Seller finance on a mortgage loan for a Multifamily Deal in Texas

[Katherine Menchaca]

Hello BP family,

Here in Texas we have come across yet another magnificent property. We have built a relationship with a seller of a multifamily property with 7-9 bedrooms, in an area that is underway for vast development within the next 2 years. The newly built 4-bed 1600sq ft houses across the street will be selling for $350K once they're complete. It’s also near a university. Other multifamily properties in the city are 10-20 years older and require some additional work, are for sale for 50K more with only 4-6 bed rooms.

The owner owes 164K for a mortgage loan balance and put another 67K into updates/renovations/new appliances recently. Now he's $231K in debt. He's selling for $412K, which is great for a renovated updated property that'll be worth at LEAST half a million in a couple years.

However... The property won't cashflow at that price point, the numbers don't work with today's interest rate. Despite having an 800 credit score, virtually no debt and a couple cash flowing assets... that means absolutely Nothing and of course doesn't help with today's interest rates.

I'm working to possibly structure the deal with a mortgage loan and seller finance. I’d use our heloc for down payment. The seller has turned down multiple offers from other investors offering less. I'm certain he won't go down on price more than 12K. He has a lot of debts he's obligated to.

I'll be the only one to offer nearly full price. this needs to be creative, however I'm uncertain of whether the title company will draft this up or if I need an attorney and the unforeseen risk of further inflation has me concerned on interest rates and taxes. I'm not sure my realtor knows quite how to structure this since it's uncommon. Since this is a turn key property there is extremely low cash flow. However when the market picks back up in 3-4 years, interest rates drop, and rent goes up, it'll cashflow very well along with tremendous equity build.

With my proposal, the seller would hold 2nd lien on the property and receive payments on a 5 yr balloon. Since the Mortgage company will pay off and take over the title, they have 1st lien. My realtor didn't like the idea and stated the seller would have no real protection or ties to the property at that point once the bank absorbs the loan at 200K. She stated it would basically be selling the house at $200K and the seller would have no real gain or incentive for the method/deal I'm proposing.

I disagree, considering he's refused all other offers made by investors for the past few months which have been requesting 12%-15% off asking price.

I know for almost certain the seller would be content with $225K to take care of his debts and wouldn't mind seller financing the rest. However... those numbers still don’t work or cash flow. He's likely waiting it out for an all cash buyer or full purchase price buyer....likely not going to happen.

This is a great Buy and Hold -long term rental.

It's a far stretch but if his priority is on the total sale price then I'll offer him just a little under.

If by some magical miracle a 30 yr bank loan with an interest rate of 3% with 20% down were available, then we would certainly take that any day and at least break even on the monthly profits and expenses at a $400K purchase for this particular property. I would consider it a terrific buy and hold deal. But that rate-ship sailed a year ago and Private money lenders are like leprechauns, they are very quite, hidden, and you try to follow the end of the rainbow but can never quite find the exact spot they’re in among the trees! 

The potential offer: $400K Purchase Price

- $200,000 Bank finance Loan (to pay seller half of 400K)

- 45K down/30 yr mortgage (bank loan & Closing costs) (using Heloc for down payment)

- 8% predicted/anticipated rate for investment loan D:

- $ 3,220 Total monthly payment Expenses ( Mortgage + Heloc pymt + Unforeseen Capital Expenditures-$500 )

- $3,400 Estimated revenue from units (conservatively)

- $150-$250 Estimated cashflow (Estimated cashflow in 5 years after Refi: $1,100)

Seller finance terms:

- $200,000 seller financed

-2nd lien holder on property

- $333 principal monthly payments only or $4,000 annual lump sum to Seller each yr for 5 years.

- 2 % interest rate for 5 years to be paid at the back of the loan

- Cashout Refi in 5 years to pay off Seller balance and our Heloc and obtain a better rate

Q: How could I structure this with interest paid at the back of the loan?

Q: Realtor question: Since the bank takes over the loan and title at $200K, does that result in the 6% realtor/brokerage fee dropping from $24K down to $12K?

Q: Which type of events besides REI meetings do passive private money lenders/investors commonly attend?

Looking at these numbers again... it hurts the investor soul to see such little cash flow and risk possibly cutting into CapX funds. It may be too risky considering there are more apartment complexes and new homes being built to compete with all around the area.  Thoughts?

[Mike Chern]

Basically the seller is not adjusted to the current market yet, I think you should be patient and don't force the trade. The one across street for 350k maybe is a better deal, lol.

[Adam Bartling]

@Katherine Menchaca I used to work for an apartment lender before going on my own.  Mike is correct, the cost of the property is a little high. You will need to drill down to actual rent collected and see what the property maintenance  costs are also.   Remember you only buy on past performance, too many greedy people try to say "rents are currently $1400 but you could bump them up to $1800,  Guys stop that crap!  Sensationalism gets rookie investors all the time.

