Deal Structure/Analysis: Seller Financing Option vs Commercial Loan

[Jeremy Dugan]

Good morning BP,

I am working with a potential off-market seller who wants to off-load their converted motel (8-units, 1 is the motel office that can be commercial space) as they retire. I've received their rent roles (4,760/mth) but believe that the market value is about $6,600 to $8,100/month. The Commercial Loan Officer I am working with comes up with a Loan Amount of $336,000 (Total value is $448,000) because of the low rents. I also have their expenses which are in line with my estimates/analysis.

I do not believe the Seller's will like that valuation and I know they are hiring an appraiser. Also, I believe they own this property out-right, no loans, etc.

I'd like to structure a deal where they provide seller's financing with a 2-3 year off-load timeline that gives them a) some cash now via a down payment and b) some regular monthly income all while I work to bring rents to market value and we both benefit on the sale and refi.

How would something like that work and what would it look like? Very much appreciate any advice or recommendations on how to approach this conversation/negotiation.

[Jaycee Greene]

Quote from @Jeremy Dugan:

Quote from @Jaycee Greene:

Quote from @Jeremy Dugan:

Good morning BP,

I am working with a potential off-market seller who wants to off-load their converted motel (8-units, 1 is the motel office that can be commercial space) as they retire. I've received their rent roles (4,760/mth) but believe that the market value is about $6,600 to $8,100/month. The Commercial Loan Officer I am working with comes up with a Loan Amount of $336,000 (Total value is $448,000) because of the low rents. I also have their expenses which are in line with my estimates/analysis.

I do not believe the Seller's will like that valuation and I know they are hiring an appraiser. Also, I believe they own this property out-right, no loans, etc.

I'd like to structure a deal where they provide seller's financing with a 2-3 year off-load timeline that gives them a) some cash now via a down payment and b) some regular monthly income all while I work to bring rents to market value and we both benefit on the sale and refi.

How would something like that work and what would it look like? Very much appreciate any advice or recommendations on how to approach this conversation/negotiation.

Hey @Jeremy Dugan, welcome to the BP Forum! Looks like you've already outlined most of the way something like that would work. One thing that I would add is your plan to refinance the property once the sellers note matures and that's when you'd pay them the rest of the purchase price through a cash out of the higher valued property. Happy to answer any other questions you have.

On the exit strategy for seller financing, say the deal was Property Value: $450K, DP: $80K, Loan $370K. Over 3 years, I make interest only payments to seller, but raise market rents and it assesses at $650K. Could I get an 80% LTV Cash-Out Refi ($520K), pay off the $37OK, and pocket the difference ($150K)? Is that how it would work?
[In my scenario below, I was thinking about a share of the equity upon refi (what @Jack Pasmore called "the kicker" or share of the upside) since I don't think the seller would agree the property values at only $450K, even though that's what the rent and NOI say]

@Jeremy Dugan In my experience, such a "kicker" is only present when the other party is an "investor" rather than the "lender". In your situation, the seller is providing debt, not equity. In my opinion, if you pay a "kicker" to the seller, you're just taking money out of your own pocket and transferring it to a party that is not taking an equity risk in the deal. Just my 3 cents!