Owner financing terms?

6 Replies

I have previously posted about a self storage facility I have been trying to acquire, and I am now close with the seller on the terms. They are older and want to sell their properties, yet they are more interested in owner financing than just a straight all cash offer. 

The building I am looking to acquire is a 6500 sq ft block construction shingle roof building built in the 1980s, with a total of 42 garage doors (21  10x30 units with doors on either side so they can be subdivided into 2 units). There is no climate control, security gate, etc, it is simply a self storage building. 

Original ask was $150k, I originally offered $100k cash. They declined but indicated a willingness to take $120-130k, so I countered with 50k down, 120k total, 5%, $1000/month payment for 3 years with a balloon payment at the end. The seller countered my offer with 125k, 50k down, 3 year balloon amortized over 8 years, at 7.5%. Either way I still have the ability to acquire a self storage building for less than $20/sq ft, which is cheap!

Will definitely include no prepayment penalty as part of the agreement so I can pay off at any time with a bank loan if I want.

Part of the appeal of the owner financing is that the property shows ugly on paper, the owners have been showing as little rents as possible (not reporting cash) and showing phantom expenses. As such i would have a hard time getting a bank loan on it now because my DSCR wouldn't be high enough to cover this debt.

My question is, what do you think of these owner financing terms? The 7.5% seems high, but if I can purchase and show profit for 12 months I am hoping I could find a bank willing to loan me money cheaper. Either way the goal is to pay off completely in 3 years so I can own debt free. 

Originally posted by @Brandon M.:
The 7.5% seems high,

Really? 7.5% is probably about the long term average for mortgages.  Personally I consider that dirt cheap considering it is for an investment. I certainly wouldn't want to owner finance that inexpensively. 

Of course you should negotiate the best rate you can get.  Ultimately don't be concerned about the rate. Focus on the overall deal.   Good luck - Ned

Probably they have a tax issue is why they want to owner finance versus a straight sale.

Originally posted by @Ned Carey:
Originally posted by @Brandon M.:
The 7.5% seems high,

Really? 7.5% is probably about the long term average for mortgages.  

This is why I was asking, because I am not very familiar with owner financing terms. I said it SEEMED high, but I wasn't sure. 

@Joel Owens  - They are willing to do owner financing because they still like the idea of getting income as opposed to one lump sum. Also because they have run the facility so poorly (not very strict on collecting rent on time, not keeping good books and records, no written leases on a few tenants) and because they have been showing losses on taxes, they know it is hard for someone to get bank financing if the buyer can't service the entire payment from their own personal income. 

Originally posted by @Brandon M.:

This is why I was asking, because I am not very familiar with owner financing terms. I said it SEEMED high, but I wasn't sure. 

 Brandon, I haven't a clue what common owner financing terms are. My point is that 7.5% is historically cheap. (for investment property not homeowner mortgages) The low sub 6% rates we have had for a decade are as extreme or more so that the run up of prices in the boom.  

My guess is there are owners that will finance at 3% because that is what banks are charging. And I know there are owner finance deals that are 16%+

Again to make it clear, not just to you but others reading along, interest rate doesn't matter. The total deal does. If you could buy a property for no money down and it would generate $100,000 a year in NET Positive cash flow but the interest rates was 20%, would you care about the interest rate?

Well of course in that scenario it doesn't matter what the interest rate is, but I get your point. A deal is a deal and the interest rate should not matter if it is still worth it in the end. 

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