How To Buy An Apartment Building With Owner Financing

This is one of my favorite deals I’ve done. It took every tool in the toolbox as well as a couple new strategies.

I don’t think I could’ve pulled it off without the experience I gained from buying these 11 condos.

Any time I learn a lot from a deal, I like to share with my readers. I’ll be as in depth as I can, but if you have any more questions I’m always happy to answer.

Finding and Funding

How did I find it?

I was scanning the MLS multifamily listings on my phone while stopped at a red light. As I’ve mentioned before, Our MLS is extremely light on multifamily listings. There are usually only about 40. However, I do try to stay up to date with them. In this case, it paid off.

I emailed the listing agent, and asked about the property. I also asked if the seller would consider owner financing for the eight unit building. She responded promptly that he was.

How did I fund it?

After initial negotiations, I was able to secure owner financing at favorable terms. The problem was that he needed a 100k down payment to pay off his bank loan.

Originally my plan was to sell another property and utilize a 1031 exchange into this one. The sale of that property fell through, and I had to find another route to fund the 100k.

I knew the numbers on this deal were good enough to attract partners. Everyone wants a good multifamily deal right now. And they’re hard to find. Because of that, I had zero doubts I could find capital partners to join me in this deal. I made a few phone calls and shot a quick email to the subscribers of this blog. Interest was extremely high, and the deal was funded within 24 hours.

Here’s a deal summary that I sent to the partners. It describes in depth why I like this deal, the numbers, and the game plan for operations.

Negotiating it into a great deal.

This is probably the most important part of this deal. I don’t consider myself a tremendous negotiator, but I’m getting better. One of the ways I keep improving is by putting myself in position to negotiate deals like these. To practice with higher and higher stakes.

There were a couple key wins during this negotiation.

1. Switching the owner financing type from “contract for deed” (CFD) to taking title at close. Since the seller was requiring a 100k down payment, I really didn’t feel comfortable with not taking title at closing. Originally, I wasn’t sure how a CFD would work with a potential 1031 Exchange. There were too many unknowns and variables for me to do the deal that way. I had already made a full price offer at 339k, and agreed to 100k down. When I let him know “contract for deed” was a deal killer they found a way to do a promissory note instead.
2. A price reduction from 339k to 316k. I negotiated the price and terms of the owner financing before I ever went to Oneonta to view this property. The only thing I had to go on was pictures of the exterior and pictures of one unit. When I went for inspection, I found out the rest of the units needed a little love. I knew that in order to make this a deal worth doing I would need to get the price down. I asked for a reduction to 305k. The seller countered at 316k plus some commission reduction. I accepted, and we moved forward to closing.
3. 60 days to make first loan payment. The week before closing, I viewed the 8 units with the property manager who will be handling them. I remembered the challenges faced in the transition on the 11 condo’s I bought. I decided to ask the seller if we could have 60 days after closing to make the first payment. I explained that there could be some turbulence with tenants during the change over, and I wanted to be sure we had them smoothed out before needing to make a payment. The seller agreed. At closing, he said asking that actually made him like me more. I think it also made him feel good about his loan security, because he knows I’m thinking ahead.

More Key Takeaways

1. Being an agent really sweetened this deal. The commission advertised on MLS was 5%. I gave up some of that during negotiations, but was still able to roll over 11k into the purchase of this building.
2. Negotiating on terms can be powerful. Instead of firing off a low-ball offer, I put in an offer at list price. I asked for terms, that were better for me than those previously offered.
3. My network was the key. Raising 90k was really easy because I talk to other investors everyday. It made me curious how large of a deal I could put together with partners from my network.

Conclusion

Hundreds of investors analyzed this deal. I’m not sure why they passed, but I do know this. We put together an investment that should have strong returns. There’s a high probability we can return all investor capital within 5 years.

Closing on this deal is the beginning. Now the work begins. Now we have to operate effectively. I’m sure I’ll learn some great lessons from this phase as well!

Thanks for reading! Please send any questions or comments to rob@robdrum.us