One at a lower price.
And one at the exact price the seller wants but with him holding back 10-20% of the purchase price in the form of a 2nd mortgage (with a second position to your bank loan).
We've used "seller financing" on two self storage deals in the past year.
And it raised our cash on cash return by 20%+.
And lowered the amount of capital we needed by $500k.
Here's a THREAD about a deal of mine and how this magical debt structure can work.
👇👇
One at a lower price.
And one at the exact price the seller wants but with him holding back 10-20% of the purchase price in the form of a 2nd mortgage (with a second position to your bank loan).
Two reasons:
#1 most have some debt on the property.
#2 most want most of their money now.
"you name the price and i'll name the terms?"
This is a case of that situation exactly.
Lets paint a picture here:
Not many interested buyers so I knew I had some leverage.
His asking price was $4.5MM. I wanted to pay $4.2M.
After a week or two and a lot of back and forth I found his lowest number.
At that point I made the two offers.
One at $4.2MM with normal terms and a bank financed closing.
The second at a price of $4.325MM with $500k of "seller financing".
So lets go over the dynamics:
Instead of getting 70% ($3MM) financed through my bank and coming up with the last 30% ($1.3MM)...
I finance 70% ($3MM) through my bank, 11.5% ($500k) through the seller, and only needed to come up with 18.5% ($800k).
Generally 25% per year is what you pay to your LPs or what you expect as a return on your own capital.
But the seller only gets 5%.
Lets talk about how its structured with him:
It's a 5 year term, meaning the rate is locked for 5 years. After that the rate goes up to 7%.
If I ever refinance, which I plan to do at 18 months, I have to clear his loan and pay it off.
And they have first position. Meaning if we default, they get made whole first.
+ they trust us and like us (that matters, a lot).
Definitely not on competitive properties.
And not unless I have some leverage and rapport with the sellers.
Because it's a risk for them. They are your new banker. You stop paying or run the property into the ground, they lose big.
This increases your risk. It increases your leverage. And your obligation on a monthly basis.
Do not do this unless the deal is juicy enough to support the added debt.
What did I miss? How have you utilized seller financing?
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Let me offer a framework for thinking about things like this, something called an “Omega Event.”
It was first described to me by Erik Martin, one of Reddit's first community managers:
In governance, Omega Events exist due to the fact that no system of beliefs, no worldview, no set of rules, can account for everything that will ever happen.
Eventually someone (or some group) will do something that lies outside the scope of all existing rules, and you will have to make decisions again from first principles.
Sometimes the Omega Event emerges from the confluence of many unrelated factors. When it does, it is wholly different from anything you’ve encountered.
