I found a seller that owns a 20,000 sq ft. office building with no mortgage that is interested in carrying the note for me. The building has a gross cash flow of $68,000 as it sits now, with a gross potential of $160,000. The seller is currently running $37,000 in operating expenses. Building needs $10,000 is common area updates and then each vacant unit would need paint, possibly carpet prior to renting. The building at 90% full would have an ARV of $950,000. Below are the terms of my deal: Purchase price: $550,000.00 Down payment: $10,000 Interest Rate: 3% (Max payment is $2,000 a month) Term: 5 years I was able to negotiate that months 1-3 my payment is $0.00/month, Months 4-6 my payment is $1250.00/month, and months 7-60 are $2,000/month. Giving me time to make updates and get tenants in. It ultimately makes my down payment $1,750, since I'll be getting $8,250 in mortgage payment savings over the first 6 months that I can use towards improvements. I don't think I have any issues with the deal as it sits above. The seller has received cash offers but for around $400,000. I know I'm overpaying but with a monthly payment of $2,000 and 3% interest and 5 years I think I'll be able to make up the difference plus and have plenty of equity at the end of the term. My issue comes in that the seller had their attorney look over the offer and the attorney is recommending that I give them a personal guarantee. The plan was to purchase this with an LLC and have it be separate from all my other dealings. I think that the property can work if properly managed but of coarse there is always a risk. The attorney is recommending the guarantee because of the low down payment. Is an effect counter argument that the down payment is small but I'm paying you an extra $150,000 more then anyone else, not to mention the interest you make on the $550,000 for the 5 years? Or if I think the deal makes sense should I just sign a personal guarantee and be done with it? Another thought I had was if I sign a personal guarantee that I only guarantee up to $400,000 (what the property is worth today) Thoughts our appreciated.

Should I personally guarantee a seller financed office building?

Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

11y

Regardless of the down payment, a seller would expect a personal guarantee. In this case, even more so.

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David Dachtera

Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes

11y

Hi, Sam,

The REAL question is: do the numbers work?

If they don't, the personal guarantee won't matter: the numbers don't work - period.

If they do, save the personal guarantee as a very last resort, and then try to find some reason to not do the deal. If the deal withstands scrutiny, again - the personal guarantee should not be needed.

Either the building pays its own way or it doesn't.

My $0.02 ...

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Account Closed

Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes

11y

The low down payment is either a score or a huge red flag. You say say the other offers are more than 25% lower than yours? How much of a red flag do you need???? :)

Low debt service doesn't make up for overpaying. I doubt you'll get the deal without a personal guarantee as the seller (with an attorney) is no dummy. The way the downpayment and deal looks to me is an opportunity for you to pay for PM and commercial leasing experience. The seller gets $10K. You stand to work your butt off, improve the building with your funds, hopefully improve the income. You've locked yourself in at a price you can't resell or refinance without a lot of cash improvements and leasing work. The seller has nothing to lose. You're paying to work for him if the deal doesn't work out.

Pay attention to the other offers. Of course they want a deal, but why are the only offering $400K? Value add can be creative and make a deal out of a lemon, but no day dreaming allowed! I don't believe this seller is letting $500K in potential re-sale value go because he wants to be done. If he wanted to be done he wouldn't be taking a $10K down and carrying a note for greater than value. Talk about a way to get a property back. That's a foreclosure or deed in lieu set-up.

Sorry to be harsh. I like creative, but overpaying makes no sense in this situation. BTW I actually LOVE to be wrong. Lots of people have been wrong about the profitability or feasibility of my deals, many here on BP. Please, please come back in 3 years and tell me you're selling or doing a cash out refi for $950K. :)

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Account Closed

Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes

11y

Originally posted by @Sam Erickson:

The attorney is recommending the guarantee because of the low down payment. Is an effect counter argument that the down payment is small but I'm paying you an extra $150,000 more then anyone else, not to mention the interest you make on the $550,000 for the 5 years?.

Is your argument that overpaying should exempt you from personal guarantees? If anything, overpaying shows your lack of experience and that there is a greater chance the seller will get the property back. The seller and his attorney know what they are doing. Overpaying, ON PAPER, doesn't mean anything. Doesn't show commitment, ability or experience.

Can you buy for $450K cash, and find a private lender or partner?

