Are you willing to pay extra for no money down or creative finance deals?
Dear Group Members, thank you in advance for your valuable feedback on this matter. I’m currently looking to purchase a property at a 6% cap rate where I know we paying extra. ( 2% cap extra) the property for us and market value has a value of an 8-8.5 cap rate. However, the seller won’t budge on price but agreed to do a seller finance on the second note for 10%. With this being said, we only need the 15% to acquire this property.
The ROI is good but the downside is the extra premium we paying to get the deal. No appreciation! But good cash flow.
What are your thoughts? Thank you in advance!
@Daniel Perez you need to find out what your business plan is for it. When does the seller want his payment in full? Within 3-5 years, 10-20 years? How many units? The reason I ask is because if he is willing to hold a full primary note you could offer more than the asking price just to get your terms. Your terms could be 0% interest or close to it with a payment in full at year 10 or so (at year 10 you refinance or sell). It's a win/win as he is getting higher than asking price and won't have to pay full capital gains taxes at once while you are getting your terms.
Although it is extremely unlikely for larger properties, this strategy can sometimes work for the smaller mom and pop type properties but you definitely would have to provide a down payment. Just depends on the size and the seller really.
at the end of the day it doesn't really matter wher you get the second note from. If your bank would do 85% financing at that price point would you buy it?
I have seen people overpay just because it was "creative" and I've seen people walk away from good deals as well.
Disconnect your own emotions and preconceptions and use math to guide your decision.
At the end of the day when you load up all the debt stack, will this be a good investment? Is the risk/reward ratio acceptable to you and/or your investors?Does it fit within your long term goals and strategy?
If the answer to all these questions is yes, go for it.
I'm with @Joseph Gozlan . The benefit of seller financing may outweigh the higher rate but you won't know until you crunch the numbers. I would be willing to pay a little more for seller financing, particularly if the terms were beneficial (low money down, balloon at 10 or more years, etc.).
The IRS has what is called (imputed interest). Basically if a seller charges LESS than market for interest rate the IRS can tax them on the difference.
If the seller wants to hold a 10% second that is VERY different than holding the whole note. One is 10% exposure or more and one is 100%.
If the seller did not want to 1031 exchange into something else but pay taxes in small chunks then having the seller hold the primary note might make sense as they pay small taxes over time.
You really have to find out what the sellers HOT buttons are and see if you can come to an agreement. Who holds a second absolutely can make a difference. If the second was mezzanine debt from a lender that could be very expensive at 10% interest rate and higher versus a seller held second maybe you get at around plus 4% as an example fixed for 7 years with a 30 year amortization. That way your BLENDED interest rate for the 75% first, and 15% second maybe still around 5%. If you push a lender to first position loan past 75% the interest rate starts rising a good amount to cover additional risk.
Most sellers will not finance 100% of something because if there is a broker or agent involved they are paying close to a 6% commission and fees to set up the legal docs with an attorney. So really about 10% of purchase price off the top is gone. Then if borrower defaults and seller has to try to foreclose and pay legal fees, gets the property back worse than when they gave it to buyer,etc. the seller can have losses.
I do not overpay for property to get owner financing. That is a sure way to lose your shirt on a deal. You are basically paying above market hoping the property appreciates over the years past the point at when you paid. The debt could come due at a time in the market where actually the property lost value and things could go the other way with big losses.
Owner finance can come into play when a borrower might have some cash to work with but the conventional lenders will not work with them as they have some past issues that preclude them from currently qualifying for a regular loan. That is usually on the seller holding most of the primary note.
Hi All, thank you for your valuable feedback!! This is for a 25 unit deal and it seems that putting the emotions aside and analyzing the actual numbers it’s the main priority. Again, thank you for your input !
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