It cannot be done! I hear people tell me and others all the time that seller financing and other creative real estate strategies cannot be done, especially in a hot market like we have today. Add to the fact that I play in the apartment space and those “in the know” will say that you cannot do seller financing. Well I am here to tell you otherwise. This is my 3rd recent transaction with some type of seller financing.
We just bought a 120 unit with seller financing and syndicated it. How did I get seller financing on a 120 unit apartment complex? I asked! Plain and simple, you will not get what you don’t ask for. So if it works for the deal, then ask for it.
Why seller financing and not traditional financing? Traditional financing is at very low interest rates, with great terms, so why would I not go with bank financing? This 120 unit is 78% occupied and needs over a half a million in renovation. Local banks had a hard time with it because I am out of state, syndicating and it’s not stable (90% occupied). Also, I was wanting to get a construction loan, where they would lend on 75-80% of the purchase plus renovation. The other option was a bridge loan. Bridge loans are expensive. They will cost $150,000+ up front for financing, charge 7-9% interest, have pre-payment penalties and have a 1% disposition fee (Charge 1% of the loan amount when you pay them back). By not doing a bridge loan we will end up saving well over $300,000.
The seller accepted our offer, which was contingent upon our due diligence period of 30 days. At the end of 30 days my $60,000 was going to become non-refundable and it was clear that bank financing would be challenging, if not impossible. So it was either a bridge loan, cancel the deal or ask for seller financing. I decided to ask.
The deal structure that you set up needs to work for you and the seller. The seller was stuck on price, but still motivated to sell, so I needed to give him his price and work with his motivation. We ended up agreeing on some awesome terms.
We gave him an 8% down payment on the purchase.
Then I told him that I would put an additional 12% into an escrow account, held by my attorney to complete the construction.
That money will be available to us in order to take construction draws as we complete the renovation. If for any reason we defaulted, then the seller could get the money
The loan is non-recourse
Interest only payments in year 1 of 5%, then year 2 of 6%, with a 3rd year option of 8%
Finding the Motivation: The seller bought the property and planned to complete a full renovation, raise rents, and stabilize, but was only ½ way done, 3 ½ years into it. They were making only $6,000 – $8,000 per month after all expenses, not including capital improvements. If you take that into consideration, then they lost money each month. There was still major lifting to do on the property with an additional half million plus left to spend and at the same pace another 3 years left to go. The motivation was there for them to sell and be creative if needed.
Presenting the offer: For this deal, it was simple. I told the seller (and it was the truth), that I would need to cancel the deal or he could provide seller financing. The broker submitted my seller financing terms to the seller and after some thought, they decided to move forward with it as long as we could work out the contracts. I would suggest doing a few things when presenting seller financing. First, I would make sure the terms are clearly spelled out, second, I would make sure you provide a Principal and interest schedule so they can see what they will make, third, provide the reason for seller financing and forth, show your credibility.
A few key ingredients to be successful in real estate, at least in my opinion, is to be willing to be flexible, diligent and creative. Look at the transaction and decide what options to purchase work for you and never assume you know what the seller wants until you ask the seller (not the broker).
Understand that many seller’s just want their money. They increased the value and want the cash or want to 1031 Exchange. In this case they may have no desire to sell the asset to you with a seller carry back, land contract, master lease, seller credit or any other creative way. If you don’t ask for it, however, you will never know if they would have.
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