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

[Frano Buhovac]

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?  

[Emma Powell]

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Once you've qualified the deal is a good one, seller financing is often a great way to go. You'll still need a down payment, from what you've written above you'll be raising capital from partners on that. Be sure to follow all SEC syndication rules: any silent partners bringing in money and doing no work and no voting are not allowed unless you file the proper legal documents, and preparing those are expensive. If all partners bringing in cash are also doing some work, keep it under 6 people to avoid looking like crowdfunding, and they all need to have voting, responsibilities etc. You'll need an attorney to build a good operating agreement and LLC for the joint venture, likely two LLCs, one to hold title, the other to manage the property.

When you're ready to refinance, you're basically doing a BRRRR, you'll be in a better position on experience with a lender, but the one who signs on the loan will need a net worth equal to the loan size and 10% of that shown as liquid. So bringing in that experience partner now who can sign on a commercial loan later is a good idea.

Cons of seller financing is they often have lower LTV and higher interest rate than banks, but if they don't I use them. Another issue is if they get impatient to refinance, so build in a large cushion of time with a few extensions pre negotiated. They're not required to follow all the same regulations as licensed lenders, so be aware of what their legal responsibilities are. In some ways they're easier, in other ways they're harder, because their negotiations can often be influenced by their emotions.

Happy to help more, feel free to ask questions. This is an amazing start for you, the first large commercial deal, and will open doors the rest of your investing career!

[Frano Buhovac]

@John Warren Thank you for the advice. You are right it is a big deal, I'm currently connecting with brokers from the area but additional help would not hurt.

[Brent Coombs]

@Frano Buhovac, since you "currently don't have the required down payment", I take it that the only reason they want to sell is because they need (at least) that deposit amount up front?  ie.  Otherwise, why sell at all?

ie.  You'd better find a way of coming up with that deposit, else: goodbye deal?

ie.  Get it done.  Good luck...

[Dylan Thomas]

@Frano Buhovac I am definitely late to this thread, but I am very interested to hear how your idea panned out! Were you able to buy the building?