Seller/Owner Financing for Multifamily Acquisitions

[Daniel G.]

Hi BP Community.

My question is about seller/owner financing for multifamily acquisitions. I am looking at a 97 Unit property in Texas that is being offered at close to an 8% cap rate.I visited the property on Monday and realized that it meets most of my criteria. All though I know this alone makes it one of the better deals that you’ll find in the current market there is one other thing that makes this deal unique and interesting. The property is being sold by the owner which leads me to think that this opens an opportunity for seller financing.

I’ve never acquired a property with seller financing before but am familiar with the benefits that this has for the seller. For example, it allows them to defer capital gains tax and instead take payments to create a higher rate of return than whatever instrument they would be using for the funds they receive otherwise.

I am attracted to the seller financing option because of the possibility of reducing my downpayment which would have to be 20-25% using a traditional loan, it saves me origination fees, etc. My questions are the following:

• With interest rates currently at 4-5% do you think it is wise for me to pursue seller financing?
  • Assuming that I would get a regular non-recourse loan at re-fi 2-5 years from closing.
• How should I structure the seller financing offer?
  • 25-30 year Amo
  • What Interest rate?
  • 7-10 year Term.
• Is there another financing strategy in which the seller could finance the down payment, say 20-25% of the price?

As I said, I want to take advantage of the fact that this property is being sold by the owner which broadens the scope of creativity in the acquisition of the asset.

I would greatly appreciate any and all of your input. Thanks in advance,

Daniel 

[Kelcey Land]

I don't have a lot to add as I've only done owner financing for sfr's. But this sounds like a great opportunity.  Please keep us posted 

[Jeff Rappaport]

@Daniel G.

Your first step is to talk to the seller.  Find out if the seller would entertain taking payments for his equity.  Ask some questions about what is the least he would accept for a down payment?  What is the least he would accept for his monthly payment?  You need to know what, if anything, is owed on the property and what the payment is monthly.  

There are a many ways to structure owner financing - maybe there is a loan on the property that you can take over subject to; maybe it is free and clear and you could get the seller to carryback a portion of his equity in second position; maybe it is free and clear and he would finance the entire project for you.  You won't know until you ask!  Go back to the seller and find out if this is something he would consider.  Find out what is owed, how much, taxes, expenses, rent rolls etc.  Then come back here and post what the situation is and we can help you structure several different options for the seller.  Good luck!

[Grace Andres]

Yes, talk to the owner. In most cases, owner financing usually asks for 50% downpayment, not less! Talk to him to feel out how flexible he is. Beware, sometimes owner financed properties have something(s) to hide..ie, open violations, open permits, illegal rentals, etc. Remember, if it seems too good to be true, it is!! Buyer beware!! Good luck.

[Cassie Sherie]

@Daniel G. look... the way I see it... if you like this property and the numbers work ...great! See if you can get the owner to do seller financing, get it for a good price...BUT, don't make this all about you... make sure it is a win for the seller too, especially if they are willing to help you out...ask what the situation is for selling and see what kind of value you can bring to them. 

[Gino Barbaro]

@Daniel G.

Hi Daniel

Remember, EVERYTHING is negotiable and will be affected by how motivated the seller is.  Try to gauge his or her motivation.  I think 4.5% is fair, ask for 30 yr amort, try for a 10 year term.

Always start higher and then back down.

Try to work with a bank that is amenable to owner financing, and you could have the seller carry the entire down payment as a note.  But the bank has to be on board and confident in your business plan and your ability to operate this property.  Ask the seller what bank holds the mortgage and contact them to see if they are interested

Gino

[Daniel G.]

@Gino Barbaro First of all thank you for taking the time to provide your input. Second, thank you for your podcast! I listen to A LOT of podcasts and Wheelbarrow Profits is by far one of the best.

I'll be sending you a PM in order to save everyone here the pain of my many question asking. Hopefully when all is said and done I'll be posting a success story on this platform!

[Ayodeji Kuponiyi]

@Daniel G. nothing to add, everyone pretty much nailed it. @Gino Barbaro is the man! Keep us updated with your progress.

