Financing Small Multifamily Under $1M: The Seller Note Fix

Financing small multifamily under $1 million is hard for one structural reason: the loan is too small for commercial lenders to bother with and the building is too big for residential underwriting. Most commercial shops have fixed origination costs that don’t pencil on a sub-$1M note, so they set a floor and stay above it. The answer is usually a local or community bank, plus a seller-held second to cover whatever the bank won’t lend.

Amandeep Singh, a New Jersey and Pennsylvania investor who now holds roughly 20 doors including a 10-unit and a 3-unit, ran exactly this gauntlet on his first 5+ unit purchase. He searched every commercial lender he could find, landed on a local bank, and then had to solve two more problems: the equity gap and a lender occupancy condition on a building where tenants were fleeing mid-escrow.

What follows is the three-part structure he used, the pre-closing leasing workaround that satisfied the bank, and how he built the capital base to be in the game at all.

Why Commercial Lenders Won’t Write a Loan Under $1 Million

The dividing line is four units. Up to four units is residential financing. At five units and above the property is commercial, and the underwriting, the documentation, the rate structure and the lender pool all change at once.

Singh crossed that line on a distressed 10-unit that had already fallen out of contract with another buyer. He put down a deposit and then went looking for money. By his own account he contacted every commercial lender he could find in the country, pulling names off the twentieth page of Google search results.

The repeated answer: the loan was too small. A commercial lender carries substantial fixed cost on every file regardless of size — underwriting, third-party reports, legal, servicing setup. On a $600K or $800K note, that cost eats the return. So most set a floor at roughly a million dollars and decline anything below it. Compounding the problem, the building was distressed, which pushed the value — and therefore the loan — further down.

The lender that said yes was a local bank. That is the pattern worth internalizing before you go under contract on a first small commercial deal:

• National and correspondent commercial lenders generally won’t quote below their minimum loan size, no matter how good the deal looks.
• Community and local banks hold the loan on their own books, know the submarket, and will underwrite a small balance commercial loan as a relationship.
• Start the lender search before the deposit goes hard, not after. Singh’s approval came together, but he was solving financing with money already committed.

Build the local bank relationship list in your target county first. It shortens the search from twenty pages of Google to three phone calls.

Closing the Equity Gap With a 20% Seller-Held Note

Approval from the local bank did not finish the deal. There was still a gap between what the bank would lend and the cash Singh was prepared to put in — and the reason he capped his own contribution matters more than the gap itself.

The 10-unit was distressed and needed significant renovation after closing. Money spent at the closing table is money not available for roofs, units and turns in month two. An investor who funds the full down payment and arrives with no reserves has bought a stalled project.

So he went back to the seller and negotiated a note for 20% of the purchase price, held for a few years. The bank’s first position loan plus the seller’s 20% second closed the deal without draining his renovation capital.

The exit on that note was planned from the start. Once the building was stabilized — occupancy restored, income predictable — the plan was to refinance and pay the seller off, converting the seller’s paper into conventional debt at better terms and a better rate.

Three things make this structure work rather than just sound clever:

• The first lender has to approve the second. A seller-held note behind a bank loan is not a side agreement; disclose it and get it blessed in writing.
• Give the note a real term and a real payoff plan. Singh’s was a few years, with refinance-after-stabilization as the stated exit.
• Protect your reserves as a hard constraint. Decide what you must keep for renovation, then structure backward from that number.

We requested the seller to authorize us to rent the apartment on behalf of him until the closing is done. Post which, we keep the proceeds from the rental. And in case the closing doesn’t happen, then we switch the lease back in their name. So it was a little complex, but we found a way.

— Amandeep Singh, Harman Homes

The Second Reason to Keep the Seller on the Note: Cooperation

The equity gap was only half of why Singh wanted the seller on a note. The other half was leverage over the seller’s attention after closing.

A distressed 10-unit comes with what he called a can of worms — deferred maintenance you didn’t find, a boiler nobody understands, a submetering arrangement that only makes sense if someone explains it, tenant history that never made it into the rent roll. The person who knows all of it is the seller, and the seller’s motivation to answer the phone drops to zero the day the wire clears.

A seller holding 20% of the purchase price has a standing financial interest in the building performing. He answers calls. He explains why the third-floor unit has never rented in winter. He signs the estoppel correction you need.

Singh’s framing was that you have to foresee this before you close, not after:

Practical version of the same idea:

• On any building where operations are opaque, price seller cooperation into the structure rather than hoping for goodwill.
• A seller note is the cleanest form of that — it costs you nothing extra and aligns the seller’s interest with stabilization.
• Pay the note off when you no longer need the relationship. Once Singh’s building was stabilized, the cooperation was no longer worth the cost of the seller’s paper, and the refinance made sense.

This is the part most first-time commercial buyers miss. They negotiate the note as financing only, then discover its second function by accident.

Meeting the Lender’s Occupancy Condition Before You Own the Building

Mid-escrow, tenants started leaving. They had learned the building was being sold and panicked about what a new owner would mean for them. Meanwhile the bank had made a specific occupancy level at closing a condition of funding.

That created a vise. Occupancy was falling, the buyer had no legal authority to lease units in a building he didn’t own, and the seller — already mentally checked out of an asset he was selling — had no reason to go find tenants for someone else’s building.

The structure Singh and the seller agreed to had three moving parts:

1. Written authorization from the seller allowing the buyer to market and lease a vacant unit on the seller’s behalf, with the lease in the seller’s name, prior to closing.
2. Rent proceeds to the buyer after closing. The buyer does the leasing work and keeps the economic benefit once the deal funds.
3. Reversion if the deal dies. If closing never happened, the lease stayed with the seller as landlord of record — so the seller was not exposed to a tenant placed by a buyer who walked.

