Seller Financing a Multifamily Property - Seller/Buyer Sides?

Question

A client is interested in buying a multifamily property with 80% seller financing.  The property has no mortgage on it.  Who has completed a sale with seller financing?  With no mortgages and no bank involved, are terms that can be offered/negotiated wide open?  Balloon payments, payment of interest only, payment of principal, # of years/months, what are some of the risks for both sides on this deal?  The seller has said they are concerned that they need the money for health considerations.  FWIW the property is worth $1.5MM and the buyer will be putting $300K down.

Ned Carey · Answer

@Abby Shemesh @Abby Shemesh (You come up two times when trying to tag you) Did you notice that the original poster was agent for the Buyer not the Seller.

@Carleton Ashley Please note that Abby's advice makes sense for the Seller not your buyer client. Almost all of the risk in on the Sellers side. The risk to your client is simply paying to much or negotiating terms he or she cannot comply with.

As said above, you are free to negotiate just about anything. The risk of negotiating a deal that is somehow unfair (Dood Frank laws etc) is basically on the Seller.  It is you clients best interest to get the longest term, and the lowest interest rate. A balloon is a serious risk to the buyer. Interest only is a personal choice but I think a poor one.

Chris Seveney · Answer

@Carleton Ashley

This is completely up to buyer and seller on what the terms of the deal are. Whatever you can negotiate better for you

Chris Seveney · Answer

@Carleton Ashley

Think about what you said though- seller financing when borrowers are not qualified for a loan.

If someone is not qualified and the seller gives them a loan, what do you think the end outcome will be? Seller financing is usually an awful use when it’s because the buyer is asking for it. While numbers look good on paper after paying ordinary income on the interest and principal returned that does not get invested a 7% loan will net you 2-3% yield at end of day.

Carleton Ashley · Answer

Awesome - think it is time to launch a marketing campaign to lead with seller finanicing!

Ned Carey · Answer

@Carleton Ashley yes as interest rates go up seller financing tend to become more prevalent. You haven't seen a lot talked about in regard to seller financing for many years as interest rates have been dropping and  buyers could easily get loans. Now that rates are going up then it starts to make more sense for both parties.

That said it depends on the deal and the situation. The warning @Chris Seveney mentioned should carefully considered.

I will give a counterpoint to Chris's point. A major cause of downward cycles is the overtightening of credit. Lenders tend to overcorrect and over tighten credit during downturns. Often solid deals don't get done because lenders perceive greater risk than is actually there. This is where owner financing can be very beneficial and done with realistic amount of risk.

Carleton Ashley · Answer

THANK YOU ChrisGood points on paying taxes on the ordinary income - hadn't thought about that. But the good news - is at least the seller is earning interest on their money, right? And what if it is a buyer who IS qualified? - should that not put the seller at ease?   Assuming there is a qualified buyer, what are the main reasons seller financing would appeal to a seller?   Under performing asset/personal relationships with tenants, deferred maintance, seller wanting a fixed income) are pain points that would appeal?

If they default: then I'd imagine the result is a foreclosure - which I'd imagine stipulations in the agreement that put buyer responsible for seller's attorney costs in the case of a default?  Good question to consider - and I'd imagine the seller would be somewhat protected with the down payment that I'd imagine.  All good things to think about thank you for the response - will check in with a local attorney - any other color comments on the topic are appreciated!

Eliott Elias · Answer

If property is paid off, anything is negotiable. The one who holds the gold makes the rules, I would ask for 7%+ interest rate balloon in 5 years.

Carleton Ashley · Answer

Thank you.  Seems like it is all negotiable - assuming no mortgage and perhaps proposing a couple scenarios and terms to sellers would help them see the picture.  Not sure many landlords think of seller financing as a option when selling - but what do I know?  Just trying to think of ways to generate new business in this market.  This is very helpful, thanks Abby!

Carleton Ashley · Answer

Thanks Ned!  Do you think in a market where interest rates are +/- around double where they were last year - that seller financing deals will be more prevalent?  I was always under the impression that seller financing applied mostly to those who could not qualify for a loan: under qualified buyers.   But - is there an opportunity in this market (as a real estate broker) to lead with seller financing and target sellers (say 70, 75, 80 YO) and specifically market thier properties to qualified buyers....seems like there could be many benefits to the sellers and IF they are open to being on a fixed income, not much of a downside since they are protected and earning interest on their $$ (many landlords I know are more comfortable with bricks and mortar than ()stocks/bonds/equities)  anyways.

Carleton Ashley · Answer

Thank you.  That helps - hadn't considered a trust or corporation/personal guarantee - but that makes sense.  With enough of a down payment (and assuming the property is not owner occupant protected by homestead laws), and with good buyer credit - that there is limited risk for the seller.

Seller Financing a Multifamily Property - Seller/Buyer Sides?

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