Owner Financing in Commercial Real Estate Purchases

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Owner financing (also called seller financing or owner carry-back) is a powerful commercial real estate investment strategy for buyers and sellers. Most people in real estate know how powerful it is for a buyer to receive seller financing. Most people, though, don't realize the advantages that are also available for the sellers.

Commercial owner financing is when the seller of a property allows the buyer to pay all or some of the purchase price over time. Typically, the transaction is set up as a private mortgage, which means that the seller holds a lien on the property just like a bank. In many situations, this may be an optimum solution for both the buyer and seller.

Owner Financing Benefits for the Buyers

Owner financing saves thousands of dollars on closing costs with a private mortgage. Depending on the relationship between the buyer and seller, the seller may agree to help with some or all of the closing costs and other fees. Additionally, if the financing is structured effectively, the buyer can literally save thousands of dollars in application fees, buy-down points, and other up-front charges that banks and mortgage brokers can require as the price of a loan. Closing costs charged by banks and mortgage brokers can be significant. On a commercial loan this can mean savings of tens or hundreds of thousands of dollars.

Despite the growth in the number of mortgage options available to commercial buyers, there are thousands of individuals who do not qualify for conventional financing even if they have a strong credit profile. With seller financing, the only criterion that the buyer has to meet is that of the seller's choosing.

Owner Financing Benefits for the Seller

Many owners who are considering selling their property reject the possibility of owner financing. This can be a hasty decision without considering the benefits of offering owner financing. In fact, owner financing can add thousands of dollars of profitability to your sale.

With seller financing you may be able to attract more buyers who might otherwise find it difficult to purchase your property. In many areas, rising commercial prices have made financing difficult. Payment terms from conventional financing can run higher then the economics of the transaction can support. With owner financing you have a significant ability to structure terms that work for both the buyer and the seller.

Owner financing allows the seller to continue to profit from the transaction for years to come. The seller will no longer own the commercial property, but will still be earning passive income from the interest on the mortgage. This can greatly increase the overall profits of the transaction by taking part of the purchase price as a promissory note.

Finally, offering owner financing can save the seller massive tax charges. If the owner is 'cashed out' they must either quickly reinvest the profits in a 1031 Tax Exchange, or must pay taxes on sometimes large profits. If instead the owner accepts payments on the transaction, the tax liability can be spread out over many years. The potential immediate tax savings for the seller can be enormous.

So there are powerful benefits for both the buyer and seller in using owner financing in commercial transactions. More transactions can get done, at much better economic terms for both parties. Every commercial transaction should be considered for the benefits of owner financing.

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