Many a self-storage deal has been saved through creative seller financing. This is the concept in which the seller offers great lending terms to the buyer that offset the other drawbacks. So how can you make a deal work with seller financing that would not work without it?
The effect of low or zero interest rates
Let’s assume that the storage deal is priced too high. A big part of your mortgage payment is the interest rate that you must pay on the debt. By lowering the interest rate, it effectively reduces this payment and allows you to pay more and still have the same monthly mortgage cost. In extreme cases, the interest rate could be reduced to zero.
The power of zero down
Another way to save a storage deal is to have the seller accept a low down-payment – all the way down to zero. Since your return on investment is based on how much money you put down on the deal, then the lower amount you put down, the higher the return. Additionally, a lower down payment can allow you to put your capital into needed facility repairs, if that’s the problem with the deal.
The stress fee life of fully amortizing debt
Another way that the seller can structure a loan that would make a failing deal attractive again is through having the mortgage fully amortizing. In this manner, for example, a 25-year mortgage comes with a guaranteed 25-year set of monthly payments. With normal bank lending, there is typically a balloon every 5 or 10 years, which puts you at risk of finding a new lender, as well as a bunch of bank costs.
But there can be one big catch
When the seller gives you creative financing, you have to be aware of the impact when it ends. For example, if the seller goes with zero down, what are you going to do if there is a balloon payment due five years later? A normal bank will require 20% to 30% down and how will you come up with that? So make sure that you take into account the real world that awaits if your seller not is not fully amortizing.
And there are some things you can’t fix with any financing plan
While seller financing can fix many things, it can’t fix a list of fatal deal attributes:
- • Environmental pollution on the property.
- • Lack of adequate permitting by the city to operate as a storage facility.
- • No legal title to the property.
- • A flawed survey with material issues.
Conclusion
Creative seller financing can be a wonderful tool to making a failing storage deal come back to life. But these methods do have some limitations so make sure that you understand all the details and have planned accordingly.