Big Announcer (00:03):
This is the Self Storage Podcast with the original self storage expert, Scott Meyers.
Joe Downs (00:11):
Welcome back to the Self Storage Investing Podcast. Joe Downs here and thrilled to be back in the host chair. Folks, in a world of ever-changing interest rates and a challenging debt market, have you ever wondered how to find and fund incredible self storage deals? What if I told you there's a creative financing strategy that can unlock hidden opportunities and create win-win situations for both buyers and sellers? Well, today we're going to dive deep into that world — the world of seller financing. And to help us navigate this powerful tool, I am joined by my VP of acquisitions at the Belrose Group, Jack Pezzino. Jack, welcome to the show.
Jack Pezzino (00:49):
Thanks for having me, Joe. Excited to be here today and share some of our experiences with creative financing.
Joe Downs (00:54):
You lie. I didn't give you a choice, but I appreciate you being here anyway. Seriously though, folks, today we have a fantastic story to share with all of you. It is a real-life case story — and it is a Belrose case story — of how we used seller financing to acquire a 60,000-square-foot facility in a prime location. We're going to break down the story, extract the valuable lessons, and then pivot to the pros and cons of the strategy. And of course, we'll have a special invitation for you at the end, so stick around.
Jack, we're going to talk about M2 Maxi. So we acquired this back in 2023. I'm going off memory here. Obviously, the facility just called M2 Max. It was in Wilmington — still is — in Wilmington, North Carolina.
(01:41):
I think you found it on Crexi. I think it had been sitting there for a while. I think I said the year was 2023. And if you're a listener and you've been in the business or you've been listening to this podcast for a while, you might remember interest rates were on a steady climb in that 23-24 era. And at the point in time we're talking about here, I want to say they were already at traditional bank lending rates of north of six and a half, which had come a long way from where we were for the prior couple of years. And we might have even been at 7%.
Jack, your brain has a ridiculous memory, so I'm sure you'll correct me there. But in either case, my recollection is they were going up seemingly every month. And I know that made it very challenging for us at that time to buy deals because when you were underwriting them, every time you got comfortable, it seemed like the interest rates went up.
(02:38):
Property itself, again, just to set the stage, 60,000-plus-square-foot facility wasn't exactly what we would call self storage. We didn’t call this that at the time. Now we call it pro storage, but looking back favorably and fondly at this, at the bewilderment of what to call this thing — but it was that. It was larger units built by a plumber for his friends who were contractors and business owners. So there were these large units. I know he filled them up quickly. They stayed full consistently, but he was a classic mom-and-pop because he wasn’t really in the storage business, so he wasn’t really raising rents.
He didn’t really know what he had. And I recall he was looking to retire — not only from his plumbing business, maybe he had sold that, I can’t remember, but also from managing this facility.
(03:38):
And the last thing I’ll say before I turn it over to you for probably what will end up being your more accurate recollection: I think we were struggling to make this deal work from a traditional financing standpoint, Jack. And I also believe this was the very first seller-finance deal we did. So Jack, you were instrumental in structuring this negotiation and financing the deal. How did we get this done?
Jack Pezzino (04:04):
So this was a fun deal all in all by itself because this is the first one we looked at that was oversized self storage units as well. That'll be a story for another day, but this was a nice little facility with 14-foot doors. And I think the smallest unit here was like 475 square feet or something like that. It was big units.
Joe Downs (04:24):
It was not like the other children in the portfolio. No. This one beat to its own drum.
Jack Pezzino (04:31):
Yeah. It was tough looking at it, but then kind of going through the traditional financing route, we were talking to banks. Elena, who does our finance for us, was shopping lenders and talking to mortgage brokers and everything else like that. No one was committing to any term sheets until the week of closing, where it was very hard to end up getting a deal done without a financing contingency.
At the time, I want to say interest rates were right around that 7% mark, but they were going up every month. So we didn’t know where it was going to end.
Joe Downs (05:05):
Very tough environment to try to underwrite and close deals.
Jack Pezzino (05:08):
Yeah. So what we ended up doing here was sending what we like to call our good-better-best offer, where we ended up taking what we could offer where we felt comfortable going to the bank. If interest rates were at seven, then we were probably modeling out around seven and a half to give ourselves that 75 days to plan for another potential interest rate hike.
But then in our better-best offers, we created our own terms where we found out the seller was looking to retire. He liked the cash flow coming in from the business; he was just tired of running it. He didn’t want to go there and clean out any units. He didn’t want to fix a gate or change a light bulb. He was done.
