Seller financing only works in an appreciating market?

Question

Is my logic off or does seller financing only work if the market is appreciating? The sellers that I have talked to want 5 year ballons no one wants to hold a note for 20-30 years. Let’s say the market turns as many are predicting and values drop. What happens in 5 years when you go to refi and the property is worth 30% less? You won’t be able to pay off the sellers note.

Eric Bilderback · Answer

Seller financing is aggressive (which is generally good). If you own real estate it is always good when it the price goes up! But it is important to own real estate, When I have done owner financing I knew I wasn't going to make money but I wanted in and put the cash flow I made into the deal (delayed gratification). If you have an ethical/good seller and you like the deal do it.

Joe Villeneuve · Answer

I've actually found it to work out better in a down market...but either one works out well. My main focus now is on using seller financing. It is usually found is to be the best win/win /(win) situation/strategy

Jacob Sloop · Answer

It completely depends on the terms...!

5 year balloons are common in commercial multifamily..

What is the property type? If you don't have confidence in its value in 5 years than don't buy it, simple.

Wale Lawal · Answer

@Dan Rusu

One common concern business owners have is that the buyer is going to run the business into the ground. Because seller financing is “junior” to bank financing, meaning in the case of bankruptcy the bank will get paid out first, they understandably want to know what they can do to maximize the chance they get paid in full.

However, owners should remember that they are normally receiving monthly interest and principal payments right after close. Few businesses fail within the first few years, so the chance that the owner collects 0% of their seller debt is very low. Nonetheless, owners should still be proactive about setting up a buyer for success.

The best way to do this is to start early. Owners who begin exit planning a few years before a sale can begin to extract themselves by putting more responsibility on key employees, which eases the transition between owners. Additionally, owners should spend time with the buyers during the pre-LOI and diligence phases. It's a two-way street: owners should build rapport and trust with buyers, just as buyers should roll their sleeves up and understand what they're buying.

Post-close, owners should thoughtfully consider the best way to introduce the buyer to employees, vendors and customers. There are a number of resources available online that walk through the “do’s” and “don’ts” here.

All the best!

Scott E. · Answer

The risk will be higher if you are doing 100% LTV financing and there isn't opportunity to add value through renovations.

But if you're putting 10%-20% down, plus you can add some value through renovations, plus it is cash flowing strong every month, you should be in good shape when the balloon hits. Just don't spend all of that cash flow. Make sure you're socking it away into a reserve fund.

Eliott Elias · Answer

You want to have enough equity in these properties to be able to refi or sell without taking a loss.

Seller financing only works in an appreciating market?

Seller financing only works in an appreciating market?

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