Need guidance with seller financing on a commercial property
Jaston RobinsonBusiness Member
Real Estate Agent · RI · Member since 2019 · 53 posts · 20 votesHello BP I recently came across a lead in Central Falls, Rhode Island. This deal is two 3 families on one lot (Cant NOT subdivide). These buildings are completely paid off & have been in the seller's family for almost a century! Little maintenance however, there are some big capital X (siding one house, 3 unit rehabs, potentially hard wire smokes in each house & a junk clean out). My strategy is BRRRR, is that the best plan?
The seller's situation: she is gearing up to retire & would like to use the money from the houses to put towards a condo else where. She also does not have the ability to do the updates to make the house market ready. Lastly, she is requesting to staying & pay rent for 3 months while she finds a new place to live.
My questions: First what are y'all over thoughts & advice? How can I get an accurate purchase price for this property where I'll be able to refinance into a low interest loan after the rehab? What will that refinance look like? & how does the seller get paid off? How can I combine seller financing & other forms of financing to make this deal happen?
Thanks in advance
@Jaston Robinson how much are the rents and how much is she asking for the property? In other words, how do you know she’s not asking at or above market value for this - why is this particular property a deal? Just because there’s seller financing doesn’t mean the seller isn’t asking more than the property is worth.
If you were to buy this and make the repairs and then go to a commercial lender for a refi, that lender would do an appraisal and then be willing to make a loan at a certain loan-to-value ratio, for example 75%. So you'd need to know about what that ARV will be, that the appraiser will determine, and then you'll need to subtract the new commercial loan amount from the previous owner's private loan balance, to figure out how much you'll need to bring to the table to pay her off at the refi.
So you’ll need that amount, plus anything the current owner (seller) wants you to put down for the private loan, plus the money for the repairs, which could add up to a good amount so you should have an idea of about how much that will be going into it.
Also, have you discussed interest rate (if any) and term with the seller? If you can get seller financing at 2% and a 30 year term with no balloon, then that would be better than any commercial loan you could get, so you could just stick with that and not do a refinance at all. But it depends on being able to negotiate favorable seller financing terms upfront.
A good place to start is to propose a 30 year fixed term, for example if she wants 300K you could propose 360 monthly payments of $833.33. If she is sharp or she is using an attorney, then that probably won’t work and she will come back asking for an interest rate, but it is nice to try for no interest and sometimes it works which is awesome when it does.
@Jaston Robinson how much are the rents and how much is she asking for the property? In other words, how do you know she’s not asking at or above market value for this - why is this particular property a deal? Just because there’s seller financing doesn’t mean the seller isn’t asking more than the property is worth.
If you were to buy this and make the repairs and then go to a commercial lender for a refi, that lender would do an appraisal and then be willing to make a loan at a certain loan-to-value ratio, for example 75%. So you'd need to know about what that ARV will be, that the appraiser will determine, and then you'll need to subtract the new commercial loan amount from the previous owner's private loan balance, to figure out how much you'll need to bring to the table to pay her off at the refi.
So you’ll need that amount, plus anything the current owner (seller) wants you to put down for the private loan, plus the money for the repairs, which could add up to a good amount so you should have an idea of about how much that will be going into it.
Also, have you discussed interest rate (if any) and term with the seller? If you can get seller financing at 2% and a 30 year term with no balloon, then that would be better than any commercial loan you could get, so you could just stick with that and not do a refinance at all. But it depends on being able to negotiate favorable seller financing terms upfront.
A good place to start is to propose a 30 year fixed term, for example if she wants 300K you could propose 360 monthly payments of $833.33. If she is sharp or she is using an attorney, then that probably won’t work and she will come back asking for an interest rate, but it is nice to try for no interest and sometimes it works which is awesome when it does.
I agree with Anthony's questions and analysis. What are current rents? Are they at or below market? If below market, can you make improvements needed to increase to market? Is there any rent control? Hopefully not. Run your cap rate, cash on cash and ARV analysis in advance. Try to seller finance with a reasonable or low down (keeping capital for reno and reserves). Fix it up. Raise rents. Add RUBS to your rental agreement to have tenants pay water, sewer & garbage (unless they already pay by custom in your jurisdiction) to reduce your expenses. Your property, if done right, should then be worth significantly more than when you acquired it. Do a cash-out refi (usually up to 75% - 80%) and used those tax-free proceeds over and above the seller carry back note amount to enhance reserves and go buy more income property. If seller is willing, do not pay her off with the cash out refi. Instead "walk the note" (substitute collateral & hypothecation) to acquire yet even more income property. Keep a close eye on reserves. Be sure to buy in the right locations. Best wishes & good luck! David
@Anthony Thompson you have some good points about ARV etc and those loan terms sure would be better then anything you can get anywhere! I think she would have to be bonkers to take them but hey he can always ask.
@Jaston Robinson this may be a tough one. Does she have a price in mind and is it even possibly worth that price? To get a real price you have to get an appraisal but they are pricier on this type real estate and until its real, not worth doing. This property would likely be appraised on income not comps. Value is not the addition of the value of the 3 houses.
If you bank finance it would be a commercial loan and value likely based on income. Typically commercial is more interest and 20 year term, sometimes with a ballon payment. Local banks are your best bet. You would also need to be sure you had the cash to rehab with the deal with her.
For seller financing is she looking to buy in those 3 months she is renting from you or is she just renting here for a couple years and then relocating OOS. If the later try for longer owner finance pointing out the win for her. What do you have in mind for downpayment, interest rate? If she is looking for cashout and you are looking for long term all owner financing you aren't on the same page and it isn't worth pursuing.
And a note on 3 century old houses on one lot, sometimes house 2 and 3 were originally the shed and the barn so keep that in mind when planning rehab.
@Anthony Thompson She is asking a heavy 600k for the property. However, due to the income & repairs needed she is open to lower offers. We came to the conclusion that 600k would basically be the ARV so naturally we're going to offer significantly less. Current rents are at about $2,000 & Central Falls has a cap rate of 10.35%. Some units are vacant & others are well under market. I believe this can be a deal because the seller has many pain points. First, she's gearing up to retire, she has an older uncle she has to look after who is a horder & lastly, she is being pressured by the city to do some immediate repairs, which she doesn't have the capital to do. I think all of this building up will make it easy for her to take our offer along with the seller financing.
My partner & I are also re-crafting our offer. We are now offer 400k with 30 year fixed at 4.875% and seller financing the 20% at 3% for 10 years. We think this works for us because we are intending on holding this property for many years. What's your thoughts on that offer? is it fair? are we being too generous?
@David M Trapani Hey David! current rents are about $2k roughly. Some vacant & other well under market. We absolutely can improve the property & do some updating. No rent control & market rents are looking about $1,200 x 6 units = $7,200 monthly. That's how we got an ARV of about 600k. Thank you so much for this advice. If our offer is accepted we'll putting a lot of this into action.
@Colleen F. Hey Colleen, she's asking 600k which would be the the ARV of this particular property. We are going to offer 400k so we can be competitive to secure it before it hits the market. She is looking to rent while she relocates to a condo. That's great advice, we plan on really highlighting her being able to stay when we present the offer to her today. Wish us luck!
@Jaston Robinson sounds like you are asking her to finance the entire purchase? 20 % at a lesser interest for the down payment portion? or do you have other financing for the first 80%? If it is the whole purchase price wondering about how she could see this as a good offer with only 3 months to move and no cash coming out of the property to buy the condo she hopes to live, in unless of course she has other resources. Definitely let us know how you make out.