Owner Financing a Commercial Property

Commercial real estate can be particularly difficult to sell in today’s post financial crash times. Prospective buyers often just can’t get financing through traditional banking channels. On top of that, if your property is unique or in a depressed economic environment it can be very tough. That’s why many commercial property owners have turned to seller, aka owner financing a commercial property to help sell a commercial property. Offering to owner finance the transaction opens up a lot more possibilities to sell your property. (By the way, these rules apply to seller financing a residence.)

So let’s say you are thinking of offering seller financing to help sell your commercial property but really don’t want to wait 15, 20 or more years for your money. This is where selling the note created from the sale comes in. And while note buying industry purchases real estate notes at a discount, there are some things you can do in the transaction to mitigate that discount. Below are steps you can take to overall put as much cash as possible into your pocket.

1. Advertise the option for seller financing in your property ads but put a minimum down payment as a requirement for the owner financing. I would recommend a minimum of 30% and more would be better. Don’t be shy about this. There are a surprising number of people with cash to invest in a business, even if their credit falls short for securing a bank loan. A large down payment does several things for you. It a) Weeds out the dreamers with no money, b) Dramatically reduces the possibility of a default by the buyer and c) Significantly reduces the amount of a discount from a commercial note buyer so you end up with all those down payment dollars in your pocket.
2. Have the prospective buyer provide a tri-merge credit report for your review. Check for recent (last 3 years) bankruptcies and foreclosures. Also, look for outstanding judgments. I would turn anyone with these problems away. If these aren’t an issue, look at the middle credit score. This is a judgment call but I would want to see at least a 640 mid score. Most commercial mortgage buyers like to see a mid-credit score above 640 and even if they will go lower, higher means more money in your pocket.
3. Set as high an interest rate and as low an amortization period as possible for a lower discount from a note buyer. I would recommend 7% or higher and 15 years or lower respectively. You might also want to set a balloon payment, particularly if you don’t plan on trying to sell your commercial note but don’t make it too short if you want to sell the note as a buyer may assume since your buyer can’t get financing now, they are unlikely to be able to do so in 1 to 3 years. I would go for a 5 year balloon. This should allow the buyer time to get his credit in order for a refinance.

There you have it, the best way to owner finance a property to move the property quickly but also to make the note more valuable to a commercial note buyer. I hope this was helpful.