In Part 1 of a brief 4 part series, we discuss a case history of how, when selling commercial property, a seller can impressively increase their return when providing seller financing for the purchase.

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Transcript:   Today we’re going to talk about a question I answered for a client about how to structure a sale of a commercial property they’ve owned in a small partnership for years. He bought it from his dad who carried back about a half a million dollars at the family rate of three and a half percent. Now, the payments are amortized over an original twelve years so that payments are relatively high. They’re going to take a very small down payment, only a hundred thousand dollars, which their real estate attorney said he doesn’t feel comfortable with. My comment was he doesn’t feel comfortable because he has a three digit IQ on a price of a million and a quarter. That’s okay, sell it to the tenants, take the hundred thousand dollars down. His question addressed what to do with the note that they’re going to carry back for the difference. What I told him immediately was you don’t want to carry a traditional second position note secured by the building. You want to do what’s known in the business loosely as a wrap around note. In principle it means exactly that. It means instead of them carrying back a note on the difference between a million and a quarter, minus a hundred thousand dollars down, minus the five hundred they owe their dad, instead of having the note be that amount the note would be just the difference between a hundred thousand dollars down and the remainder of the whole price, including dad’s five hundred. What they would do, they would construct a note using a real estate attorney and that note would be for a million one hundred fifty thousand dollars. It would include, inside that note, the five hundred thousand dollar first position note that is secured by their dad on the property. Now, the way we do that is this. You structure the note as if the seller is lending the entire million one-fifty. The payments are structured on that. In this case it’ll be four percent interest amortized over ten years, no balloon payment whatsoever. We’ll talk about that later. What will happen is this, they will get payments that will come directly to them. The buyer will not be responsible, in any way, for making the payments on the dad’s five hundred thousand existing note. The sellers, my client, will take the money from the first payment and take enough money out of that each month to pay the five hundred thousand dollar payment. Now, that note, that five hundred thousand dollar note, has about eight and a half years to go. The note they’re carrying back on the property would have ten years to go by definition. What’s going to happen is by doing it this way, wrapping around, and we’ll get deeper into that later, the seller’s, my client, will be able to get the equity gain themselves on that five hundred thousand. What are they doing? They’re paying three and a half percent on five hundred thousand. They’re being paid four percent on a million one-fifty. Now, normally that loan would’ve only been six hundred fifty thousand and then the buyer’s, the tenants that are buying it, would’ve just paid two loan payments, one of them six-fifty that the seller’s are carrying back and the existing five hundred thousand note that the seller’s owe their dad. By doing it this way they’re making a spread of a half percent on that amount of money, and simultaneously they’re getting four percent on a million one-fifty instead of four percent on six hundred and fifty thousand dollars. We’ll continue this next time.