For many storage buyers, seller financing is an important component to that transaction. In this Self-Storage University podcast we’re going to explore some of the methods you can use to enhance your ability to obtain seller carry.
Episode 131: How To Find Seller Financing Transcript
In the self storage industry, as in all forms of commercial real estate, one of the most attractive financing styles is seller carry. Having the seller carry the financing cures so many problems for you as the buyer. But how do you get seller financing? This is Frank Rolfe, the Self Storage University podcast. We're going to talk about how to find find seller financing, how to nudge the mom and pop seller into accepting the concept of being not only the seller, but also the banker of the transaction. So first, let's define what seller financing means. Now, when you buy a self storage facility from a mom and pop and you pay them cash at closing, the normal structure is you get a loan from a bank, you put down a down payment, typically 20 to 30%, and at closing, the sum of your down payment and the loan from the lender equals the purchase price, which is given basically in the form of cash in a cashier's check or certified funds to mom and pop the seller as a trade for having them sign the title over to you as the new buyer. And mom and pop are then completely out of the picture.
You'll never talk to them again, probably ever see them again. You'll take the property and start your turnaround plan and hopefully increase the rents and increase the occupancy. But there's another option out there to finance deals and that's having instead of a bank carry the financing, have the seller carry the financing themselves. And this concept is typically called interchangeably seller financing or seller carry. They both mean the same thing. It means that the mom and pop seller is acting as the lender. Now, what do mom and pop demand by being the lender? Well, typically they're going to want to have a first lien on the property, such that if you don't make your payments and you go into default, they take the property back. But unlike a lender, typically they're not going to have any kind of recourse. It's very hard for mom and pop to have recourse on a seller note because if you read how bank and how recourse works with the bank, it's a kind of complicated process. So I've never seen a seller note that has recourse. Since all of us don't want recourse, we want non recourse financing. One huge benefit of seller financing is the simple fact it's non recourse.
But there are other advantages to seller financing because the mom and pop seller is not bound by any banking laws. In America today, there's not a lot of things on the books that you can't do. As far as how that note is written, with the mom and pop seller, they could have a below market interest rate. They could have zero percent interest if they wanted to. They could have any form of amortization they want, any form of deal length. You might end up with 0% down, 5% down, 10% down. The options are endless. It's whatever two consenting adults agree to. That's what the note could be. So as a result, seller financing is extremely attractive for buyers. But how do you get it? How do you convince mom and pop to carry the paper? What are the strategies there? Well, the first strategy is to explain to them the many benefits carrying the financing. It falls into basically two categories. Category one, they'll pay less taxes at closing. Because when you carry the financing, you're only taxed on the money as you receive it. You would pay tax on the down payment, you would pay tax on the payments as they come in, but you don't pay the tax up front.
And again, talk to your tax professional on this. I'm not an accountant, but I'm pretty sure anyone will tell you that from a seller's perspective, carrying paper is more advantageous from a tax perspective than getting your money paid in advance. But the other big one is that you can typically pay the seller more in that monthly amount than they could get themselves out in the open marketplace. A CD rate. Right now, let's say if you wanted to go with a longer term CD, five year maturity, 10 year, something like that, or treasury, you'll get about 4%. But if they carry the paper on the deal, you might be able to pay them 5%, maybe 6%. Some banks today are at 7%. If a seller would carry the interest rate from the bank loan, you do it, wouldn't you? But that might get them nearly double what they would make in the open market. That's the other huge benefit to seller financing. And as long as you remind them of this fact, typically many of them will toy with the idea and potentially accept the concept of seller financing. Now, it's very important when you try and get seller financing from people that you don't tell them, oh, I need seller financing.
The word need can be toxic because mom and pop typically don't want to carry paper unless they feel that you don't need them. So they want to believe that you can go out and get a bank loan easily, that you're someone who looks good on paper, good credit, great track record. And any bank would love to have as A customer. And if that's not the case, if you tell them, oh yeah, well, I'm going to have trouble getting a loan. You know, I had a bankruptcy two years ago. Well, you've blown the deal because they don't want to make the loan unless they think that a bank would. And don't be too over aggressive in this concept. Again, you want to appear that bank financing is on the table for you, but remind them it's to their betterment to carry. And sometimes they don't offer to carry on the front end because they don't really themselves understand the benefits. And if you explain it to them verbally or maybe even in writing, many of them will warm to the idea and eventually embrace it. But yet, there's another option to try and get seller financing on a storage deal, and that is to give someone a contract that gives them the option of either cash or terms price.
So now what we're doing is we're saying, hey, mom and Pop, we'll either pay in cash and get a bank loan, or you could carry the financing. And of course, in this construction, you make the terms price, the seller carry price, much more attractive than the cash price. If you were going to pay a million dollars for the property in cash, you might offer the terms price of $1,200,000 or 1,000,002, $50,000, because you're trying to steer them into the idea of carrying. And if you're going to say, now wait a minute though, I can't pay that much more with seller carry, you actually can based on how that seller carry is structured. Or you might, as a sacrificial bunt, be putting the number artificially low on the cash item just to try and again force them, make it compelling for them to go with. Of course, the higher number, most of us, when given the option of two choices, one higher than the other, as far as money in your pocket, you'll always shoot for the higher. Now, there are some dangers to that construction that I want to make you aware of. So if you decide to do the cash versus terms offer, the big risk is that once you've said you have this option or this option and they choose the the cash option, you can't then backpedal if you don't give them the two options.
You could always try and sell them on the idea of seller financing over time. But in this case, you pitched it to them and they immediately shot it down and said, no, I want cash. And you said, okay, well, if you want cash, this is the price it's very hard to then get out of that construction. But of course the benefits are great if you give a cash versus terms price, because in many cases that will help steer them into that transaction and also in the front end gets them more educated. Then they have to really think about it hard, ask their attorney, ask their spouse, ask their accountant, and make that final decision. The bottom line is that there are a lot of storage transactions done in America today where you're buying already existing facilities, typically more in suburban, exurban, super commuter kind of areas, but nevertheless, it's there. If you'll only try and seller carry is always worth the effort. This is Frank Rolfe, the Soft George University Podcast. Hope you enjoyed this. Talk to you again soon.