The result: a tenant moved in, occupancy came back to the required level, the bank funded, and the seller took no risk for cooperating. As Singh put it, it was complex, but everyone got what they needed.

The transferable lesson is to treat lender conditions as problems to be engineered around, not verdicts. When a condition depends on something only the seller can legally do, the fix is a written side agreement that makes doing it costless for them.

Reading a Seller’s Real Motivation Before You Negotiate Price

Singh’s first purchase taught him to figure out what is non-negotiable to a seller before touching the number. That seller was already wealthy, had emotional attachment to the property, and did not need the money. If the building burned down it would not have changed his life.

On price he was immovable. In Singh’s words, if he had tried to reduce the deal by a dollar he would have lost it.

So he stopped negotiating price and asked for seller financing instead. The seller got his number — the thing he cared about — and Singh got terms, which was the thing he cared about. Neither side conceded on what was actually non-negotiable to them.

Before you open with an offer, work out three things about the seller:

• What is motivating the sale. Money, time, tiredness, estate, relocation. Each one buys you a different concession.
• What is untouchable. Often price, sometimes closing date, sometimes the fate of a long-term tenant.
• Where there is real flexibility. Terms, timing, holding paper, leaseback, credits and repairs.

Sellers who won’t move on price will very often move on structure, because structure doesn’t register as losing. A price cut feels like a defeat; carrying a note at full price feels like a favor. That asymmetry is where most creative deals live.

Building the Capital Base First: Partial Flips and Small-Dollar Rentals

Singh funded the move into multifamily while still holding a W-2 job, and the mechanism was deliberately unglamorous: buy cheap distressed and tax-sale properties, fix only the one defect blocking a sale, and exit early.

The logic is that a property often has a single problem preventing a transaction. The roof is shot, so nobody will finance it. The flooring is destroyed, so buyers can’t physically walk the house and form an opinion. Fix that one thing, get people through the door, and sell. He treated taking a property to full completion as an ROI reducer — low ticket, high return, out as soon as he had two to three times what he put in. Across roughly 35 acquisitions in two to three years, he sold about 15, many of them unfinished.

The counterexample is instructive. One remote Pennsylvania property cost $33,000 plus $25–30K of work — about $65K all-in. It would not sell at $90K, $85K, or even $75K. He rented it for $1,100 a month instead.

Run the comparison he ran: $1,100 of rent against a $65K basis. In most markets you would need to spend something closer to $250,000 to produce that same $1,100. The flip exit was blocked; the rent-to-basis math was excellent. He later pulled more equity out on refinance than he had put in.

His advice to his earlier self was to build a sustainable recurring base first, then chase higher-ticket opportunities. And his most expensive lesson so far was overleveraging — his fix now is maintaining a healthy debt-to-equity ratio rather than maximizing debt on every deal.

Frequently asked questions

Why won’t commercial banks lend on a deal under $1 million, and who will?

Commercial lenders carry large fixed costs on every loan file — underwriting, third-party reports, legal, servicing setup — and those costs don’t pencil against a small note. Most set a minimum loan amount around a million dollars and simply decline anything below it, regardless of how strong the deal is.

Local and community banks are the realistic source. They keep the loan on their own balance sheet, understand the submarket, and will treat a small balance commercial loan as a relationship. Amandeep Singh contacted commercial lenders nationwide on his first 10-unit before a local bank agreed to the loan.

How do you structure a seller-held second note on a multifamily purchase?

The common structure is a bank first mortgage plus a seller note covering part of the remaining balance, so your cash contribution stays low enough to preserve renovation reserves. Singh negotiated a seller note for 20% of the purchase price held for a few years, with a plan to refinance and pay the seller off once the building was stabilized.

The first lender has to know about and approve the second — this is not a side agreement to keep quiet. Give the note a defined term and a stated payoff mechanism, and confirm documentation with your own counsel.

What happens if tenants move out during escrow and the lender requires occupancy at closing?

You can ask the seller for written authorization to lease vacant units on their behalf before closing. Singh did exactly that: the lease went into the seller’s name, he handled the leasing, rent proceeds came to him after closing, and if the deal collapsed the lease reverted to the seller as landlord of record.

That last provision is what made the seller comfortable. He took no risk from cooperating, and the buyer got occupancy back to the level the bank required.

When does it make sense to sell a flip before finishing the rehab?

When one specific defect is the only thing blocking a transaction and fixing it restores the property’s salability. A failed roof stops financing; destroyed flooring stops buyers from walking the house. Repair that, get people through the door, and sell.

Singh used this to build capital while working a W-2, exiting as soon as he had two to three times what he had put in. Taking a property all the way to completion adds time, holding cost and construction risk that often reduces return rather than increasing it.

Why is valuation different on a 10-unit building than on a single-family house?

A single-family home is priced by comparable sales and by what the buyer pool in that neighborhood will pay. As Singh put it, you can build a Mercedes-Benz, but if the buyer is a Honda buyer, that’s what they’ll pay for it.

A 10-unit or larger building is valued off net operating income, and there is rarely a clean comp for it. That means you control a meaningful share of the value by adding income and reducing expenses rather than waiting for the market to reprice the neighborhood.

The bottom line

Before you put a deposit on a first 5+ unit building, line up two or three local banks in that county and confirm in writing what their minimum loan size and occupancy conditions are — everything else in the structure, including how large a seller note you’ll need to ask for, follows from those two numbers.