Request from Seller for Loan Advance on Seller Financing - Math Help

[Kim Hopkins]

Hello! 

Well, this is a brain tickler. So we purchased a retail property at the end of 2022 with seller financing: 5 year term, 30 year amortization, 0% interest. Payments are $2k per month. Three year option to extend for additional $500/month. The entire loan is for $725k, but with the 5 year term, we would pay him a total of  $120,000 before the loan is up and we need to refinance (or use our option). We've paid one year, so $24,000 so far. 

The seller just asked if we would be willing to give him $100,000 now, and in exchange, he would knock $25,000 off the total loan amount. (Obviously the loan balance would also be reduced by the $100k).

Now, I know this is not a good deal for us, but I can't explain why. And I also can't figure out how to underwrite such a proposal in terms of return. Certainly there would be some break even point where if we give him $100,000 now, and he knocks $X off the total loan amount, then it's a good deal for us. But I don't know what $X is or how to even analyze this proposal. 

Thoughts? 

Thanks!
Kim

[Bill B.]

You’re dismissing a 25% return on your $100k? Admittedly it’s over 4 years, so it’s really only a guaranteed 6% return. But that means you have to have a guaranteed return higher than that to dismiss this out of hand, much less say it’s bad for you. 

I guess if you want to get greedy or set a bad example if suddenly you need help come extension time or when that runs out.  Then sure stick it to them after all they’re the idiots that gave you 0%. 

Personally I’d take it partially because it’s a good deal for the buyer, partially because you’re helping someone out that helped you out a year ago. Plus it will help with your refinance. If you feel the need to WIN at the buyer’s expense without taking actual cash out of their hands agree with the option period being extended to 4 years. That will cost the buyer a boatload of money, but not actual cash out of hand.