The Interest Rate Balancing Act
Balancing Sale Price & Interest Rates:
In a recent discussion with a seller, we were asked why we were suggesting she sell her property for a rate well below what banks are offering. She reminded us that she had purchased her portfolio using seller financing years ago at a rate well above what traditional lenders were offering.
We discussed her short and long term goals, and attempted to determine which goal was her primary objective. This presented a series of questions relevant to all sellers considering owner financing.
- Does the interest the owner is charging really matter? In this situation the interest rate was not the motivating factor- the short term goal was to retain the net monthly cash flow that the owner was already receiving.
- When does the seller want to be paid off? A long term goal was to receive a large lump sum payoff near the age of retirement, and if interest rates dropped between now and that point in time, the owner wished to be protected.
- How do you balance the purchase price versus the interest rates? We determined that in this scenario, the final purchase price and maintaining her current cash flow were her primary goals.
We can achieve a higher sales price when the owner’s current loan is paid off, by charging lower interest rates over the course of the loan. This allows the buyer to raise rents and make the needed renovations prior to the loan being refinanced in year five.
In short, the interest rate charged should help sellers achieve both their long and short term goals. An interest rate and seller contract should be set up to retain cash flow and achieve the highest sales price, AKA “The interest rate balancing act”.
Common Interest Rates in Today’s Owner Financing World: Traditional bank financing for apartments has made selling your property for a premium more complicated.
Interest rates can now range anywhere from 6% on larger deals with debt over $2,000,000, to just under 8% on deals under $1,000,000. This is a far cry from the 2.75% interest rates we were seeing two years ago.
To combat this, a majority of properties selling in 2023 have utilized owner financing.
Please reach out to discuss how seller financing can benefit you as an owner.
SVN Cornerstone Multifamily Team
Nate Gant is an Advisor with SVN Cornerstone. Nate has been an active member of the Eastern Washington real estate community since 2010. He has brokered more than $100 Million in real estate transactions, specializing in land development, REO and investment properties. To get in touch with Nate, email nate.gant@svn.com or call 509.993.4440.
Jordan Lester is an Associate Advisor with SVN Cornerstone. Jordan served as a brokers assistant for 3 years with SVN Cornerstone before becoming a full time broker. Jordan specializes in the multifamily sector of commercial real estate. To get in touch with Jordan, email jordan.lester@svn.com or call 509.496.6922