Owner Carry - How common is it in today’s Market?

Multi-Family and Apartment Investing
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Owner Carry - How common is it in today’s Market?

Edward Stephens
Realtor and Investor · Leawood, KS · Member since 2015 · 166 posts · 78 votes

Hi BP!  How common is it in today’s market for a seller to carry a 2nd mortgage when selling his apartment building? Is the market too hot for today’s apartment building buyers to reasonably ask a seller to hold.a second mortgage as part of the deal? Thanks in advance.

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
5y
Originally posted by @Todd Dexheimer:

I've done it 5 times over the past 3 years. The key is to ask and show them the numbers. Many sellers don't want seller financing, because they don't understand it. Show them the amortization schedule and explain to them in writing what the terms are and how they benefit. 

as stated proper presentation makes all the difference normally you have to entice the seller with rates a tad higher than what you can get form a commercial lender but keep in mind no points no appraisals no due diligence fee's etc etc.  although many MF investors look to 1031 so the amount willing to carry will be somewhat shrunk but it can work no doubt.. 

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  • Aaron W.
    Rental Property Investor · Northern Virginia · Member since 2019 · 793 posts · 620 votes
    5y

    @Edward Stephens Never say never. If you find the right seller who does not want to go through the hassle to list or does not want huge tax burdens. This could also be a short term solution for a seller to look for another property to 1031 the proceeds into. It's all about finding the right seller and giving them the right reason to do it.

    Best of luck!

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  • Edward Stephens
    OP
    Realtor and Investor · Leawood, KS · Member since 2015 · 166 posts · 78 votes
    5y
    Originally posted by @Aaron W.:

    @Edward Stephens Never say never. If you find the right seller who does not want to go through the hassle to list or does not want huge tax burdens. This could also be a short term solution for a seller to look for another property to 1031 the proceeds into. It's all about finding the right seller and giving them the right reason to do it.

    Best of luck!

    Makes sense.  Didn’t think about the advantage a seller would have regarding 1031 timing.  Thanks for the reply! 

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  • Marlon Messer
    Rental Property Investor · Pasadena CA and Southeast TX · Member since 2012 · 10 posts · 10 votes
    5y

    I closed on a 44 unit apartment complex Feb 1 this year with seller financing, and the seller is the president of a local chain of banks.  Traditional financing was available but I decided to save it for another deal.  Seller required a sizable down payment, with 6% interest rate and 5 year balloon.  Terms could have been better but it cash flows from day one and will be a great deal after renovating the property.  At the end of 5 years I would not be surprised if the seller decides to continue carrying the note.  All I did was ask and the seller obliged.  

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  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    5y

    I've done it 5 times over the past 3 years. The key is to ask and show them the numbers. Many sellers don't want seller financing, because they don't understand it. Show them the amortization schedule and explain to them in writing what the terms are and how they benefit. 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Todd Dexheimer:

    I've done it 5 times over the past 3 years. The key is to ask and show them the numbers. Many sellers don't want seller financing, because they don't understand it. Show them the amortization schedule and explain to them in writing what the terms are and how they benefit. 

    as stated proper presentation makes all the difference normally you have to entice the seller with rates a tad higher than what you can get form a commercial lender but keep in mind no points no appraisals no due diligence fee's etc etc.  although many MF investors look to 1031 so the amount willing to carry will be somewhat shrunk but it can work no doubt.. 

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    1Reply
  • Will GastonPro Member
    Rental Property Investor · Columbia, SC · Member since 2010 · 1k+ posts · 2k+ votes
    5y

    @Edward Stephens I think many sellers would be open to carrying a 2nd...IF (and this is a big IF) they trust the operator of the property.

    I know great operators that I would loan 125% LTV on property. Some people just know how to manage property well and have shown a history of being trustworthy.

    If you're not a great operator yet, what are the chances you could get one on board in exchange for some equity?

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  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    5y
    Originally posted by @Jay Hinrichs:
    Originally posted by @Todd Dexheimer:

    I've done it 5 times over the past 3 years. The key is to ask and show them the numbers. Many sellers don't want seller financing, because they don't understand it. Show them the amortization schedule and explain to them in writing what the terms are and how they benefit. 

    as stated proper presentation makes all the difference normally you have to entice the seller with rates a tad higher than what you can get form a commercial lender but keep in mind no points no appraisals no due diligence fee's etc etc.  although many MF investors look to 1031 so the amount willing to carry will be somewhat shrunk but it can work no doubt.. 