(05:57):
So it opened up the conversation to another avenue of financing where he became the bank, but we then were trying to figure out the pressure points: was he looking at a certain number within the purchase price? Was he looking at monthly cash flow, or was he looking at a certain down payment to go into another activity or a house? Ultimately, I think we got around a 6% interest-only loan for five years with a five-year option.
Joe Downs (06:32):
Which was huge at the time because I think you’re right. Now that I think about it, rates were at seven and climbing. So this was really, from a debt perspective, priced really well for us — and it was interest only, and we got the five-year option.
Jack Pezzino (06:46):
And it was 25% down. So we got pretty solid conventional terms there. Banks at that time, I think, were also trying to get you to put about 35% down because of the uncertainty.
Joe Downs (06:58):
I’ll bet you the next 10 deals we did at least were 35% down. So yeah, that was very favorable from a down payment standpoint.
Jack Pezzino (07:05):
Yeah, but it ended up being a win-win. The seller got a nice monthly cash flow from the facility, turned over ownership to us, and no more management headaches for M2 Maxi.
Joe Downs (07:21):
And seller financing was a vehicle that allowed us to play with levers and dials like you just referred to, Jack, like the down payment and the interest rate and the terms and all that. And we are going to get into the pros and cons in a second, but just trying to tell the story part of a real life story that actually happened here to set up the rest of what we are going to talk about, which are all the details of seller financing, pros, cons, etc. But it is because of that, because of the flexibility of it, because you are working one to one with the seller, that we were able to play with those dials. Is that fair? I mean, I know you went back and forth and kind of teased out of the seller what mattered most.
Jack Pezzino (08:04):
Yeah, absolutely. That is exactly what made this deal work. It gave us the ability to customize everything directly with the seller instead of through a bank.
Joe Downs (08:15):
What was the hot button? What was the hot dial for the seller? Do you recall?
Jack Pezzino (08:17):
Yeah, I think this one was a broker listed deal with Southeast Brokers, and working directly with Mike over there, the owner really wanted to get to his number, somewhere in the four to five million range. He wanted something more so predicated on future value, which at that time was very common, especially with the facility we were looking at that was 50 percent below market rates and had not had rents raised in years.
Joe Downs (08:59):
Was his focal point really the sale price? I thought it was more about cash flow.
Jack Pezzino (09:05):
So originally they told us it was the purchase price, but then going back and forth with the broker, we found out it was like, he likes the cash flow of the business. He just does not like operating it. That is when we said, all right, so we are going to put together a couple options, one with the purchase price but not the monthly payment, and then another with the monthly payment but not necessarily the same purchase price.
Joe Downs (09:33):
Yeah. And I am going to tell one more interesting tidbit about this story, and then we will get into the key takeaways that I want you to expand on for the listener.
One of the big takeaways here is that you do not always know what the seller’s hot button is. Sometimes it is the exit price, the purchase price, because maybe someone told them, do not sell that for any less than X. But more often than not, it is about the down payment or the cash flow. I do not think we have had many sticklers on interest rates. In fact, I think that is the first place they cave. Six percent was great in this environment, and we have done even better since.
(10:41):
This facility came with two acres of land, not two separate parcels, but one parcel across the street in a business park. Had we gone to a traditional lender, our plan to develop that parcel would have been difficult because a bank would have tied it up as collateral. Since we structured it through seller financing, we were able to convince the seller not to encumber it. That flexibility allowed us to later develop it, and now that land is producing revenue. We could not have done that with traditional financing.
(12:06):
All right, Jack, great story. Obviously, it illustrates the power of seller financing. Let us talk about some key lessons and main takeaways, how to create a win win, the risks and due diligence, and then custom deal terms. So Jack, let us start with the first one. How did this create a win win between us and the seller?
Jack Pezzino (12:50):
It all started once we understood his motivation. He wanted to retire. He liked the cash flow of the business but not the day to day work. We provided him with steady monthly income and freedom from management, and we gained a 60,000 plus square foot asset with two extra acres for potential development. Everyone won.
Joe Downs (13:32):
I love it. All right, but it is not without risks. We teach this a lot to students, and as we can tell when they bring us all kinds of seller finance scenarios, it is not all sunshine and rainbows. What are some of the key risks?
Jack Pezzino (13:58):
A lot of people assume the seller carries the most risk, but I would argue the buyer does. You are essentially entering a partnership with that seller, they become your bank. You need a rock solid legal agreement. Always have a qualified real estate attorney review the documents to protect your interests. There is no institutional safety net here, so you have to think like a bank and make sure you are not over leveraged.
