Would You Pay an 18% Premium for Seller Financing at 2%?

Multi-Family and Apartment Investing
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Would You Pay an 18% Premium for Seller Financing at 2%?

Tayvion Payton
New to Real Estate · Dallas, TX · Member since 2020 · 24 posts · 16 votes

Hey everyone,

I'm evaluating a multi-family deal and could really use your insight. The seller is offering seller financing at 2% interest with a 9-year balloon. On the surface, the deal seems appealing, but there's a catch: the asking price is $475,000, which is about 18% over the market value (based on comps and DealCheck estimates around $402,000).

Details of the Deal

  • Property: Duplex, 2,400 sq. ft.,
  • Purchase Price: $475,000 ($197.9/sq. ft.).
  • Estimated Market Value: $402,000 ($168/sq. ft.).
  • Financing Terms: 2% interest rate, with a 9-year balloon.
  • Unit B Income: $2,049/month (Section 8 tenant through November 2025).
  • Unit A Income Potential: Similar rent or higher; Section 8 cap for the area is $3,234/month.
  • Monthly Loan Payment (P+I): $1,386.
  • Cash Flow Breakdown (if both units are rented at $2,049/month):
    • Gross Rent: $4,098/month.
    • Vacancy (10%): $410/month.
    • Operating Expenses (37.3%): $1,376/month.
    • Net Cash Flow: $943/month.

Key Questions

  1. Would you be comfortable paying an 18% premium for financing at 2%, especially in a market where current mortgage rates are closer to 7%?
  2. How much weight do you give to the cash flow benefit of cheap debt when the property is priced above market?
  3. Would the 9-year balloon concern you, knowing you'd need to refinance or pay off the balance at potentially higher market rates in the future?

I like the cash flow and see the potential for increasing rents, but I’m hesitant about overpaying. I’m considering countering with a price closer to the market value, but I’m curious how others approach deals like this.

Looking forward to hearing your thoughts! Would you jump on this, or is the premium too steep?

Thanks in advance for your input!

2Reply
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Most Popular Reply

Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
1y

What’s the plan?

You probably won’t be able to sell with 9 years without taking a loss. You basically have no escape plan. God forbid the property is destroyed by fire/flood. 

You’re paying $70k in “non-deductible” interest in exchange for less deductible interest. 

What’s the downpayment? Can it be zero? Can you get 15 years? Will the property taxes skyrocket? Work in a balance reduction if you pay it off early? Is the IRS/your CPA cool with the idea?


good luck. Be safe. 

3Reply
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  • Dominic Mazzarella
    Investor · Hendersonville, NC · Member since 2016 · 498 posts · 285 votes
    1y
    Quote from @Tayvion Payton:

    Hey everyone,

    I'm evaluating a multi-family deal and could really use your insight. The seller is offering seller financing at 2% interest with a 9-year balloon. On the surface, the deal seems appealing, but there's a catch: the asking price is $475,000, which is about 18% over the market value (based on comps and DealCheck estimates around $402,000).

    Details of the Deal

    • Property: Duplex, 2,400 sq. ft.,
    • Purchase Price: $475,000 ($197.9/sq. ft.).
    • Estimated Market Value: $402,000 ($168/sq. ft.).
    • Financing Terms: 2% interest rate, with a 9-year balloon.
    • Unit B Income: $2,049/month (Section 8 tenant through November 2025).
    • Unit A Income Potential: Similar rent or higher; Section 8 cap for the area is $3,234/month.
    • Monthly Loan Payment (P+I): $1,386.
    • Cash Flow Breakdown (if both units are rented at $2,049/month):
      • Gross Rent: $4,098/month.
      • Vacancy (10%): $410/month.
      • Operating Expenses (37.3%): $1,376/month.
      • Net Cash Flow: $943/month.

    Key Questions

    1. Would you be comfortable paying an 18% premium for financing at 2%, especially in a market where current mortgage rates are closer to 7%?
    2. How much weight do you give to the cash flow benefit of cheap debt when the property is priced above market?
    3. Would the 9-year balloon concern you, knowing you'd need to refinance or pay off the balance at potentially higher market rates in the future?

    I like the cash flow and see the potential for increasing rents, but I’m hesitant about overpaying. I’m considering countering with a price closer to the market value, but I’m curious how others approach deals like this.

    Looking forward to hearing your thoughts! Would you jump on this, or is the premium too steep?

    Thanks in advance for your input!


    This is an interesting scenario. That 18% premium reduces the cap rate quite a bit. Which isn't everything, I know. The cash flow would be nice, but are you planning to hold for a long term or refinance before the balloon or sell?

