seller financing bc we don't have enough for a down payment for traditional financing but I was under the impression that with the sellers low equity we would have to put even more cash in.

2. How does a master lease option look different than seller financing? And in both cases would we need to refinance with traditional financing in a few years?

Reading about real estate feels like reading about swimming to me, you can read books but at some point you have to get in the water. Looking forward to getting my feet wet!

Joseph Graeve · Answer

Great advice and value added @Brian Gibbons and @Bill S.

Everyone here is putting out good advice. Definitely keep looking for deals and find one you feel comfortable with but it is true that this may be a good one exactly BECAUSE he has low or no equity. if you show him that it will be such a long time before he is able to sell traditionally he might be happy to work with you doing a master lease option or a Seller financing.  I have experience in doing multiple seller financing and lease option deals, and also experience turning around a non performing apartment building. just haven't ever used a Master lease option but that does sound like an amazing idea Brian.

Let me know if I can be of any use  to you or answer any questions you have.

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