Joe Downs (14:49):
Exactly, and that ties into my next point. Without a traditional lender, you lose a second set of eyes. Banks require appraisals, environmental reports, and feasibility studies. In seller financing, those are business decisions you must make. The seller will not require them, but they are still critical. Why, Jack?
Jack Pezzino (15:30):
Because it is your capital at risk. You are underwriting the deal without a lender’s guardrails. You still need to verify everything, income, expenses, value. I treat seller finance deals as if the bank were involved, same debt coverage ratios, same analysis, same caution. That way, we do not over leverage or expose our investors.
Joe Downs (16:39):
And just to emphasize, we still do all of that, appraisal, environmental, and feasibility. Even when it is not required, it is smart business.
(17:40):
Now let us talk about benefits, the fun part. Jack, what are some of the biggest upsides of custom deal terms that we were able to strike with M2 Maxi?
Jack Pezzino (17:48):
This is where the magic happens. You are not bound by a rigid bank checklist. You create the interest rate, the down payment, the length of the loan, whether it is interest only or principal and interest. You make it fit your business plan. The goal is to craft a structure that is a win win for both you and the seller.
Joe Downs (18:42):
You clearly love this part, and I get why. It is fun to play with those levers and really get to know the seller. When they start negotiating within your options, you know you are close to a deal.
(19:37):
Let us shift to the main pros and cons. First, the pros. Why should anyone in this business learn about seller financing?
Jack Pezzino (20:26):
First, make sure the seller owns the property outright, no or very little debt. That is key. When that is the case, seller financing opens up more opportunities. You can get creative with terms and structure deals that banks would not touch. It is flexible, faster to close, and can be tailored to meet both parties’ needs.
Joe Downs (21:36):
Just to clarify, own outright means they do not have a loan on the property, or if they do, it is small enough to pay off at closing. And when you say monthly money, you mean the interest payments we make to them as the lender, right?
Jack Pezzino (22:02):
Exactly. And there are more pros. You can get to the closing table faster since there is no bank underwriting, and you avoid a lot of junk fees. Still, even though not required, I recommend getting the feasibility, environmental, and appraisal done, it protects you.
Joe Downs (22:39):
Yes, and you can close as soon as the seller is ready if you are too. Plus, no ten thousand dollar processing fee surprises.
(23:23):
All right, let us talk about cons.
Jack Pezzino (23:25):
The first big one is overpaying. Some mom and pop owners have unrealistic price expectations because of what someone told them their property is worth. You need to be disciplined. Do not over leverage yourself or buy a deal that does not make sense just because it is seller financed.
Joe Downs (24:12):
Do not buy yourself a job, right?
Jack Pezzino (24:15):
Exactly.
Joe Downs (24:16):
It is okay to pay slightly above market if there is strong upside, like expansion potential or under market rents, but not so much that the deal no longer works.
Jack Pezzino (25:00):
Another con is foreclosure risk. Because this is not through a bank, you need airtight loan documents. If you default, the seller can take back the property and keep your down payment and payments made to date. That is why good legal representation is essential.
Joe Downs (25:53):
Good point. You are still underwriting a commercial deal, do not get carried away with 90 percent or 100 percent financing. Those are exceptions, not the rule. We have had chances to do that and said no. We prefer to have equity cushion.
(26:57):
One pro that ties into that is that you are having your attorney write the loan documents. That means you eliminate arbitrary bank covenants, those hidden default clauses that can hurt borrowers. Traditional lenders sometimes include conditions that can trigger default even if you are paying on time. Seller financing removes that layer of risk.
(27:57):
So once again, seller financing gives you control over terms, flexibility in structure, and faster closing, all while avoiding some of the arbitrary restrictions of institutional lending.
(28:49):
For listeners who want to learn more about creative financing strategies and how to fund their first self storage deal, we have a special invitation for you. We have a Self Storage Academy coming up in just a couple of weeks. You can register at theselfstorageacademy.com. It is an immersive learning experience diving deep into topics like seller financing, deal analysis, and more.
Even if you cannot make that event, go to thestoragemastermind.com and join our free digital community filled with resources like this.
Joe Downs (29:35):
Jack, thank you for being a great guest. And to our listeners, thank you for tuning in to the Scott Meyers Self Storage Investing Podcast. We will be back next week with another episode to help you continue your journey to financial freedom through self storage investing. Until then, happy New Year and take care.
Big Announcer (29:35):
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