Seller financing Down Payment of 20 Unit Apartment Building

Member since 2021 · 9 posts · 8 votes

I came across a 20 unit apt in Houston, TX. The owner has a mortgage on it that is not assumable.

Is there a way to purchase the LLC that holds the building/mortgage or will that still trigger a due on sale clause? Or would I need to request to loan docs to confirm this?

The property is ~75% occupied, so it wouldn't qualify for agency programs.

The seller is extremely motivated and may even consider seller financing her equity. Are there any lending programs that allow for seller financing of the down payment in 2nd position?

This would be my first real apartment building, I only own a 4 unit. If I had to come up with the down payment, closing costs, etc. it would be tight, and I worry that I wouldn't have enough working capital.

Thank you for your help!

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Joshua ChristensenPro Member

Real Estate Broker · Albuquerque, NM · Member since 2015 · 285 posts · 232 votes

@Victor Peng

We do a lot of seller finance deals in Albuquerque. Our attorney explained the "DOS clause" as a tool lenders can, at their option, exercise in the event a transfer has occurred. Because these lenders are so big and their payments are machine processed, they typically only see that a transfer took place after the loan shows up on a default report. They don't police these.

Now, that being said, consult with an attorney in the state you're looking. @Gino Barbaro hit it on the head, get creative. Master Lease it and work into a purchase for financing. Lock in your purchase price at your agreed sales price today and then finance it in 3-5 years down the road.

There are more than one way to skin it.

WArning: You are asking legal questions in a forum online. It's a recipe for disaster. Spend the money and talk to a real estate & business attorney who can advise you on transfer vs. keeping the LLC, and keep you out of trouble.

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Simmy AhluwaliaPro Member
Lender · Atlanta, GA · Member since 2015 · 1k+ posts · 200 votes
2y
@Victor Peng - what is the purchase price and location? Will the existing 75% occupancy cover the new mortgage debt?
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Robert Rixer
Investor · Miami, FL · Member since 2015 · 355 posts · 268 votes
2y
You can only find the answer to the LLC purchase possibility by reading the loan docs. No one on here could definitively answer it.

I would be suspect of why the owner is so motivated. If it's external factors such as they need the money to do a bigger deal, or they're closing down their fund, or they're getting out of RE completely then fine. However with 75% occupancy, the motivation seems to be property related. In which case you need to ask yourself, do you know all the issues with this property and why do you think you could succeed in turning this property around where this operator has failed.
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Victor Peng
OP
Member since 2021 · 9 posts · 8 votes
2y
Quote from @Robert Rixer:

You can only find the answer to the LLC purchase possibility by reading the loan docs. No one on here could definitively answer it.

I would be suspect of why the owner is so motivated. If it's external factors such as they need the money to do a bigger deal, or they're closing down their fund, or they're getting out of RE completely then fine. However with 75% occupancy, the motivation seems to be property related. In which case you need to ask yourself, do you know all the issues with this property and why do you think you could succeed in turning this property around where this operator has failed.
Understood. Owner inherited the property, terrible previous property manager who was taking advantage of her, she stated she would be unable to afford the property taxes.
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Victor Peng
OP
Member since 2021 · 9 posts · 8 votes
2y
Quote from @Simmy Ahluwalia:

@Victor Peng - what is the purchase price and location? Will the existing 75% occupancy cover the new mortgage debt?

Houston,TX
Not sure, I haven't reached out to lenders. I imagine I would have to go through bridge financing and refi out once stabilized if I can't assume the existing.
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Gino BarbaroPro Member
Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
2y
@Victor Peng
Contact a lawyer if you decide to purchase the LLC. It may save on taxes, and may help to close the deal, but it will open you up to potential liability.
This sounds like a master lease option deal.
Gino
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Shafi Noss
Lender · Nationwide · Member since 2018 · 571 posts · 310 votes
2y
The name 'due on sale' is misleading, it is usually a 'due on any kind of transfer of interest clause'. Unless the lender is small and inexperienced, I would assume the due on sale clause would trigger if you purchased the LLC.
Have run into those unique seller carrybacks before as well, generally not something lenders like but may be possible with the right setup.
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Joshua ChristensenPro Member
Real Estate Broker · Albuquerque, NM · Member since 2015 · 285 posts · 232 votes
2y
@Victor Peng

We do a lot of seller finance deals in Albuquerque. Our attorney explained the "DOS clause" as a tool lenders can, at their option, exercise in the event a transfer has occurred. Because these lenders are so big and their payments are machine processed, they typically only see that a transfer took place after the loan shows up on a default report. They don't police these.

Now, that being said, consult with an attorney in the state you're looking. @Gino Barbaro hit it on the head, get creative. Master Lease it and work into a purchase for financing. Lock in your purchase price at your agreed sales price today and then finance it in 3-5 years down the road.
There are more than one way to skin it.
WArning: You are asking legal questions in a forum online. It's a recipe for disaster. Spend the money and talk to a real estate & business attorney who can advise you on transfer vs. keeping the LLC, and keep you out of trouble.
1 Reply
Michael SmytheBusiness Member
Real Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
2y
@Victor Peng is the seller willing to share the books with you?
They are undoubtedly losing money, how are you going to turn this around?
You could buy via lease-option, which usually doesn't trigger due-on-sale clause.
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