Why would a seller agree to an AITD?

Question

I'm about to start shopping for a multi-family property in Los Angeles (most likely 5+ units). Someone suggested looking into an AITD purchase. Did some reading and can see how it benefits the buyer, but can't understand why a seller would do this at all.

Any ideas? Thx!

Chad Carson · Answer

@Ben Kahle Good question and BIG topic.

I have sold with wrap-around mortgages in South Carolina (same concept as AITD) several times.

For me it had huge benefits, because I kept my underlying financing (from a seller typically) in place instead of paying off great terms at 5%, 4%, or even 0%.

The play for me was a big income spread, often $3-500/month on $100,000 deals and recouping some of my equity with the buyer's down payment.

I was making money on a margin, just like a bank does.  If I sell to you at 7% and my underlying loan is at 4% I make a 3% spread on the amount of my underlying loan and I make 7% on any equity I have above that.

The ROI on these deals is off the chart, but of course I have risks if the buyer defaults because I have to keep paying my loan until I can foreclose and get the property back. Big reserves are a must.

Another big risk for the seller is the due on sale clause if the underlying mortgage has one.  Most of mine did not because I bought with seller financing, but I did wrap a couple of mortgages that had due on sale clauses with the knowledge that I might have to pay them off if they were called due.

Chad Carson · Answer

Right. Seller who will finance typically wants income or relief from management but doesn't need a big chunk of cash. Retiring landlords and estates with small number of heirs have been my best candidates on past deals.

You never know what a seller really wants until you offer. So I like to make multiple offers - low cash price, higher prices with terms.  If you make the offer face to face, you will learn their true motivation. Then you can hopefully use your acquisitions tools to find a solution that works for both of you.

If AITD investing is too advanced or risky, maybe try leasing or lease options. Similar concept, often less down payment and less risk because you can back out of option if needed. Great tool in high priced, appreciating markets.

Best of luck.

Account Closed · Answer

@Chad Carson - Thanks so much for your detailed answer. Great info. I am somewhat new to this, and much of it goes over my head.

It sounds like a seller who's willing to do this would be one in a position where they don't need (or want) to "cash out" on a large chunk of their profit. In other words... let's say I own a 5-plex in LA. I purchased it 10 years ago for $350K and it's now worth $850K. I want to sell the building and take my large chunk of cash and move to Mexico or something.

Why would I do an AITD?