Since the onset of the pandemic, the capital markets have slowed. For the borrowers that have been able to secure financing, the market uncertainty has changed the length of escrow and the types of properties lenders will finance. As a result, fewer deals have closed, even for investors willing to buy in this market—but there is new financing alternative that has some buyers excited: seller financing. In a seller financing deal, the transaction closes immediately and the buyer makes principal and interest payments to the seller.
With seller financing, the bank option is taken away, and there is no bank requirements, no loan contingency, no appraisal,” John Katnik of James Capital Advisors tells GlobeSt.com. “It is a much easier way to do a transaction right now. And, for the seller, if you are willing to stay in the deal for a few more years, there are a lot of benefits. You collect interest payments on the loan, and the collateral is the property, so if the buyer doesn’t perform, you can take the property back. Seller financing also opens up the buyer pool.”
Seller financing has become a way to access capital in this market. Katnik has already done two of these deals in the last two months, and he has seen increasing interest from both buyers and sellers. “I have done two deals with seller financing in the last 60 days, and I am seeing it a lot as an option with deals in the market,” says Katnik. “It is tougher to get a loan right now with banks. They are being more stringent with their underwriting, and it is taking longer to get deals approved. Typically, you can get deals approved in 45 days, but today most lenders are taking 60 to 90 days. It is just harder to buy something.”
Not every deal is a good fit for seller financing. 1031 exchanges, for example, don’t work with seller financing. “It doesn’t work for every transaction. You can’t do a 1031 exchange, for example,” says Katnik. “Typically, people that are taking advantage of seller financing are cashing out from another investment and putting it in real estate.”
However, when it is a good fit, seller financing can help to maintain pricing and has added income because of the interest payments. “This is a good way to achieve an aggressive price during COVID-19, and have the added benefit of interest payments,” says Katnik. “In a lot of cases, those interest payments are nearly as high as the rent payments that they are collecting on the building.”
Overall, deals are still getting done, even through the pandemic. “There are deals that are sitting, but if you price a deal correctly and where the market is, it is selling,” says Katnik. “There are still a lot of people that have money to place that believe multifamily is still the best asset class.”
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