How to Leverage Seller Financing for this Deal

Question

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. · Answer

@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.

Deborah Wodell · Answer

Creative approach! But just know—commercial lenders will still require 20–30% down, even with seller financing in 2nd position. So you’d likely need $280K–$420K out of pocket.

Your idea of offering $1.4M with $400K seller carry (interest-only, 5-year balloon) can work if the lender is comfortable with the structure. Some may allow it if your 1st mortgage is $1M and you're bringing enough cash to satisfy their equity requirement.

Once closed, a HELOC on the increased equity could help fund your reno—if the appraisal supports $1.4M.

This deal has potential—especially with the future development plans.

Dennis Bamford · Answer

Hello Andrew, I have questions, do you have the 20 or 30% down for a bank loan? Is the property free and clear? You'll be losing half of your tenants once the seller retires, plus you'll be rehabbing the upstairs, so you'll be without income for at least 3 months, that's if the county/city will let you make it into an apartment.

If you have the down payment and property is free and clear, give your down payment to the seller and have then carry the note and do a  5 year balloon.

How to Leverage Seller Financing for this Deal

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