I have a 250 unit multi family i am looking to buy the owner has a mortgage balance of 5,558,615 amortization 360 months interest rate 6.16% and gsi is 1,274,602 exp are 752,802 and noi is 521,800 100% occupied. The Seller wants 10% down, enter into a partnership with buyer and grant 49% ownership (no loan approval). Buyer pays interest on remaining equity at 7%. Then pays remaining equity to seller when refinancing the loan.
I need someone to explain this type of owner financing and if this sounds like a good deal.
Welcome to BP, Lee!
This is going a long way around the bush, there are also greater risks for the buyer.
You down is only buying 49%, he maintains control and finances the 49% to you. Later on, the thinking is that you are in title and you pass the seasoning for the purchase transaction where you may be required to have 20/25 or 30% down. The thinking or his pitch is that you can then refinance the rest of the 49% and all of his 51% based on the appraised value rather than the purchase price. Sounds good in theory.
A lender will look at the interest held, 49% and the debt against that as well as the purchase of the 51%, they may or may not recognize the skin in the game after one year that is claimed to have been circumvented by the paperwork shuffle. Much hinges on the appraised value. Also at steak is your experience at that point, the cash flow of the entire project and what may be credited to you from the 49% you purchased, not to mention your ability to carry the full load.
Be it a sale contract, an option to purchase the remaining partnership interest or another buy-sell agreement, these sellers will have a performance period to buy and if you fail to meet that deadline, you're skinned as the deal expires and your 49% reverts back to the seller.
Most of these deals fall flat when investors buy without the ability to actually buy it conventionally. Lenders in larger deals get picky about getting into some convoluted contract, partnership and future sales agreements in an attempt to play the system. Not that it isn't technically feasible but it's not as if the lender isn't aware of the deal. Now, if you own 1200 other units, they may think the management ability is there, ability to pay, the experience level is good, the title interest is then sufficient they may do the deal.
These fly much better when the partnership side goes for 5 or 10 years, where the arrangement is seen as a legit business arrangement, but on a short term basis, the reality is obvious.
I wouldn't take 49%, it would have to be 50% or more, in fact, the deal should be 10% down and forget all the sham stuff and finance the 90% with something like a 5 year balloon......period! That convoluted method really sets the stage for skimming off 10% and end up with the interest back, a rinse and repeat scam but on a larger scale.
If that deal is being offered to just anyone then it seems to really be a come on to weak investors trying to get into large properties. Good luck :)
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