Seller Subordinated Carrybacks on MF

4 Replies

Hello BP Nation:

On MF transactions, Sellers often will carryback a subordinated note (junior to the bank note) in order to lessen the upfront capital requirements of the Buyer. 

Can someone tell me more about the nature of these notes?  A few specific questions...

  1. Do these typically amortize, or are they interest only?  If amortizing, are they usually ~25 years?  More?  Less? 
  2. What is the interest rates on these?  ~7%
  3. Do they 'balloon' at 5/7 years?  I can't imagine a Seller wanted to hold my note for a full 30 years...

I'm looking for *typical* information; I understand that this will vary.  I'm seeking 'ballpark' info so that I can structure offers in a realistic way that maintains/builds credibility. 

I'd love @Joel Owens  's input, since I've always valued his input and experience-based market insight.  Thanks to all!

You try to get the seller to go for 7 year term an 30 year amort. at market rates 5% for int. rate.

If they go below market interest rates there is imputed interest from the IRS on the seller but it doesn't affect you.

No legal advice.

Thanks so much @Joel Owens .  

The idea, then, is that after 7 years, you'd refi the primary debt and -- due to principal paydown and forced appreciation on the property -- be able to have the refi assume the remaining subdebt, while still maintaining conventional financing LTV ratios?

You could sell and 1031 exchange or you could bring in a small partner to retire the owner finance debt.

Thanks, Joel.  That makes sense.  And I think that's doable!

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here