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Joel OwensBusiness Member

Moderator

Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

11y

You could try and master lease the property from the owner and have an OPTION to buy at a preset price of 550k.

This way you are not taking on personal liability but putting in a little bit of money and time and if you improve the value you have a strike price well below the new realized value.

If it doesn't work out simply walk away. The seller wouldn't have to spend tons of money foreclosing on you.10k is NOTHING. The attorney will eat that up before court costs if something goes wrong with the seller financed deal.

Here is a site that explains a Master Lease in some detail.

If the sellers motivation is getting a higher sales price and someone fixing the headache with time, money, and work then they might go for this.

No legal advice given.

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Sam Erickson

OP

Real Estate Broker · Milwaukee, WI · Member since 2014 · 338 posts · 129 votes

11y

@Account Closed I think your making a lot of assumptions and drawing your own conclusions from a very brief 5 point deal summary which wasn't even the topic in question. That being said I will respond to some of your points. If you still feel the same, I'll take your points into consideration.

Though I acknowledge I am over paying, I believe I'm only over paying by $50,000 (something you recommended I did when you thought the value was $400,000) The other offer at 400K is a low ball offer from a guy that throws you know what at the wall to see what sticks. I thought maybe I could use that as leverage thus my comment of the paying $150,000 more then anyone else. Also my offer at $550,000 is still 100K under what he asked for.

As for the seller they are an older couple that moved here from Asia years ago and paid $875,000 cash for the building, to operate their acupuncture business out of it. They then leased out the other spaces. The lease numbers are poor based on their inexperience. They have all 1 year leases, with no bumps. Some tenants have been their for 7 years and have never had the rent increased. The are also running the expenses at 55% of rent, being that 50% is a conservative rule I think with my experience I could bring it lower then that, but I'm actually using the 55% in my numbers. They are now looking to retire.

I should also note that in the last 5 years they put a new roof on, 9 of 9 furnaces replaced, all concrete work redone, and retaining wall replaced. Leaving very minimum risk of Cap X in the next 5 years.

My experience however started 6 years ago and hasn't stopped as I worked for a REIT as Senior Commercial Manager of the fund and lead leasing agent. In my fist two years with the fund I not only worked with national brands and improved relations I oversaw a Days Sales Outstanding reduction of 25%.

I know I'm coming back swinging but I can't tell you how tired I get of responses that I see on posts from people that seem to just be waiting to bounce on people and then proceed to draw conclusions to fit the narrative that they want to write, and think that by using smiley faces it gives them a pass to be dis respectful. I would urge you next time to ask questions, "what is market value?", "why are they entertaining seller financing?", "do you have experience with commercial?", "what is your re-leasing plan?" "what are rents per sq ft in the area?" All of which I would have been happy to answer and begin a dialogue on the deal itself if you were interested in doing so.

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Sam Erickson

OP

Real Estate Broker · Milwaukee, WI · Member since 2014 · 338 posts · 129 votes

11y

Originally posted by @Joel Owens:

You could try and master lease the property from the owner and have an OPTION to buy at a preset price of 550k.

This way you are not taking on personal liability but putting in a little bit of money and time and if you improve the value you have a strike price well below the new realized value.

If it doesn't work out simply walk away. The seller wouldn't have to spend tons of money foreclosing on you.10k is NOTHING. The attorney will eat that up before court costs if something goes wrong with the seller financed deal.

Here is a site that explains a Master Lease in some detail.

If the sellers motivation is getting a higher sales price and someone fixing the headache with time, money, and work then they might go for this.

No legal advice given.

Thanks for the thoughts Joel that might be a good option to go with. I remember reading some blogs a year or two ago on BP that talked about Master Lease. Thanks for bringing it back up.

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Tony Jordan

Specialist · Nashville, TN · Member since 2014 · 8 posts · 0 votes

11y

great replies, Sam - especially to the questionable response...sounds like a great deal, especially with seller financing in place...the re-leasing strategy will be your gold...

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Account Closed

Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes

11y

Originally posted by @Sam Erickson:

@Account Closed I think your making a lot of assumptions and drawing your own conclusions from a very brief 5 point deal summary which wasn't even the topic in question. That being said I will respond to some of your points. If you still feel the same, I'll take your points into consideration.

