Offer Structure - Seller Financing & RE Mortgage - Creative

5 Replies

Hey guys! Looking for advice on how to structure an offer if we pursue a business opportunity. We've never done any creative financing or seller financing up to this point. This would be a real estate and business purchase.

Details: 

  • Real estate (retail space) valued at $3.5 million in last appraisal (likely some appreciation, as our market is appreciating quite well and continues to grow)
  • Rapidly growing retail business - growth of over 30% in 2018, tracking 12% growth first quarter of 2019

Without giving too much detail on all of this, since I can't, I'm looking for how you creative folks would make an offer. The price is $4.95 million. 

Our offer would be contingent on the property we have under contract selling, and we would likely 1031 into the retail property included in this business sale. (Note the seller is asking $3 million for the real estate, as he wants to keep it with the business. Our offer would move $500k from the business sale to the property sale for our 1031 purposes. i doubt it matters a lot to him at the end of the day.)

This leaves $1.45 million, which we would like to ask for seller financing on (74% of the business price). I'm trying to determine the best way to set this up for cash flow and make the seller want to accept the offer. 

I've been looking at options like different interest rates, 15 year amortization, 5 year balloon payment, and 1 year of interest only so we can get the cash roll built up a little better year 1. Any advice on this? I'd really like 1 year of interest only at least, to help with reinvesting in growing the business.

I typically structure 15 year amortized with a balloon payment where you feel comfortable maybe year 5 maybe year 8, or maybe the seller would like to collect more interest by holding the note for all 15 years.

I usually ask for interest only payments with 1 principal payment due per year for example monthly payments of $5,000 interest only with $100,000 principal payment due every year on July 1st.(I just picked random numbers)

I typically make a bit of a better offer to entice them to accept the seller financing and I leave terms up to negotiation to keep from scaring them off.  I also like to do the math ahead of time so I can point out “you will make this much extra cash by seller financing” Always let them know they have more to gain in the transaction.

I would also consult with a lawyer to make sure both parties are safe.  Never trust anyone based on their word and a handshake.

There’s so many ways to structure a seller financed deal, it all comes down to the needs of both parties.  You have to make sure it’s a safe investment for you and make sure you incorporate what they are attracted to in the offer.  If they like the interest rate but not the terms, adjust the terms, etc.

Originally posted by @Andrew Flora :

I typically structure 15 year amortized with a balloon payment where you feel comfortable maybe year 5 maybe year 8, or maybe the seller would like to collect more interest by holding the note for all 15 years.

I usually ask for interest only payments with 1 principal payment due per year for example monthly payments of $5,000 interest only with $100,000 principal payment due every year on July 1st.(I just picked random numbers)

I typically make a bit of a better offer to entice them to accept the seller financing and I leave terms up to negotiation to keep from scaring them off.  I also like to do the math ahead of time so I can point out “you will make this much extra cash by seller financing” Always let them know they have more to gain in the transaction.

I would also consult with a lawyer to make sure both parties are safe.  Never trust anyone based on their word and a handshake.

There’s so many ways to structure a seller financed deal, it all comes down to the needs of both parties.  You have to make sure it’s a safe investment for you and make sure you incorporate what they are attracted to in the offer.  If they like the interest rate but not the terms, adjust the terms, etc.

 Thanks, Andrew. I was just reading about showing them how much more they make if they seller finance. That's an awesome strategy, and I wouldn't have thought about that probably. It already makes the offer I'm playing with look even more attractive! 

Right, they might be bummed about having to wait to get paid but the delayed gratification can net them, in your case, hundreds of thousands of dollars.  That’s why banks are in the business, it’s easy money!  And why it’s better to be the bank when you are able!

I will invest in real estate until I get old and tired of it, at that point I plan to sell it all and start loaning hard money to catch the low hanging fruit.  Mail Box money!

Originally posted by @Andrew Flora :

Right, they might be bummed about having to wait to get paid but the delayed gratification can net them, in your case, hundreds of thousands of dollars.  That’s why banks are in the business, it’s easy money!  And why it’s better to be the bank when you are able!

I will invest in real estate until I get old and tired of it, at that point I plan to sell it all and start loaning hard money to catch the low hanging fruit.  Mail Box money!

 Mail box money sounds great! You just have to be at that older point, where you have cash and need less return. Not there yet, but hope to be one day. Ha.