Purchasing Property with Seller Carry Back as Equity Instead of Debt

[Mike Lowery]

Hello BP Community! 

I am sure it has done before and I am not thinking too outside of the box, but in starting to structure syndication deals, it dawned on me that if you could find a seller willing to carry back some capital, you could provide equity instead of debt?

For clarification, I will use an example:

Purchase Price: $1M

Seller Carry Back: $300K

Loan: $700K

Instead of a traditional seller financing deal, where the seller would take a second position to the bank, why not offer them equity stake in the asset?

I understand this is not ideal as most sellers are looking for cash and would not keep equity in an asset just to relinquish operation?

But in the long run, the owner is more than likely cashing out the equity they have built in the property while also continuing to earn cash flow from the asset. Not to mention the equitable position that could be passed down or capitalized upon at disposition. 

Has anyone has experience with this? Pros and Cons? Things to watch out for? Am I crazy?

Thank you for your anticipated input!

[Don Konipol]

Quote from @Mike Lowery:

Hello BP Community! 

I am sure it has done before and I am not thinking too outside of the box, but in starting to structure syndication deals, it dawned on me that if you could find a seller willing to carry back some capital, you could provide equity instead of debt?

For clarification, I will use an example:

Purchase Price: $1M

Seller Carry Back: $300K

Loan: $700K

Instead of a traditional seller financing deal, where the seller would take a second position to the bank, why not offer them equity stake in the asset?

I understand this is not ideal as most sellers are looking for cash and would not keep equity in an asset just to relinquish operation?

But in the long run, the owner is more than likely cashing out the equity they have built in the property while also continuing to earn cash flow from the asset. Not to mention the equitable position that could be passed down or capitalized upon at disposition. 

Has anyone has experience with this? Pros and Cons? Things to watch out for? Am I crazy?

Thank you for your anticipated input!

Why wouldn’t the seller get his own loan for $700k and maintain 100% ownership instead?
Here’s the holes in the program you presented
1. Almost all lenders want borrowers to have personal capital invested in the deal - if there are any that would finance 70% and allow seller carry of 30% in a subordinated note they’d be charging interest rates of 15% +
2. As mentioned above why would the seller hand equity to a buyer when the buyer brings no investment?
3. For a seller to agree to provide a second with no buyer capital contribution the property would probably be priced significantly over market value and hence unsellable conventionally at that price.
4. Unless the seller is going to accept a note with deferred payments the property is going to have a negative cash flow

There are many scenarios that can be drawn up and theoretically look good, but the reality of sales price, rental income, and property expenses don’t fall into the narrow window that makes sense.  Yet, once in a while a deal like this can be put together.  What’s required is a combination of some of the following

1. Seller agreeing to sell a property at discount of 20%  less than market value
2. A property being operated inefficiently where income can be quickly increased or expenses quickly reduced
3. An event outside of the property itself that results in rapid price appreciation
4. A property that can be repositioned for greater income and or value
5. The ability of the buyer to qualify for lowest interest rate loans available
6. Seller highly motivated to sell