How to Leverage Seller Financing for this Deal

[Andrew Daley]

A family member is selling a commercial building as they head off into retirement.  It is ~3,900 sqft with a busy hair salon on the first floor and a law office on the second floor (seller is the lawyer who is retiring).   I'd like to consider buying and converting the 2nd floor to a 2 bedroom and a 1 bedroom apartment.   Seller would like to get a $1m - he's been advised he could get as high as $1.4mm.    Is there a scenario using seller financing where I could:

- Offer to buy for $1.4mm, however, ask for $400k in seller financing (interest only with a balloon at 5 years).    

- Get a mortgage for the 1mm

 - Seller gets $1mm now and then a balloon in 5 years w/ accrued interest for the remaining $400k.

 - If valued at $1.4mm - establish a Heloc to tap into the equity (80% of $1.4mm is $1,120,000 - yielding up to $120k to leverage for the renovation of the 2nd floor to apartments)

Would a lender even consider this scenario - or are their other considerations to make a deal work for this?

There is enough land on the lot to build an additional set of 4 2 bedroom apartment units eventually so I'd like to look at cashflowing the original investment and then consider refinancing into a bigger build out later to create new apartments (rolling seller financing into it...).   

[Tom S.]

@Andrew Daley  Agree with Dennis' post above, if you have the downpayment, see if you can do straight seller financing.

Regarding your numbers, there is no equity (and therefore no HELOC available) in the scenario you posted. Valued at $1.4M, $1M bank loan and $400k seller financing. The seller would also have to agree to subordinate his lien to 2nd since the bank will require 1st position. So the 2nd position is already taken (the seller, being a lawyer, will certainly insist on a recorded lien).

Hope that helps. I did a similar deal as you posted, except there was plenty of equity. The ARV was $400k and the bank lent $150k as a 1st, and I had the seller subordinate a $100k 2nd. The bank provided rehab financing as part of that loan, and the deal worked out at the ARV supported it.