Though I acknowledge I am over paying, I believe I'm only over paying by $50,000 (something you recommended I did when you thought the value was $400,000) The other offer at 400K is a low ball offer from a guy that throws you know what at the wall to see what sticks. I thought maybe I could use that as leverage thus my comment of the paying $150,000 more then anyone else. Also my offer at $550,000 is still 100K under what he asked for.

As for the seller they are an older couple that moved here from Asia years ago and paid $875,000 cash for the building, to operate their acupuncture business out of it. They then leased out the other spaces. The lease numbers are poor based on their inexperience. They have all 1 year leases, with no bumps. Some tenants have been their for 7 years and have never had the rent increased. The are also running the expenses at 55% of rent, being that 50% is a conservative rule I think with my experience I could bring it lower then that, but I'm actually using the 55% in my numbers. They are now looking to retire.

I should also note that in the last 5 years they put a new roof on, 9 of 9 furnaces replaced, all concrete work redone, and retaining wall replaced. Leaving very minimum risk of Cap X in the next 5 years.

My experience however started 6 years ago and hasn't stopped as I worked for a REIT as Senior Commercial Manager of the fund and lead leasing agent. In my fist two years with the fund I not only worked with national brands and improved relations I oversaw a Days Sales Outstanding reduction of 25%.

I know I'm coming back swinging but I can't tell you how tired I get of responses that I see on posts from people that seem to just be waiting to bounce on people and then proceed to draw conclusions to fit the narrative that they want to write, and think that by using smiley faces it gives them a pass to be dis respectful. I would urge you next time to ask questions, "what is market value?", "why are they entertaining seller financing?", "do you have experience with commercial?", "what is your re-leasing plan?" "what are rents per sq ft in the area?" All of which I would have been happy to answer and begin a dialogue on the deal itself if you were interested in doing so.

Disrespect isn't something I relate to much in online forums. I don't attempt to gain or give respect here. Hopefully something gets clarified or rethought, or a new idea or perspective gets considered. Goes both ways.

You said you were overpaying. I think it's a bad idea. Just an opinion. I don't think you'll get the deal without a personal guarantee and think your counter (I'm already overpaying) is misguided, Just an opinion.

Like I said, I love to be wrong. Get the deal on your terms and make it work. If people on online forums make you tired, there is a solution for that.

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Dale Shin

Real Estate Agent · Los Angeles, CA · Member since 2014 · 80 posts · 20 votes

11y

To me the personal guarantee means you believe in it and stand behind it 100%. If you don't feel it's a good deal, then you should just walk away.

But with the info you gave, hopefully it truly is the cash flow positive property it sounds like it is and a decent value add project as well. If you buy, please be sure to post the outcome!

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Account Closed

Lender · Dallas, TX · Member since 2015 · 283 posts · 128 votes

11y

Outside of all the great comments above, the simple fact is that a 100% personal guarantee is CASH. If you were to go to a third party lender on this size deal, the loan would have personal guarantees so that inherent in the seller financing is the concept that to sweeten the deal, the seller is providing you an economic advantage hence the higher price.

I would argue to the seller that he is not making a third party loan. he already has the "risk" by owning the property and should a rainy day event occur, he is back to square one plus what ever you have paid to him and towards the property improvements. Lets assume that you buy this deal and one year down the road you default. To collect on the personal guarantee, he would need to foreclose, establish a value, and set a loss to collect on. As a lender/seller he would have a very sensitive issue pursuing a deficit judgement given the current number of cases involving predatory lenders. I am not an attorney, but I have served as expert witness in over a billion dollars worth of default cases. Enforcing a guarantee is not that easy if you are not a bank. Obviously, you would want to go through a judicial foreclosure so as to be able to make your case.

Notwithstanding the above, you could ask for a partial guarantee, say 20%. in effect the seller would be financing the down payment. But for me, a personal guarantee turns the deal into a cash deal. I would ask the seller to take a price much closer to the all cash offers in exchange for the guarantee or pay a slightly higher rate. As a point of reference, when we need a guarantee/cosigner. we pay the guarantor 1% to 2% of the guarantee amount annually.

good luck

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Joel OwensBusiness Member

Moderator

Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

11y

You have to find out what the sellers currency is in negotiations to make the deal work for them.

If it is not something you are willing to do maybe propose a different scenario the seller hasn't thought of or considered. Sometimes the deal just doesn't work.

