How to get Seller-Financing Apartment Buildings

Question

Hello BP,

I was wondering what I could offer to seller's as far as a seller-financing option? I'm looking at apartments in my area that go for $300,000 to $750,000 and they are relatively motivated.

Do credit unions allow the seller to finance the other 25% of a commercial loan for this?

How do the seller's agents get paid in the transaction if there is no down payment?

Thanks in advance,

Pat G. · Answer

@Jonathan Johnson I would first ask the Seller what they are going to do with the money after they sell during your normal course of talking with them. If they don't know what they are going to do then Seller Financing is an option. If the seller says they are taking the money to buy another property, then seller financing is out.

Once the seller states that they don't have a plan for the money, what I do in my LOI I give them 3 different options, 1 All Cash, 2. Seller Financing, and 3. Bank Financing. I also include a chart of the Tax benefits of using seller financing. I show them that they wouldn't lose 35%-40% in taxes on the gain on the sale.

Hope that helps.

Scott Morongell · Answer

@Jonathan Johnson when you are looking at a property this is something you should be able to uncover when dealing with the broker. That being said, if you can't afford to buy the property without seller financing you shouldn't be trying to buy it. Seller financing is more of an icing on the cake approach. One of the questions you will hit the broker with multiple times is why is he/she selling??? What are they doing to do with the money? You have to find the pain point. If you can find the pain and reason you can structure a deal much better and will be favorable to you. One of these is seller financing.

Don Konipol · Answer

@Jonathan Johnson

I know of no lending institution that will finance a property, other than maybe a SFR under a Govt guarantee, without the borrower having his own money at risk.

It used to be known as the second mortgage crank; the buyer either ends up with no down payment or even put money in his pocket at closing.  And it required various procedures to ‘fool’ the lender into thinking the borrower put his money in as down payment.  There is one term that covered all these old time programs, mortgage fraud.

So, nobody suggests that the second lien, or borrower having no down payment not be disclosed anymore.  What is suggested is a combination of fantasy, urban legend, and unique circumstances. For example, I can do a property purchase with no down payment, with or without the seller taking a second.  I can do it because a lending institution will make me an unsecured personal loan for an amount equal to the down payment, or allow a seller second because of my 35 years successful track record and my 850+ Fico score.  Yet for the latter I might have to put up one of my free and clear properties as additional collateral.

So when people hear about these deals being consummated they don’t hear about the other parts that are basically not duplicable for the vast majority of investors.

Giving additional collateral as security is basically the same as taking a loan on the additional collateral and using it as a down payment.  Using perfect credit to get a no down deal is the same as using credit to get a personal loan and using that for the down payment.  Therefore, I don’t consider these nothing down deals.

Bottom line is that no institutional lender is going lend to anyone, except as outlined, without a down payment. And no, the seller can not make the down payment for you.

Some private lender may entertain the situation if (1) he wants the property and anticipates you won’t be able to make the payments, or (2) he is in the ultra high risk lending business , like World Business Lenders and will be charging you 72% interest with no prepayment  allowed , or (3) he is brain dead, just inherited a bunch of money from his parents, and is eager to lose it as fast as possible without going to Las Vegas.

Mauricio Ramos · Answer

Hey @Jonathan Johnson, im going to attempt to give you some info on the first part of your question, as i dont really understand the second portion of it about the commercial lender and FCUs.

To make your seller financing purchase option more appealing, you have to offer it with a cash offer. The seller finance option should be higher than your cash offer, assuming that the terms that you are offering to the seller are better than the terms the bank is offering to you. That is why you can offer a bit more. But please do not overpay.

Sometimes, if the property needs a LOT of work, the property may not pass the lender's inspection or may not appraise. One option is wait for the seller to do all the repairs. But what happens if the seller doesnt have the funds? This is when you, the buyer, can offer seller finance terms until the repairs are done and you can refi with conventional lending.

Typically i would offer terms like downpayment between 15-25%, 0 to 5% depending on the property (yes, i have obtained 0% interest), 20-30yrs am, 5 year balloon (shorter if you are using the seller financing as bridge), 90 day moratorium, no PPP, non recourse.

Like @Scott Morongell is saying, you have to find out what the seller needs, is it a chunk of money as down payment? is it a certain amount of money every month? is it an interest rate they have in their head? Give them that and work all the other terms in your favor. Win win.

Broker fees should come out of the downpayment. HOWEVER, i have seen brokers take notes at closing. For example, the broker will get $250 every month for the next X amount of months as the commission.

With seller financing, sky is the limit.

Invest Differently,

Mauricio

Eli Molloy · Answer

There are a couple general ways I’ve heard of structuring seller financing.

One is to have the owner hold a note for 100% of the property or 70-80% with the buyer putting in a down payment. More common SFRs and lower dollar properties.

Another is to have a traditional loan for 70% and the seller finance the rest, or a portion of the rest with the buyer putting in a small down payment. As mentioned above, you should be open and clear about this with the bank/CU , they may not be open to the idea.

You can get creative when paying the agent. If the seller has the cash and is willing, that’s easy. Or there may be some prorated rents and CapEx fund money to use.

Good luck!

Neil Henderson · Answer

I'll echo what @Pat G. is saying. Ask them what they plan to do with the money from the sale. If they don't know, explain to them the tax hit they could take by just taking a lump sum payment on the sale of a property. Explain that with seller financing, they'll be getting ongoing income from the property, without having to do any of the work. They can "chip away" at the overall sale price over a 3-5-10 year period of seller financing before you pay off the balance of the loan.

How to get Seller-Financing Apartment Buildings

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