$8mil MF portfolio, seller finance, what interest rate?

Question

BP,

I am working on a deal in Texas, and I have found an off-market portfolio that the seller is willing to finance.

I've done some underwriting, but I am caught up on what interest rate to start negotiations with.

It seems the price is most important to seller, he is motivated to sell, but doesn't have to sell.

Any suggestions or starting points for interest rate negotiation?

I don't want to come in higher than I need to, but also don't want to get laughed at for coming in too low.

I am also motivated to get the deal.

Any feedback is appreciated.

Thanks in advance

Jacob St. Martin · Answer

Hello Kelby,

Sounds like a good deal you have here. Here are my thoughts:

Anyone who has built an $8 million real estate portfolio has some real estate experience and a solid understanding of investment principles. Maybe you can start by looking at the cash flow of this portfolio and working out what rate you would need to get your desired cash on cash return based on the price the seller wants. Then you could go to him and show him the numbers and I think he will most likely think that is reasonable.

Another point though, it is okay to be laughed at sometimes. If he doesn't want to give you a number to start with then go in and make a lowball one and if he laughs at you then you ask what he would need in order to play ball and now you guys are in negotiations.

Andrew Postell · Answer

@Kelby Schimming yeah, I would not TELL my interest rate first...but I would know where to start.  Usually, we base these types of negotiations on what we can receive on the market.  Do you have a lender that you normally use?  If so, what rate/terms would they provide you on this deal?  That's your baseline.  If the seller is only willing to give you worse terms, then you know to use your normal lender.  Let's start with that and go from there.

Scott E. · Answer

First rule of negotiation - Don't be the first to show your hand.

Ask the seller what interest he needs for the deal to make sense on his end. Then start your negotiations.

Caroline Gerardo · Answer

Also find out how long he wants to spread the capital gains tax as an installment sale. Find out why he is willing to carry and offer the solutions of "how to's. Get a servicer lined up, impound the tax and insurance, get quotes for insurance/ ask for his agent name to get quotes, get some AVM's completed (automated valuations to know the numbers), assume what seller says the rents are they are inflated as they are selling, try as hard as you can to close with empty units and vet your own tenants.

Christian Ehlers · Answer

Good Luck Kelby! You're in a great spot and regardless of how this works out you'll have gained great experience to bring with you to the next deal.

Kelby Schimming · Answer

@Christian Ehlers I appreciate your feedback and thank you for providing a number. I like your comment that references Chris Voss's book. I recently read that book and have put together my summary, known facts, labels, and all that good stuff. Been doing the role playing he recommended as well. Anyways, thanks for your feedback!

Dallas Sauer · Answer

@Kelby Schimming Start with 0 and go from there!

Christian Ehlers · Answer

@Kelby Schimming I Agree with @Scott E. here. Ideally you would ask him what terms he wants first (Purchase Price, Down Payment, Interest Rate, Length of Term) and see what he says. The overall picture is important and knowing what he wants and how long he wants to finance for is extremely helpful.

If he won't go first don't be afraid to go low. If price is most important give him his price and a lower interest rate that makes the deal work. 0% likely won't work for any experienced investor, but perhaps start at 3-4% and go from there.

If he wants terms that make no sense, use the famous quote from Chris Voss's book "Never Split the Difference" and ask him "How am I supposed to do that when_________?" When It won't cashflow, when I don't have that much downpayment, when I need to do renovations, etc.

Have him help you solve YOUR problem while negotiating. Hope this helps.

Robert Payne · Answer

I would approach with a monthly payment figure first. Don't include rate or term, just frame the negotiation around the monthly payment the owner wants. If the owner gets the payment figure they want, they are more likely to be flexible with the rest of the terms. Once you know the number they want, make sure it cash flows. If it does, work up a rate and term that you like and start there.

Kelby Schimming · Answer

@Andrew Postell Thank you for the feedback...I appreciate your baseline comment as you really can't do anything effective without a baseline, I'll start there and see where that takes me. Thanks again.

$8mil MF portfolio, seller finance, what interest rate?

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