Bountiful, UT · Member since 2015 · 4 posts · 1 vote
Hi Everyone,
I am currently looking at a deal for a 14 unit complex that has a seller financed note and the current owner is offering an additional seller finance to close the deal. He is asking for 6% interest on his deal, and I would just take over the original seller finance that holds a 4% interest rate. The 6% would include about 60% of the total asking price, and the 4% note would include around 35% of the total price, with a 5% down payment.
My question is, would it be advantageous to look at a commercial loan, rather than take the 6% seller finance piece? And is it possible to finance that part without additional down due to the bank only financing roughly 60% of the deal?
Thanks in advance for any feedback you can provide!
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
8y
Even if a commercial lender could do 5% for you (doubtful) the appraisal fee of $3500, lenders title insurance and escrow costs would put you over 6% in real dollars. And that's if they don't have an origination fee, underwriting, doc prep, funding fee, etc.
Bonus- they will bother you every year for your financials and have a 5yr rate adjust and call or balloon. Avoid commercial loans if you can. I got tired of my 3 and paid them off or refinanced with a private lender at 6% fixed (the bank was 5.75% 5/5) on a 10yr am and couldn't be happier.
Investor · USA · Member since 2015 · 325 posts · 447 votes
8y
Seems like a good deal. 4 and 6% are good rates. When do either of the loans ballon? Anything less than 3 years is too short. I just paid 6% for a commercial deal. Might want to look and see if the 4% can be assumed and doesn’t have a due on sale clause. If it is anywhere near SLC that area is really growing. Also you can’t beat 5% down. Any bank will require between 20-35% down. Good luck!
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
8y
Even if a commercial lender could do 5% for you (doubtful) the appraisal fee of $3500, lenders title insurance and escrow costs would put you over 6% in real dollars. And that's if they don't have an origination fee, underwriting, doc prep, funding fee, etc.
Bonus- they will bother you every year for your financials and have a 5yr rate adjust and call or balloon. Avoid commercial loans if you can. I got tired of my 3 and paid them off or refinanced with a private lender at 6% fixed (the bank was 5.75% 5/5) on a 10yr am and couldn't be happier.
Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes
8y
Hello and congratulations on becoming a member of Biggerpockets! I would typically say that owner financing would be the best way to go. As the down payment is to pay the minimum amount that will make current owner happy. The current mortgage might have a "due on sale" clause but is rarely enforced as long as they get the payments when they are due. the 6% and 5K down sounds pretty good. The Bank would probably charge a down payment of 20% or 25% down payment. One of the things I am concerned with is the number of units they have and being able to hire an outside Property Management Company without having to come out of pocket to do that. If he is planning to hold onto the mortgage have a clause in the purchase agreement that if he has any problem that effects the mortgage that you will receive notification if he does about the problem. When you do your due diligence do not count on anything to happen positively. Only use actual income and expenses.
There are several things that are important that you did not mention like its location, its physical condition, access and parking, its first impression, the class rating, the type of its current tenants, if it has positive cash flow, and its needed repairs or rehab. Good luck to you!
Investor · La Porte, IN · Member since 2016 · 32 posts · 14 votes
8y
I agree with Steve. 5% down is a lot less than what you will pay with a commercial lender. A commercial lender is not only going to ask for a much larger down payment (20-30%), but they will charge a large appraisal fee, all of the other costs associated with the loan. Also, a bank is typically harder to bargain with if you had to extend the length of the loan or make smaller payments for a period of time due to financial hardships (always unexpected, but do happen!). I wish I could find a private lender with 6% interest, I am paying 9% to one private lender!
Most importantly, this only makes sense if the property is cash flow positive. Another thing to consider, do you have experience managing a property that size? Does the current property manager do a good job? If it is not a property management company, how far away is the property manager from retirement? Does the property need a substantial amount of maintenance/repairs? Will you have capital for a large expense one month after purchase (or is there enough cash flow to allow for this)?
It sounds like it could be a great way to launch your investing career, but just try to think of some of the variables and what you can do to decrease those risks. Please keep us updated on how things turn out!
Bountiful, UT · Member since 2015 · 4 posts · 1 vote
8y
Kai, thank you for the feedback, the 4% note is held by an older couple that has said they definitely want to keep it going as they are enjoying the retirement income they are receiving from it. A balloon payment has been discussed with anything from 2-5 years... it definitely sounds like 2 years would be a mistake.
Bountiful, UT · Member since 2015 · 4 posts · 1 vote
8y
Steve, thank you, that is super helpful. This would be my first experience with a commercial loan so it’s good to hear the feedback on problems you have had. It sounds like 6% is also very reasonable from the seller finance aspect as well.
Investor · USA · Member since 2015 · 325 posts · 447 votes
8y
Jaden 2 years would be a mistake. I think you would bear too much market risk with rates. I would negotiate a 5 year with a 6 percent. Also, is the 4% assumable? It sounds like it if both are privately held.
Make sure the cash flow is there. One thing I did not realize with 10+ Unit purchases is that you really multiply your problems. I have always thought if something goes bad on a house “so what, I can run to the store”. You start multiplying that by 10 or 14 and your maintenance/cap ex goes way up.
Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes
8y
Thanks! There is an issues I did not mention before. Look at all of the units as a part of your cue diligence period before you close. Make sure the current owner is not making the numbers look better with concessions or forcing non-expenses. In other words, he could be offering free rent to make the occupation look better or putting off repairs that should have been made to reduce actual expenses. Best wishes!
Rental Property Investor · Charlottesville, VA · Member since 2012 · 1k+ posts · 726 votes
8y
@Jaden Zubal I would echo a bit what others have said. You're likely much better off with the owner financing being offered. I am paying close to 6% on new commercial loans these days so you're blended rate is very nice. Also, being able to put down 5% on a multi-family is a very sweet deal.
The one caution I would add is to make sure you understand why it is such a sweet deal. Why is the current owner selling it if he has nice owner financing and why is he offering owner financing? Generally but especially in a hot market there is a reason why owner financing is offered. And usually that is because there is some problem a bank might flag that you might not.
Either find out what it is from discussions with the seller or make sure your due diligence is airtight. Envrionmental? Physical? Is there a foundation, plumbing, aluminum wiring or some other problem that would make a bank balk at it?
The other thing it might be is he is just asking way more than it would appraise for. Make sure it cash flows and consider an independent appraisal.
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
8y
@Jaden Zubal have you tried to negotiate the 6%? I would try to get 5 or 5.5%. If the seller is stuck on 6%, then go for a 7 year or longer term. Also, I would get an extension from the original note holder, to extend that to 7-10 years.