Idea for seller financing via sort-term partnership

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Idea for seller financing via sort-term partnership

Kevin LikensPro Member
San Francisco, CA · Member since 2021 · 3 posts · 1 vote

Hello - this is my first post!

I’ve been living (and renting) in San Francisco for the past 25 years. I’m currently in a 4-unit multi-family building, and I was recently notified by the property manager that the landlord is planning to sell the building.

I only got turned on to REI a few months ago - I'm currently in the "saving money" phase (à la: Set for Life). My first goal is for a multi-family building that I can house-hack and live-in rehab. While I wasn't feeling ready to actively pursue that goal for a while longer, this building fits the bill - deferred maintenance is so prevalent that there is ample opportunity for adding value.

I’ve been crunching numbers to determine a counteroffer to the owner’s asking price. I don’t have the resources to buy even at what I’ve calculated to be a reasonable price, so I’m brainstorming creative financing solutions. (Some background: I’ve lived here for 10 years; the owner and I have a cordial relationship. My understanding is he doesn’t necessarily want to sell, but he needs money.)

I’m thinking about asking the owner (if and after we agree on a price) if he would be willing to sell me half of the building now (so he can have some cash), and half in a few years after I’ve added enough value and can refinance (guessing 3-5 years) to help me get off the ground. I’m assuming that would be a partnership situation with him, right?

Questions I have about financial technical aspects:

- One option I see is I get a loan for the 50% amount and give that money to him. I don’t know yet if he has a loan or not. If he does, it would mean we would both have a loan. Can one building (that’s not a condo) have multiple owners with multiple loans?

- If he currently has a loan, could I be added to that mortgage and take over a commensurate portion of it… or would it have to be a new loan altogether with both of us on it?

- Thinking about FHA loans, I understand there is a "self sustainability" rule for 4-unit buildings. If I get a loan for half the agreed cost of the building, according to my calculations (counting the full income) I could meet the requirement… or would FHA consider the income as split between owners, and therefore they would only count half of it?

Any other considerations?

Thank you for your time and wisdom!

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Jonathan Wooten
Investor · Albuquerque, NM · Member since 2021 · 44 posts · 11 votes
5y

@Kevin Likens Yes there are a couple of options you can pursue in my opinion: 

1. if there is still a mortgage on the property you can take over the building subject to the existing mortgage and then you would be responsible for paying the monthly payments but the mortgage would stay in the current owner's name so you would not have to qualify for a new loan.

2. if there is a mortgage on the property + equity then you can again take over the property subject to the existing mortgage and then seller finance the equity with the current owner. The seller financing part can be as flexible as you both want it to be - just have to find a deal that works for the both of you. 

3. you could get a hard money loan based on the deal you could work out which usually go for 12 months and then once you finalize the renovation, stabilize the property with market rents, you can refinance out of your hard money loan into a 30 yr fixed mortgage - that's called the BRRRR strategy if you want to research on it a little more.

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  • Jonathan Wooten
    Investor · Albuquerque, NM · Member since 2021 · 44 posts · 11 votes
    5y

    @Kevin Likens Yes there are a couple of options you can pursue in my opinion: 

    1. if there is still a mortgage on the property you can take over the building subject to the existing mortgage and then you would be responsible for paying the monthly payments but the mortgage would stay in the current owner's name so you would not have to qualify for a new loan.

    2. if there is a mortgage on the property + equity then you can again take over the property subject to the existing mortgage and then seller finance the equity with the current owner. The seller financing part can be as flexible as you both want it to be - just have to find a deal that works for the both of you. 

    3. you could get a hard money loan based on the deal you could work out which usually go for 12 months and then once you finalize the renovation, stabilize the property with market rents, you can refinance out of your hard money loan into a 30 yr fixed mortgage - that's called the BRRRR strategy if you want to research on it a little more.

    1Reply
  • Kevin LikensPro Member
    OP
    San Francisco, CA · Member since 2021 · 3 posts · 1 vote
    5y

    The seller has had the building for decades - if he has a mortgage, I imagine he should have a good bit of equity. That sounds like a great option to take over the existing loan.

    I would love to implement the BRRRR strategy... though, with the amount of work the building needs, I would be hesitant to commit to trying to do it all in a year. And besides that, stabilizing rents at market level in SF isn't cut-and-dry.

    Thanks so much!

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  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    5y

    Do you have the cash needed for down and repairs....or are you trying to wrap this into the financing somehow? It would help if we knew purchase price v cash in hand, estimate for repairs, Etc.....

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  • Jonathan Wooten
    Investor · Albuquerque, NM · Member since 2021 · 44 posts · 11 votes
    5y

    @Kevin Likens what is the current tenant situation in regard to existing leases? Are they on month to month leases now or do they have existing leases?

    Why do you think a year wouldnt be enough time? Is there that much deferred maintenance?

    Unless you have done that already I would recommend talking to the owner and get all the information, then get some bids from contractors, and see if you can get the hard money for the construction and then see if the owner is open to a seller financing situation.

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    • Kevin LikensPro Member
      OP
      San Francisco, CA · Member since 2021 · 3 posts · 1 vote
      5y
      Originally posted by @Jonathan Wooten:

      @Kevin Likens what is the current tenant situation in regard to existing leases? Are they on month to month leases now or do they have existing leases?

      Why do you think a year wouldnt be enough time? Is there that much deferred maintenance?

      Unless you have done that already I would recommend talking to the owner and get all the information, then get some bids from contractors, and see if you can get the hard money for the construction and then see if the owner is open to a seller financing situation.

      @Jonathan Wooten In San Francisco, leases typically begin as one year and then go month-to-month after that. The City is very pro-tenant: rent controlled and evictions must be of "just cause" (even if an eviction is "just cause" it's a headache for landlords - can take many months and significant lawyer fees; not to mention often "buy out" payments to the tenants). There is one tenant that's been in the building for over 20 years; his rent is less than half market rate.

      I think rehab will take more than a year because: 1) it may take half a year to get the one tenant out; 2) yes - a ton of deferred maintenance (a case could probably be made to tear down and rebuild the whole building); 3) my intention is to do a live-in rehab so I can do as much as possible of the work myself without being rushed.

      Do you have any preferred resources I can check out to learn more about the "subject to" strategy? I asked a mortgage broker I'm working with about it - he discouraged me without going too much into it. It sounds like a "gentleman's agreement" of sorts... because the original lender isn't going to evaluate me as a borrower, right? I just start paying the loan on behalf of the seller. The broker cautioned against the "due on sale" clause most loans have that a title transfer could trigger. Have you successfully done a "subject to" transfer?

      Thanks!

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