There is a property I am watching now at 1 million for a strip center. The lady received it as a division of assets per the divorce decree. Her husband loved real estate and she went along for the ride but doesn't care for it as much. My initial offer this year they countered but I was not interested at that level.

So I will watch it for price reductions until I get my price or I won't buy it. Tons of properties out there but time and my cash is in my favor to only buy when it suits me. I would at least run the MLO strategy by the seller on this office. Using options gives the buyer outs if done properly.

I do not like personal guarantees on value add deals like this. Sometimes sellers are not being truthful about the history of the property or the tenants. It can turn into a legal mess with a PG and seller finance.

The option gives you the chance to see how the property really performs at it's current base level to determine If you should walk away or you think you can turn it around.

Is the seller wanting to owner finance because of most depreciation has been written off and they do not want to 1031 and instead take capital gains in small chunks over time given their older age??

Overpaying for something and giving the seller a PG is just too one sided. They are getting a ton of benefits but not giving you much back. Essentially you will work like crazy to turn it around and then if you do not perform but have improved it a little they still take it back.

The upside is you are putting down only 10k. You could try and limit the PG to a percentage as mentioned by someone else. You could also have the PG be reduced until eliminated completely once certain metrics have been hit with the property.

These days I do not do a deal unless I get MY terms. I took marginal deals years and years ago back in the past to learn experience. Now that I have that education I am not motivated to do deals like that anymore.

No legal advice given.

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Chris Field

Investor · Milford, CT · Member since 2015 · 200 posts · 69 votes

11y

Well if you went to a bank you will still have to personally guarantee the note so IMHO it doesn't really matter.

Having said that interest rates are so low and commercial lenders are so willing to lend, I'd keep the sellers money in place just long enough to stabilize it than dump them for a nice commercial bank loan with maybe a 7 year adjust.

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Sam Erickson

OP

Real Estate Broker · Milwaukee, WI · Member since 2014 · 338 posts · 129 votes

11y

Thanks for taking the time to respond everyone. I appreciate the opinions and insights.

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Christopher Telles

Investor · Irvine, CA · Member since 2015 · 373 posts · 205 votes

11y

Originally posted by @Joel Owens:

You could try and master lease the property from the owner and have an OPTION to buy at a preset price of 550k.

This way you are not taking on personal liability but putting in a little bit of money and time and if you improve the value you have a strike price well below the new realized value.

If it doesn't work out simply walk away. The seller wouldn't have to spend tons of money foreclosing on you.10k is NOTHING. The attorney will eat that up before court costs if something goes wrong with the seller financed deal.

Here is a site that explains a Master Lease in some detail.

If the sellers motivation is getting a higher sales price and someone fixing the headache with time, money, and work then they might go for this.

No legal advice given.

In the case described I think @JoelOwens has given you a might fine ownership option that limits your downside risk.

Novice investors tend to ignore the beta in any given real estate transaction when it should be a major consideration particularly when working a creative financing transaction.

Case in point, you've admittedly stated you're willing to overpay for a property in order to in essence create additional value through a value add play. Your exposure to additional risk is at its highest when you must create value to simply get back to a market value.

Market value is defined as what buyers will pay for a property when it is placed on the open market for sale. And in this case it appears that value is less than what you are willing to pay for creative financing terms.

There's one truth you should look towards as a value add investor and that truth is that "you make your money when you buy the property" not after you've improved the property.

There is a reason this seller is not improving the property prior to sale. It could be a variety of reasons which you have not stated, and any of the variations on that reason could be true or dubious, but in the end there are very few sellers who will part with significant potential gains to save on improvements or the time it would take to turn around a property when they themselves have the means to carryback the financing.

I agree with an earlier comment that there is a definite red flag. Tred carefully, and don't let greed skew your view.

1 Reply

Account Closed

Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes

11y

Originally posted by @Christopher Telles:

I agree with an earlier comment that there is a definite red flag. Tred carefully, and don't let greed skew your view.

Indeed, it's the sellers means to carry back this property at $550K that is a red flag to me. My experience with sellers parting with significant equity usually happens in cash sales, when sellers need to move on. Carrying back the note with virtually no down is not moving on. I also don't believe the seller is trading any real rental income for note payments. I'd want to see leases and estoppel letters and visit with all the currently paying tenants.