[Joel Florek]

@Daniel G. Lots of good advice from @Gino Barbaro as he does many deals structured this way. He has some great material online through his site and some online courses so I would dig into his stuff more if I were you.

While your deal is much larger, I just closed on a 16 unit deal a month and a half ago. 80% through the bank, 17.5% carried by the seller structured as a mortgage in 2nd position, and I brought in the rest. Terms on the seller financed portion were 10 year am, 2% interest rate and a 3 year balloon. A few notes

- Interest rate: When we originally discussed seller financed terms during negotiations the sellers wanted 5%. At 2%, this allowed me to borrow the money paying mostly principle back to the seller each month and very little interest. With that being said I was willing to pay a slightly higher price then I wanted to because my financing costs were more advantageous.

- Amortization: While some would advocate for pushing amortizations out as far as possible, at this point in my investing career I have very little equity in my properties, aka, highly leveraged. I wanted a structure that forced me to pay down debt quickly so when my balloons are up I am in a position where the banks are comfortable with my debt to equity ratios.

- Balloon: I would have liked to get a balloon out to 5 years on this money but 3 years was something the sellers wanted to hold firm on. Since they were originally not receptive to the idea of seller financing I didn't want to push too hard on my negotiations as I didn't want them to walk from the table. They had already moved on price and interest rate so I felt giving them a win on this term wasn't the end of the world for me. As long as interest rates hold I can refinance this out at 20 years 3 years from now and will have a monthly payment that is roughly half of what mine is now for this portion of debt.

[Gino Barbaro]

@Joel Florek

Thinking outside the box!!

You should consider asking for a repair allowance at closing, usually the max is 3% of price.  You tell the seller to increase the price by 3% and then credit back the cash to you at closing.  He gets his price, and you get the funds to complete repairs.  Banks may balk at this, but if you have a business plan showing them the funds are going to be reinvested into the property, they should be thrilled you are reinvesting in their asset.  Remember, do not credit the price, you want to receive cash back at closing.
On these deals, it is either price or terms.  If you can get both, then you'll be off to the races.

Gino

[Daniel G.]

@Joel Florek Thank you for providing detail on the three components of your deal's structure. This is very helpful. In your deal is the 2% interest rate low due to the relatively short-term amortization?

In other words, would you pay a higher interest rate (4-5%) if the amortization were spread out longer, say 25-30 years? 

What amortization were you initially looking to get? I am just thinking of what offer to make the seller and there seem to be two general strategies.

1. short amortization and low interest 
   
   • 10 year amo, 3 year balloon, 2% Interest
2. Long amo and higher interest.
   • 30 year amo, 7 year balloon, 4.5% interest

What are your thoughts on this? I'd be putting about 10% of the Down Payment and having the seller finance the remaining 10-15%. 

Thanks again

[Joel Florek]

@Daniel G. the main driver for me was being sure I could pay down debt fast enough to have a minimum of 20% equity in the property at my 5 year balloon due with the 80% financed by the bank. This drove my interest in the 10 year amortization. The next piece was hitting a specific financing cost.

I went about my negotiations in what I believe to be a more unique strategy. I never actually made a specific offer for terms. What I did was provide a proposal with what I believe to be the NOI I would have when taking the property over as is. From that point I stated what my maximum financing costs were on the property. In this case it was $55k per year between the bank and seller financed loans. Because the bank was firm on a 5 year balloon I also made the stipulation I needed the terms to provide me with a debt to equity ratio(on the purchase price) of 80/20 within 5 years which is how we landed on the 10 year amortization given the sellers wanted to 3 year balloon.

Long story short I gave a list of criteria I needed to hit and said the purchase price can move, the interest rate can move but the amortization schedule (driven by the balloons) and total financing costs couldn't change. The sellers made every proposal to me along the way unitil my terms were met and we shook hands and drew up the paperwork.

[Brandon Johnson]

@Joel Florek

Thanks for sharing the detailed deal structure.  I love seller financing and it is probably my favorite acquisition strategy.

See you at the top!

[Account Closed]

I'm interested how this worked out for you @Daniel G., did you end up buying this property and if so how did you structure the deal?