The tenant is a fairly popular seafood restaurant in town that is family run business and has been a good tenant (always paying rent on time, easy to deal with etc). They have been there for over 15 years. They are interested in buying the building which they plan to upgrade. They asks for owner financing. I would need to pay the bank about 25% of the sales price. What are my risks? What should be the terms the financing?
I see you're new, 7 posts, welcome to BP!
What I like seeing is the 15 year history!!!
This really can't be addressed in a forum, IMO, the more one knows the more complicated things can be, but while complicated in some aspects, it's an easy thing to do.
First, what is the value of the RE?
Any equipment or fixtures included?
I'm guessing after 15 years, the business and owner has established credit, do you know why they are asking you to finance it?
Financing can be great for you, interest income and deferred gains on your sale. Do you hold the property personally or in an entity?
The bank wants 25% paid down on an existing loan, or 25% down on the deal? Will there be an exiting loan left in place?
Has the buyer suggested any terms?
I'll let you catch up.
You can mention me by using the @ and my name.
How the buyer wants to improve the property, how they finance and have work accomplished exposes a lender to additional risks, such can be managed without significant concern if planned properly.
As to risk, really, not that much different than owning and leasing, just different kinds of risks, you know the collateral, that eliminates much of the due diligence other lenders must overcome.
Ability to pay seems to be acceptable so long as there is not a significant difference from rents and their maintenance if they have had that responsibility.
Terms include, interest rate risks, not that critical for an individual seller, rates can be adjusted.
Amortization; how long can you carry the loan? How does that fit with your estate plan, income requirements and tax situation?
Balloon payments need to be after significant equity has been established, that 25% may apply, the improvements will effect this as well, but future ability to finance is the question to ask.
I realize some of this may not be appropriate for public consumption, feel free to contact me with confidential matters and I'll be happy to give you financing solutions and options. :)
Oh yes do that deal. It is a no brainer. You will have way less worries because of it. It sounds to me like a win, win,win which is why I have done so many of them..
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