We’re seeing an increasing number of self-storage deals closing with the seller being the lender and financing the deal. Any facility we list for sale with seller financing available always attracts higher levels of buyer interest, which results in more offers and an eventual sale price 15-20% higher than the market. As an added benefit, the seller doesn’t have to figure out how to invest the sale proceeds, and they receive monthly interest payments during the loan term.
Loan terms are always negotiated between buyer and seller, and the most common terms we’re seeing are 30% down payment, five-year term with a balloon payment, and a 4.5% interest rate. Usually, the payments are interest-only, which helps both sides. For this deal structure to work, the seller can’t have a large loan to pay off, nor can the seller intend to use the sales proceeds for something else, such as a 1031 exchange. A down payment of 30% is large enough so the buyer has substantial skin in the game. Offering a below-market interest rate is key to attracting more offers and selling at a higher price. Yes, the seller is giving up some interest over the loan duration, but selling for a higher price up front usually more than makes up for it. Creative structures work too; we brokered a deal with seller financing where the interest rate started at 4.0% and increased every year for the seven-year term.
Word of caution for buyers – you should still obtain all the 3 rd party reports that a commercial bank lender would ordinarily require, including survey, environmental, and zoning, so you know of any issues for when you go to sell.
As long as interest rates stay high, seller-financed deals are going to remain a viable and profitable option.
About the Author:
Thomas Parsons is Senior Director of Investments with The LeClaire-Schlosser Group in Denver, Colorado. He serves clients in acquisitions and dispositions of self-storage real estate throughout multiple regions of the United States. His 18 years of professional experience include management consulting in banking and private equity. Mr. Parsons moved to Denver in 2006 to pursue his MBA at the University of Colorado Denver, specializing in finance, after graduating from the University of Maine Farmington with a BA in Business and Economics.
When not in the office, Thomas can be found canoe camping in the remote Maine wilderness or running international marathons in places such as South African game preserves or the barren landscape of Antarctica. At home, Thomas is the father of two four-year-olds and enjoys coaching his kids’ soccer teams.