    I feel like overall there is a lot of unknowns here for the reduction in interest rate to be worth the premium. I would absolutely counter with a price closer to market and see how they respond.
    0Reply
  • Ken M.
    Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes
    1y
    Quote from @Tayvion Payton:

    Hey everyone,

    I'm evaluating a multi-family deal and could really use your insight. The seller is offering seller financing at 2% interest with a 9-year balloon. On the surface, the deal seems appealing, but there's a catch: the asking price is $475,000, which is about 18% over the market value (based on comps and DealCheck estimates around $402,000).

    Details of the Deal

    • Property: Duplex, 2,400 sq. ft.,
    • Purchase Price: $475,000 ($197.9/sq. ft.).
    • Estimated Market Value: $402,000 ($168/sq. ft.).
    • Financing Terms: 2% interest rate, with a 9-year balloon.
    • Unit B Income: $2,049/month (Section 8 tenant through November 2025).
    • Unit A Income Potential: Similar rent or higher; Section 8 cap for the area is $3,234/month.
    • Monthly Loan Payment (P+I): $1,386.
    • Cash Flow Breakdown (if both units are rented at $2,049/month):
      • Gross Rent: $4,098/month.
      • Vacancy (10%): $410/month.
      • Operating Expenses (37.3%): $1,376/month.
      • Net Cash Flow: $943/month.

    Key Questions

    1. Would you be comfortable paying an 18% premium for financing at 2%, especially in a market where current mortgage rates are closer to 7%?
    2. How much weight do you give to the cash flow benefit of cheap debt when the property is priced above market?
    3. Would the 9-year balloon concern you, knowing you'd need to refinance or pay off the balance at potentially higher market rates in the future?

    I like the cash flow and see the potential for increasing rents, but I’m hesitant about overpaying. I’m considering countering with a price closer to the market value, but I’m curious how others approach deals like this.

    Looking forward to hearing your thoughts! Would you jump on this, or is the premium too steep?

    Thanks in advance for your input!

    How does it compare to other options available to you? Appreciation, maintenance, neighborhood, eviction rate, proximity, condition, etc. How long will you hold the property?
    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    1y

    What’s the plan?

    You probably won’t be able to sell with 9 years without taking a loss. You basically have no escape plan. God forbid the property is destroyed by fire/flood. 

    You’re paying $70k in “non-deductible” interest in exchange for less deductible interest. 

    What’s the downpayment? Can it be zero? Can you get 15 years? Will the property taxes skyrocket? Work in a balance reduction if you pay it off early? Is the IRS/your CPA cool with the idea?


    good luck. Be safe. 

    3Reply
  • Robert Rixer
    Investor · Miami, FL · Member since 2015 · 355 posts · 268 votes
    1y

    This is the equivalent of a car salesman pitching the "monthly payment" of a car instead of the actual price of the car. Knowingly buying into the red just because of financing terms is a very unhealthy way to invest.

    3Reply
  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    1y

    What is the ROI on the premium you are paying? Meaning, you monthly payment on seller financing is $1386. What if you paid $402k with current market financing.

    I.e. if your monthly payment on a $402k PP is 1700, you are saving 314/mo, or $3768/yr. So, you are "earning" 5.16%/yr on your $73k investment, or have an 18 yr payback.  This is not a great return, but not terrible.

    As others noted, there are other risks, like having the property insured at full replacement or purchase price, or if the option is 100% seller financing with no money down or very little, versus 20% traditional down payment, this can start to move it into a better investment.

    2Reply
  • Greg Kasmer
    Rental Property Investor · Philadelphia, PA · Member since 2021 · 774 posts · 500 votes
    1y

    @Tayvion Payton - I agree with what most others have mentioned. I would negotiate a price point that is lower - maybe the 10-12% range above "market". However, also remember that the "market price" should go up with appreciation assuming you're in a somewhat appreciating market. For example, if this market appreciates (or has) at 2% per year, in 9 years the property will likely be worth 18% more than it is today. However, if this market is likely not to appreciate it's a different story. Good Luck!

    0Reply
  • Victor PatelBusiness Member
    Real Estate Broker · Cincinnati, OH · Member since 2022 · 133 posts · 89 votes
    1y

    How about a lower price but with a slightly higher interest rate?  Your payment may remain about the same as the original deal!

    [email protected]513-764-4775
    0Reply
  • Benjamin AakerPro Member
    Rental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
    1y
    Have a look at your numbers again. With 0% down and 30 year amortization, your monthly debt service will be $1756. That looks pretty bad for your cash flow.
    I'm not as worried about the 9 year balloon. With that low interest rate, you will have paid down a lot of equity in the deal and should be able to finance with a bank.
    0Reply
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