Brendan from Pennsylvania asks:
I bought my first commercial rental a few months back using seller finance and it was a breeze since the property was off market and I could talk to the seller directly. The seller and I haggled it all out based on their retirement needs and since it was still a good deal the interest didn’t matter much to me since it was an excellent cash on cash return.
I am currently searching for my next deal and have found one that interests me on the MLS but the price doesn’t make sense as-is. The realtor is telling me the seller will entertain owner finance offers. Without being able to directly contact the Seller without realtor involvement I’m stuck as to how to build my offer.
This is a great question. Congratulations on your first successful deal. There’s no question that seller financing can be a great financial tool. The thing to remember is that seller financing is still financing and you are still the owner of the property after the transaction closes.
The property should still be a property you want to own, not just because of the financing structure. That means that the property is in the right area from a management point of view. You want to know that you are invested in an area where you will see an ongoing stream of investment. You want to make sure that the investment meets your criteria in terms of supply and demand.
For example, you may choose to invest within a radius of a major hospital and target health care workers as your ideal tenant. Or you may choose to be within a radius of a major university and target students as your ideal client.
You want to be in an area where there is inflow of population, and inflow of jobs. I will never invest in properties in a shrinking market. At the end of the day, properties are simply part of the inventory of your business.
You really want to find out from the broker why the seller is selling the property. You are correct in saying that the negotiation will need to be direct with the seller. Some realtors are uncomfortable with a direct discussion with the seller. Offer for the realtor to be present in that discussion.
Your strategy of offering a lower purchase price and a larger overall deal value makes sense. But in reality you could actually be offering more than the asking price, but then choosing the payment terms. Let me give you a simple example.
Let’s say that the seller is asking $100,000 for the property. You want to purchase the property for $50,000 up front and then $10,000 per year for the next 8 years. You could tell the seller that you’re offering them $50,000 up front which they may find alarming. Another way you can write the offer is to set the purchase price at $120,000 payable as $50,000 on closing, followed by annual payments of $10,000 for the next 8 years. Such an offer will certainly get the seller’s attention. Note that a realtor is legally obligated to send any offer to the seller. The realtor can’t hold onto the offer, even if they don’t like it.
Once you are in the dialog with the seller, you can have the discussion about what is more advantageous from a structural point of view. The seller may desire to have the payments secured on title using a collateral mortgage until the property is paid in full.