I'm interested to hear about investor's experiences with negotiating deals where sellers have provided secondary financing so that the property was 100% financed. I've done this in the SFR space, but would like to hear stories with MF assets.
- What are likely scenarios where a seller may be interested in this option? Is the target seller typically someone retired in 70s/80s?
- Is it common in an "up" market.
- other than reducing seller's taxable income, what are other reasons why this option might be attractive.
- what kind of rates have you negotiated.
Share your story!
I would call 100% carry back a 1st td. These are possible but totally dependent upon the motivation of the seller. I was considering this (an Installment Sale) for tax consequences, but decided to make a clean break and we closed with a Commercial Loan for the buyer.
Could age of the owner be a factor - - maybe, but I would guess inversely related; younger may really be interested and older just want to cut and run.
Harder to make them cash flow. But you get in for nothing, increase the rents and make more efficient then you can refinance them out.
Maybe @gino barbaro can give a recap of how he's done it on his apartment buildings. Just listened to Jake & Gino's micro course and he mentioned it. I'm looking to do the same on my next apartment building. Also, looking for equity partners. My first multi-family reposition is finishing up and I'm looking for something bigger this time.
@Mark Allen , I buy 100 to 400 unit deals and haven't yet come across a deal where the seller wanted to seller finance. With commercial deals and lenders I work with, none of the lenders will allow a second position mortgage.
So if the seller was going to finance, with the lender in 1st position, the rub is the seller can't secure their interest with a second.
So why would the seller want to carry? The workaround could be to give equity away.
When I bought my first apartment building the seller carried a second, this was 15 years ago so I don't remember the rate but I got a first from a local bank at 75-80% and the seller carried 10 or 15% and I came in with 10% down. The carryback was due in 5 years if I remember right and by that point the property was worth a lot more so I was able to refinance and pay off both loans.
It worked great...BUT...that was a 16 unit property. If you are going to try it you'll have greater success, in my opinion, in the small Multifamily space (say under 50 units or so) where the seller's and lenders are less sophisticated in some instances. And most likely you'll still have to come in with 10-15% down plus closing costs.
As @Brian Adams correctly pointed out, once you climb to larger properties, the lenders won't allow subordinate financing (unless they are providing it or in some structured finance arrangements like a mezzanine)--it's a violation of your loan covenants.
If you want to 100% finance, there is really only one way to do this (needles in haystacks excepted) and that's to finance 75%-80% and raise equity for the balance.
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