All Forum Posts by: Nick Buten

Hello, I’m hoping there is a CPA in BP who can help me explain the 2 scenarios below to a seller.

***The seller has no debt on the property

Offer 1: $375,000 (Bank Financing)

Offer 2: $375,000 (Seller Financing)

- 10% Downpayment ($37,500)

- Loan Amount: $337,500

- 3 Year Term

- 5% Annual Rate

- Guarantee 2 years of IO payments ($16,875 each year so $33,750 total)

Can someone explain the differences in taxes the seller would pay on Offer 1 Vs. Offer 2? I’m hoping to be able to explain that seller financing is not only beneficial from a total return amount but also from a tax perspective (maybe it is not)? Thanks

@Adam L. My guess is it was purchased by someone using the property as their residence and not an investment. Based on SF prices in Austin this seems like the correct route. So it is hard to say whether they overpaid or not.

@Tyler Blackwell is there a value-add component? If not, here is how we would structure/underwrite the loan.

Sources

Loan: $800,000 (80%)

Equity: $200,000 (20%)

Uses

Purchase price: $1,000,000

$800,000 would be fully funded at closing.

We would underwrite using the in-place rent roll and 2018 annual expenses (Adjust RE taxes based on PP & see if there is a material difference with first few months of 2019 #'s). UW standards: 4% Mgmt. Fee, 5% vacancy, and $250/Unit for reserves (We will always put this in our UW). We would use a 6% interest rate and 25 Yr AM to test the DSCR and Debt Yield. We would expect the asset to cover a 1.25x DSCR test on an "as is" basis.

Keep in mind, we probably would not offer 80% LTV to a first time client... I would suggest creating a relationship with a few banks so when the time comes they feel comfortable at 80% LTV. Feel free to reach out if you have any further questions.