Tips on owner financing for an office I am selling?
I have some lovely tenants who want to purchase an office they rent from me. The office is about $150,000. It’s in a Seattle suburb so the real estate market is bustling. They’re having a little bit of trouble getting a loan and I was thinking of doing an owner financing deal, with a downpayment of $50,000. Any gotchas I should look for?
[{"id": "hj98fyt", "text": "Seller financing. I had a brain fart.", "replies": [{"id": "hj9ndqr", "text": "Put it on a balloon.  Otherwise they'll keep it until it amortizes and there is nothing you can do.  2 yrs or whatever you are comfortable with and a five year prepay to get some fees.  Obviously have the title company record it.  I usually make them Interest-Only.  Make sure there is a clause in the mortgage that says if they don't keep up the property, it's  a problem.  \n\nReally, you probably want to do a wrap around if it's a small commercial deal, unless you need the cash now. It gives you more flexibility if things go south.  If keeping title, then recorded land contract, so you still own it and have your loans/liens on title, and they pay you x dollars per month on y balance, and you pay your liens and keep the diff or pay down your loan.  Easy way to make some juice, and eat up their DP with some fees.  You can put a balloon on the recorded land contract also, to force them to refi and pay you off.\n\nCross collateralize anything you can. The more the better, but sometimes that's too much and or complicated for what it's worth.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hj9iivm", "text": "Get a pledge from the borrowing entity.", "replies": [], "depth": 1}, {"id": "hj9ryky", "text": "They can\u2019t get a loan with 1/3 down? Huge red flag.", "replies": [{"id": "hja8wxr", "text": "Seller would carry $100k they would get a loan to cover the difference - probably. If that is the case then they\u2019d probably have to handle the owner financing outside of escrow as the bank won\u2019t take a second position.", "replies": [{"id": "hjc1t3q", "text": "When I was a young kid, maybe 30 years old, I couldn't even get a SEARS card, but my business was expanding rapidly.\n\nI had outgrown 3 different leased spaces in the previous 8 years.\u00a0I looked for a place of my own, with more dirt than I needed, for trucks I didn't yet own, but knew I would in very short order.\u00a0\n\nIt was early 1990, I found just such a place (a bit north of Bellevue actually) and the guy wanted $300,000.00 for it. He owed 120K at 16% (he had shitty credit). Commercial rates were in the 8+% range as I recall now.\n\nI had 80K and asked him if he would do a seller financed deal over 10 years with a 50K balloon every 3 years for the first 6. He said he would and he wanted the blended loan to be at 12%.\n\nI offered him 7% and told him I'd assume his 16% loan, which I knew I could pay off fairly quickly, plus I put half of my down on his note and the other half went to him, and we canceled the 100K in balloons.\n\nIt turns out I bought at the top of the market, and went from paying almost $500.00 a month in rent, to $4,300.00 or so a month for a few years (until I paid off his loan).\n\nBut I never missed a payment, I paid off his 16% note in 2 years (6+ years ahead of the due date) and him off in something like 8 years.\n\nBanks were incredibly cautious back then.  I suspect they are today as well for small businesses.\n\nI wouldn't have any problem loaning 65% of the agreed upon price to someone today.  I'd put him on a short leash but....the OP says they're \"lovely tenants\"....my guess is, he's had them as tenants for a while.  He probably knows these folks integrity or lack therein. But, as another poster herein said...cross collateralize.  Get a lien on something they never want to lose. You'll probably never need it.\n\nDo the deal OP.  These folks will remember you for the rest of their lives and....your risk?\n\nIt's pretty negligible.", "replies": [{"id": "hjcw2wt", "text": "I love these stories. I couldn\u2019t tell you how many hours Ive spent listening to people tell the story. It would be nice if there was more posts in this sub reddit of people telling them.", "replies": [], "depth": 4}, {"id": "hjmhlo8", "text": "Fantastic info. Appreciate the lien idea... but isn't the property itself something I can claw back?", "replies": [{"id": "hjob01f", "text": "Of course, but as 2008 proved, across the globe; things change.\n\nAs 2020 proved; things can change rapidly (and violently).\n\nAnd as today, going forward, proves; they change / are changing in entirely unexpected ways.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hjc9lyt", "text": "Any concerns that they might be trying to flip it and not really interested in operating out of the space for the long term?\n\nI'd rule that out by introducing some language to the purchase and lending agreement.\n\nAlso, money down is hard, default rules/consequences are explicit, and if they are borrowing the $50k ask to review that lender's agreement.", "replies": [{"id": "hjmhgju", "text": "Sorry for the tardy answer! No such concerns at all. They're longtime tenants who partner with a business nextdoor. Thanks for that.", "replies": [], "depth": 2}], "depth": 1}]