40-Year Seller Financing: Yea or Nay

6 Replies

I'm looking at a piece of property in an area that could be a great opportunity to ride a wave of appreciation as others around it are being renovated. It's currently mixed use and is basically as close to the major university as you can get. It also comes with an extra lot, which makes this one of the few properties with adequate parking in the area.

The problem is the seller knows what he has, and is not super motivated to sell. It looks like it will not be possible to reach a deal with bank financing that will meet my cash on cash ROI requirements.

He has, however, given me indication that he would be open to seller financing, even saying he's done a 40-year note with someone on a different property.

I don't know if a 40-yr amortization is in play on this property, but before exploring it with the seller, I wanted to gauge the feelings of folks here.

What are everyone's thoughts on going to a 35 or even 40-year note to force cash flow? I would absolutely not accept a prepayment penalty, and crazy a high interest rate is out of the question because of cash flow constraints.

It seems to me that it is an opportunity to take advantage of cash flow as I allow the property to appreciate or even do some light improvements to force appreciation.  If the area redevelopment never materializes, at least I still have my cash flow.  Am I missing something?

TLDR:  Is a 40-year note a good idea, assuming no prepayment penalty and reasonable interest rate?

I would not accept a balloon payment, unless it was something like 10+ years out, giving me plenty of time to figure out what to do to get out of it.

think the seller just wants a long term cash flow stream and is not super interested in continuing with his real estate ownership. Let's just say he especially does not like performing maintenance part, judging by the appearance of the property.

@Nathan McBride   My target is for a property to cash flow with a 15 or 20 year note.  If it takes a 40 year note to make decent CF, it probably isn't' a great deal (IMO).  Of course there's possible appreciation, development, etc, but that's still speculative.

Also remember you'll pay much more total interest with 40 years.

@Tom S.

Normally, I underwrite everything assuming a 20-year note, but I'm coming up with something like 3.5% cash ROI on a 20-yr commercial note for this one - nowhere near what I need to get.

This one is tough because of the empty lot being used for parking (and therefore not bringing in rent, yet driving up the sale price due to land value).  

That extra lot, which allows access to two streets, should help the future value of the property, especially if I can work out a deal on one of the neighboring properties in the near future and really start playing the redevelopment game.

Plus there's the proximity to the university; if this was in some random suburb, I would not even consider it.

The numbers you need to run are how long will it take you to get to a point where you can make this land bankable and get it refinanced into a 20yr commercial note. You have to look at your exit strategy and see how long it would take you to get there and at that time would you be able to get out from under that 40yr note. Be that from selling of parts of the development  or a refi. 

Also make sure you have a clause that lets you divide and sell off portions of the land without a the note getting called due in full. You would have to structure the rates with the seller of course. i.e a percentage of the sale goes to paying of the note and you keep a certain percent. I've seen it anywhere from the seller receives 100% to a 70/30 split. If you can get it below a 70/30 thats a steal. 

And on the flip side you will find people that only look at cash flow. So they would take a 100 year note if they could. Because as long as someone else is paying the interest (i.e. the renters) and your cash flow stay the same then who cares?! Thats not my personal preference but others see it that way.