1 Reply

Jimmy Klein

Investor · Houston, TX · Member since 2013 · 195 posts · 102 votes

11y

Seller financing portion typically requires a personal guarantee

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Antwain Peterson

Real Estate Investor, Hospitality Management · Graniteville, SC · Member since 2015 · 16 posts · 3 votes

11y

Man this is good stuff! I'm just learning from everyone. Thank you all. Sorry I didn't have any advice but definitely learned a lot from everyone's input.

2 Reply

Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

11y

Well, sorry Joel, but to clarify, a master lease does have liability, in fact, more than a seller financed note.

Here's why, your lease is a payment obligation just as a note is, you can be evicted and judgment obtained from a lease agreement. I think Sam already knows that, but to point this out is for others.

What the seller's attorney may not know is that seller financing is an installment contract funded with equity, not a cash funded loan. In default of an installment contract, the contract becomes void and property sold reverts in equitable title back to the seller, foreclosure gains legal title. There is no deficiency judgment to be had because the sale is not completed under an installment sale. A personal guarantee is irrelevant since the debt is dissolved under installment sales. Ask your attorney!

You can mess this up with other financing, allowing other liens or encumbrances that you can be responsible for during your ownership. To that extent, personal guarantees matter but without it, you can still be sued for further encumbering the property sold.

So, I'd rather take the note than a lease and you own it! Big difference.

My question to @Sam

@Sam Ericksonundefined

Where is that 140+% rent income coming from with 90% occupancy? How many tenants will be leaving jacking rents up that much and, do state laws allow an increase like that?

Business tenants might fight back on that, putting them out of business.

As to non-recourse, investors are almost whimsical about using this limitation, non-recourse loans do have legal limitations and applications. I talk a lot about predatory lending, there is also predatory borrowing, it depends on who brings up the terms, presents the financing arrangement and if such is increases risks to the other party or is not a prudent arrangement. Did the borrower manipulate the terms to an unfair advantage? Financing is not something to take a cavalier approach with. Usually isn't good to ask an individual to do something a bank would not do (besides the credit issues which a seller is already accepting) that puts them at even a greater risk! If you're asking a seller to be your bank, then allow them to act like a bank.

As to over paying, I'm against over priced deals with seller financing or any other financing. You're just over 10%, maybe, but in commercial there can be other factors such as forced appreciation that can be accomplished rather quickly, unlike residential values. If your numbers are correct, having sufficient knowledge and experience, you're fine, especially considering the down payment. Good luck :)

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Karen Schimpf

Lender · Nat'l Commercial Mtg Lender - Round Rock, TX · Member since 2014 · 916 posts · 235 votes

11y

Wow the office building sounds like a deal! Fyi if you were attempting to get a loan through a bank you would need to be a personal guarantor on the loan, you wouldn't get those terms and rate from a bank, and you would need to put 20% to 25% down. This deal is too good to be true. It could be a red flag. I recommend you have an appraisal done to make sure you are only paying $140,000 above market and lastly and MOST IMPORTANTLY I would have your own attorney represent you in the transaction. The sellers attorney has only have their clients interest at heart not yours.

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Nick L.

Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes

11y

@Sam Erickson Are you comfortable sharing what area of Milwaukee this is in?

Also do you have any comps that would indicate projected rent psf?

Assuming the answers to both the above are good, I would take the deal with a long due diligence period and a "free look" contingency that you find a tenant for a certain number of sq ft at a certain price. If you can do it, most of your risk disappears. If you can't, then the deal is not so good after all and you should walk away.

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Dan Wallace

Vendor · Denver, CO · Member since 2015 · 63 posts · 20 votes

11y

I am a little late to this discussion but one possible counter to the personal guarantee would be to provide a personal guarantee for certain carve-outs such as fraud, negligence, etc. This way you are providing some sort of personal guarantee however on a much more limited basis.

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Sam Erickson

OP

Real Estate Broker · Milwaukee, WI · Member since 2014 · 338 posts · 129 votes

11y

Thanks everyone that responded.

I'm still in negotiations, but I'm not to hopeful at this point. Its seems that every-time we talk the seller has a new hoop to jump through.

I've tried working in some your suggestions. I'll keep you updated to the outcome.

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Should I personally guarantee a seller financed office building?

Should I personally guarantee a seller financed office building?

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