Seller financing on a 70 unit apartment building, pros and cons ?

29 Replies

Hi everyone,

I have an off-market 70 unit building deal with an amazing location, its a mom and pops type of deal where they want to get rid of the property since they are already in their 70s and I'm looking into buying it, the property is fully paid off by the owner, the owner still does the management of the property and it is not in the best shape, but the location is great Its literally 20 yards away from Loyola Chicago university. I believe that I can double the worth of the property just by managing the property professionally. 

My question is since I currently don't have the required down payment would seller financing be the best option?  

Seller financing can be a great way to go.  

But, don't forget you will still need cash. You need working capital to pay the bills and you will want to address any deferred maintenance up-front.  Trying to fund repairs of out cash flow can be a risky strategy.  (Example:  Furnace goes out and you don't have the money to fix it so tenants move out so you NEVER have the money to fix it.)  

Partnering with someone with both experience and cash can be a good way to go.  Aside from the operating cash you will need, it may open up options for financing.  They may have the 25% down payment you are looking for.  Keep in mind that if you want an agency loan, you usually need to have a partner that has already had an agency loan in the past.

Frano, it sounds like a great idea, however, getting a 70-unit building is quite the project.  I imagine it would also be harder to deal with if you're in Germany.  Most often a seller financing project is going to want at least a good portion of capital as a down payment.  You could surely see what they say, but have a good plan on coming into the discussion.  For example, tax mitigation is a huge one where they wouldn't have to pay the lump sum taxes upfront and instead payable overtime as you pay off the building.  Terms would be important, how many years would it go for, balloon payment date, amortization length and interest, etc.

Obviously you'll want to go view the property and see EVERY unit.  Don't just spot check, and then see what the condition really is. Is there a lot of deferred maintenance?  What are the rents (rent roll?) - what are the area rents?  I think it would be wise to try and partner with someone.

@Justin Hoggatt Thank you for the input!

I'm moving back to the states in 4 months, about a year ago I was checking out the building since it was a family friend, I had a conversation with them that I would love to go into apartment buildings and they offered me to take it off their hands. 

I was able to spend a couple of nights in the building since they gave me an apartment to stay for my time in Chicago, rents are way below the market and they are fine with it since the building is paid off. The great thing is they said they will wait on me for me since they really want me to take over the building. Every apartment definitely needs an upgrade, if I can bring in a partner on this deal would be definitely great!

Awesome, isn't it great when we have connections like that!?  It sounds great that they are wanting to have you take it over and will wait for you to get ready.  It sounds like you're taking the right approach and getting prepared prior to returning.

Also, I encourage you to explore what your real goal will be with this type of project.  Will you try to be property management? Renovator?  A GC in a sense?  Or simply the deal provider?  All can be lucrative and all can be overbearing.  If every apartment needs an upgrade, you're in for a lot of work.  But obviously, if the deal is right, the returns will be amazing.

A multi unit property is not for someone who does not have capital to maintain, rehab and invest. Most of our investors start with a 10-20 multi unit in order to establish the necessary procedures and relationships to be successful in the multi family market segment. Do not enter into an agreement on a 70 unit multi family that needs rehabbed without a full inspection and understanding of the potential expenses which may lay ahead. We finance multi families and you should also determine what the ARV will be when the building is returned to a more standard condition. Are you planning on student rentals? Be prepared for repairs and damages on the turn over of the units. We wish you good luck on this project!

Incredible story; I'd agree with most folks here. Try and find an experienced partner if you can, as you will need some capital to pull it off regardless. 70 units is no small task, especially with a building that was mismanaged. And just because they self managed, doesn't mean bringing in a professional management company won't have its advantages. I really just wanted to chime in and wish you luck! I hope it works out for you,

@Frano Buhovac if they would do seller financing I would pursue it. I'm doing seller financing on a 10+ apartment building in Columbus OH right now. We were able to have the seller take a secondary lien position which covered the required LTV from the commercial bank. We're purchasing this building with 0 dollars of our own money! This is just one example but this shows with seller financing you can get creative quickly. With the seller financing you and an attorney would be the ones creating the mortgage and note which means everything is negotiable. Nothing like the secondary market where you sign 100 docs at the closing table..

@Steven Goldman Thank you for your input. I understand your concerns and your answers really help with the process going forward and what to look for. the ARV would increase by as much as 40-60 percent after renovating and bringing the rent to market value since it's 40% below the market. I know that student rentals bring in higher rent but the turnover is too high and as you mentioned the repairs and maintenance can be overwhelming.

@Brian Mollo Thank you for your advice! I definitely think that I shouldn't go in alone, partnering with someone experienced will be a big advantage. You are right with the management of the property, it doesn't really mean that they will turn the place around thank you for the advice I appreciate it!

@Frano Buhovac for sure if they’re open to it first. Some people are and some aren’t. Sometime you can pitch the potential taxes they’d be paying if they just liquidated

Check avg income, % below poverty line, & racial diversity of the census tract where this is located.  In 15 seconds it will tell you if you're going to have a really hard time or easier time of making money.  Go to www.city-data.com and type in the city. Then click on the census tract where the property is located.  You want to see $45k+ income, good racial diversity, and low % below poverty.  Real estate is hyper local.  This is a hyper local free tool to hack the analysis.  

Originally posted by @Austin Steed :

@Frano Buhovac if they would do seller financing I would pursue it. I'm doing seller financing on a 10+ apartment building in Columbus OH right now. We were able to have the seller take a secondary lien position which covered the required LTV from the commercial bank. We're purchasing this building with 0 dollars of our own money! This is just one example but this shows with seller financing you can get creative quickly. With the seller financing you and an attorney would be the ones creating the mortgage and note which means everything is negotiable. Nothing like the secondary market where you sign 100 docs at the closing table..

 How did you find this deal in Columbus, Ohio?

@Frano Buhovac

If your numbers work out id jump on it. You can rehab the units over time and raise rents.

But now everyone on here knows exactly where it’s at and that owner financing is available on it. So I’d get it in contract before someone else comes along and takes it.

I’m curious how you marketed to find this deal? I’m looking for a deal like this in Oregon.

@Patrick Flanagan

Good points, I'm not worried about someone taking it away from me since the property is in the family of mine and that is the reason I've got the opportunity to do seler financing.

I took that into consideration with the rehab one at the time thank you!

1 of my mistakes was not financing the renovations, rehab, deferred maintenance on my first batch of acquisitions.

Partner up with someone and finance the property with budget to overhaul the property

You will save yourself from sleepless nights and it will speed up the rehab cycle

Turn and burn

Good luck @Frano Buhovac

@Shehzad S. You are right, I have a couple of people who want to partner up with me some of my close friends who can bring in the capital. I was also thinking that we should go ahead and do the complete renovation. It is good that I can ask people and hear out their opinion it helps tremendously. Thank you 

@Frano Buhovac Send me a message. I'm in the Chicago area and if this deal is as solid as you say, I'd be happy to partner up and get the deal done with you (depending on your goals and what you're looking to accomplish here). Check out my profile and the articles I've written on the BP blog for a sense of my capabilities and background.