    It works best with owners that want out of real estate, either through retiring or burn out. Sometimes I pay more for the property or a higher rate, other times I have actually paid less. 

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  • Edward Stephens
    OP
    Realtor and Investor · Leawood, KS · Member since 2015 · 166 posts · 78 votes
    5y
    Originally posted by @Marlon Messer:

    I closed on a 44 unit apartment complex Feb 1 this year with seller financing, and the seller is the president of a local chain of banks.  Traditional financing was available but I decided to save it for another deal.  Seller required a sizable down payment, with 6% interest rate and 5 year balloon.  Terms could have been better but it cash flows from day one and will be a great deal after renovating the property.  At the end of 5 years I would not be surprised if the seller decides to continue carrying the note.  All I did was ask and the seller obliged.  

    Thank you!  Very helpful to know that seller carry interest rates are hovering around 6%.  Did you throw in any other special financing terms, accruing the interest for the first couple years?  Or is it straight interest every month every year until the balloon?

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    • Marlon Messer
      Rental Property Investor · Pasadena CA and Southeast TX · Member since 2012 · 10 posts · 10 votes
      5y
      Originally posted by @Edward Stephens:
      Originally posted by @Marlon Messer:

      I closed on a 44 unit apartment complex Feb 1 this year with seller financing, and the seller is the president of a local chain of banks.  Traditional financing was available but I decided to save it for another deal.  Seller required a sizable down payment, with 6% interest rate and 5 year balloon.  Terms could have been better but it cash flows from day one and will be a great deal after renovating the property.  At the end of 5 years I would not be surprised if the seller decides to continue carrying the note.  All I did was ask and the seller obliged.  

      Thank you!  Very helpful to know that seller carry interest rates are hovering around 6%.  Did you throw in any other special financing terms, accruing the interest for the first couple years?  Or is it straight interest every month every year until the balloon?

      No it's straight P&I on 20 yr amortization, 5 yr balloon. Its a good deal so there was no reason to make it more complicated plus property cash flows anyhow so I might as well start paying down principle. He laughs when I drop a check off because every payment has been more than the note. Increased payment may not be the best decision on my part purely from a financial standpoint but it's how I prefer to operate. Once the property is fully renovated, thus increasing revenue the monthly payments will not increase and at that point I will begin saving the increased NOI for the next purchase.

      1Reply
  • Edward Stephens
    OP
    Realtor and Investor · Leawood, KS · Member since 2015 · 166 posts · 78 votes
    5y
    Originally posted by @Todd Dexheimer:

    I've done it 5 times over the past 3 years. The key is to ask and show them the numbers. Many sellers don't want seller financing, because they don't understand it. Show them the amortization schedule and explain to them in writing what the terms are and how they benefit. 

    Do you have a script for this?  And also, are you talking directly with the sellers or have you ever done it when a listing broker was involved?

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  • Edward Stephens
    OP
    Realtor and Investor · Leawood, KS · Member since 2015 · 166 posts · 78 votes
    5y
    Originally posted by @Will Gaston:

    @Edward Stephens I think many sellers would be open to carrying a 2nd...IF (and this is a big IF) they trust the operator of the property.

    I know great operators that I would loan 125% LTV on property. Some people just know how to manage property well and have shown a history of being trustworthy.

    If you're not a great operator yet, what are the chances you could get one on board in exchange for some equity?

    Would probably want to do my first commercial apartment deal on my own.  Just seems like less moving parts.  Definitely something for me to think about though.  Thanks :)

    1Reply
  • Edward Stephens
    OP
    Realtor and Investor · Leawood, KS · Member since 2015 · 166 posts · 78 votes
    5y
    Originally posted by @Marlon Messer:

    No it's straight P&I on 20 yr amortization, 5 yr balloon. Its a good deal so there was no reason to make it more complicated plus property cash flows anyhow so I might as well start paying down principle. He laughs when I drop a check off because every payment has been more than the note. Increased payment may not be the best decision on my part purely from a financial standpoint but it's how I prefer to operate. Once the property is fully renovated, thus increasing revenue the monthly payments will not increase and at that point I will begin saving the increased NOI for the next purchase.

     Damn that is genius…if you pay a little extra on your payments each month, it really builds a lot of confidence in his relationship with you.  And then if you ever need another deal from him some day, the good will is already there.  Love it!  Thanks for sharing!

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