Would You Pay an 18% Premium for Seller Financing at 2%?

[Tayvion Payton]

Hey everyone,

I'm evaluating a multi-family deal and could really use your insight. The seller is offering seller financing at 2% interest with a 9-year balloon. On the surface, the deal seems appealing, but there's a catch: the asking price is $475,000, which is about 18% over the market value (based on comps and DealCheck estimates around $402,000).

Details of the Deal

• Property: Duplex, 2,400 sq. ft.,
  
• Purchase Price: $475,000 ($197.9/sq. ft.).
• Estimated Market Value: $402,000 ($168/sq. ft.).
• Financing Terms: 2% interest rate, with a 9-year balloon.
• Unit B Income: $2,049/month (Section 8 tenant through November 2025).
• Unit A Income Potential: Similar rent or higher; Section 8 cap for the area is $3,234/month.
• Monthly Loan Payment (P+I): $1,386.
• Cash Flow Breakdown (if both units are rented at $2,049/month):
  • Gross Rent: $4,098/month.
  • Vacancy (10%): $410/month.
  • Operating Expenses (37.3%): $1,376/month.
  • Net Cash Flow: $943/month.

Key Questions

1. Would you be comfortable paying an 18% premium for financing at 2%, especially in a market where current mortgage rates are closer to 7%?
2. How much weight do you give to the cash flow benefit of cheap debt when the property is priced above market?
3. Would the 9-year balloon concern you, knowing you'd need to refinance or pay off the balance at potentially higher market rates in the future?

I like the cash flow and see the potential for increasing rents, but I’m hesitant about overpaying. I’m considering countering with a price closer to the market value, but I’m curious how others approach deals like this.

Looking forward to hearing your thoughts! Would you jump on this, or is the premium too steep?

Thanks in advance for your input!

[Bill B.]

What’s the plan?

You probably won’t be able to sell with 9 years without taking a loss. You basically have no escape plan. God forbid the property is destroyed by fire/flood. 

You’re paying $70k in “non-deductible” interest in exchange for less deductible interest. 

What’s the downpayment? Can it be zero? Can you get 15 years? Will the property taxes skyrocket? Work in a balance reduction if you pay it off early? Is the IRS/your CPA cool with the idea?

good luck. Be safe.