You just remind the seller that you are an investor also and unless you can make 8-10% NET on your $, or there is no reason to buy it.  Mr. Seller, I am here to stop the bleeding, we are making a fair offer.......  Get down on what is hurting him, what repairs does he not have cash, what problems and time has the property taken from his personal life.  What could he do with $ in his hand in the next 30 days, and what would the outcome be if he waited another 6-9 months.

When he complains,  Then go look for another deal!   

[Dolly Caswell]

@Katherine Menchada, IMHO, I agree with the above. It sounds terribly expensive to me and forgive me, but I think you have fallen in love with the property. I've done that too, but we really do know that recession, severe recession is coming and that means all kinds of things will be much cheaper than they are right now. Keep your cash dear, don't risk your home with the HELOC and do as suggested above. If the seller doesn't like it, go look for something else, or take a looonnng nap and wake up when the real estate market crashes to the bottom and then go buy two of what you are looking at for the same money.

[Katherine Menchaca]

We were thinking the same. We do however base our numbers on the lowest possible rent in an economic down turn. We spoke with the neighbors and asked how much they pay in rent, which was $1800, not sure if utilities were included. Their contracting company likly pays that probably with utilities included, I plan on verifying with other neighbors to see how much the rent is in other multi families there. 
The seller has two choices, keep the property and rent it out from out of state and have to deal with bad property mangers again, or lower the price and sell it at $350. Or accept only seller finance terms with 70K-80K down at full purchase price. Or accept a bank buy out of 190K along with seller financing the balance. We know we can purchase something 180K less further north however those typically require renovation (which my partner is burnt out on) and are much older buildings. Thanks for the confirmation.  Has anyone here worked out a deal to obtain a bank loan to pay off the mortgage and seller finance the remaining balance of the purchase price? 

[Eliott Elias]

You would do what's called a wrap 

[Jeff Copeland]

In the scenario you described, no one is absorbing or taking over his $164k loan. It would get paid off at closing out of the seller's proceeds. Your lender would have a new mortgage in your name in place in first position for $200k. 

From your $45k down payment and the lenders $200k, the seller would walk away with $81k (before closing and settlement costs) after paying off his $164k mortgage. Plus he would be the owner of a mortgage note in second position for the seller financed portion. 

See https://www.biggerpockets.com/... for some of the possible benefits to the seller and to help explain the process to the seller and/or your agent. 

[Katherine Menchaca]

Quote from :

@Katherine Menchada, IMHO, I agree with the above. It sounds terribly expensive to me and forgive me, but I think you have fallen in love with the property. I've done that too, but we really do know that recession, severe recession is coming and that means all kinds of things will be much cheaper than they are right now. Keep your cash dear, don't risk your home with the HELOC and do as suggested above. If the seller doesn't like it, go look for something else, or take a looonnng nap and wake up when the real estate market crashes to the bottom and then go buy two of what you are looking at for the same money.

Thank you @Dolly Caswell, I wouldn't say I'm in love with the property, I'm more so excited for the new development, hospital, housing, shops in progress that will bring appreciation to it in the next 5-8 years. And the fact that this is the first property for us that wouldn't require fixing up, updates, or painting. The proximity to my home is also convenient. My plans are to long term rent one portion and the other portion would be Mid-term rental to bring in more cash flow. I'll revisit my offer and keep negotiating for better cash flow on my side while looking for a better deal.

[Katherine Menchaca]

Quote from @Jeff Copeland:

In the scenario you described, no one is absorbing or taking over his $164k loan. It would get paid off at closing out of the seller's proceeds. Your lender would have a new mortgage in your name in place in first position for $200k. 

From your $45k down payment and the lenders $200k, the seller would walk away with $81k (before closing and settlement costs) after paying off his $164k mortgage. Plus he would be the owner of a mortgage note in second position for the seller financed portion. 

See https://www.biggerpockets.com/... for some of the possible benefits to the seller and to help explain the process to the seller and/or your agent. 

 This is certainly helpful information, thank you Jeff!

[Katherine Menchaca]

Quote from @Eliott Elias:

You would do what's called a wrap 

I have mentioned a wrap however the seller was not open to it. 

[Ronald Rohde]

Quote from @Katherine Menchaca:

Quote from @Eliott Elias:

You would do what's called a wrap 

I have mentioned a wrap however the seller was not open to it. 

 Don't force a deal where there is none. You're not pressured to buy, but he may become pressured to sell. He has decent equity to give up as a cushion. Find another deal!

[Katherine Menchaca]

Quote from @Ronald Rohde:

Quote from @Katherine Menchaca:

Quote from @Eliott Elias:

You would do what's called a wrap 

I have mentioned a wrap however the seller was not open to it. 

 Don't force a deal where there is none. You're not pressured to buy, but he may become pressured to sell. He has decent equity to give up as a cushion. Find another deal!

 Thanks,

He's lowered his price another 28K so we are reanalyzing.