In selling commercial property part 2, we continue the discussion of the ins and outs of how sellers might better protect themselves when providing seller financing to buyers, especially when the down payment is far too low.

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Transcript:   Where we last left our intrepid seller of a commercial property, negotiating the carryback he was going to secure by his old property. Now the guy was only going to put a hundred thousand dollars down. There’s no way to make that secure by changing the wording in how we describe it. A hundred thousand dollars down on a million and a quarter property is not safe. What you have to do is what I suggested to this guy. You need to check with your real estate attorney and the state you’re considering doing this but you can have what’s known as a land contract. We don’t need to talk about that here except for one factor. The main difference when you do this is that when the sale closes the buyer is not granted what we call fee title, fee simple. It’s not like you buy my car, you give me the money we agreed upon, I give you the pink. You don’t get the pink in this transaction. What the note says inside the land contract, or contract of sale, they call it different things in different states, is you get equitable title so your equity is safe. You start out with a hundred thousand down, that’s your equity. What it does say is if you do these three things, when you can verify those three things have been accomplished then the seller will grant you actual title. In this case I’m recommending that the seller not grant a real title until the loan is paid in full and that will be in ten years. That makes up for only getting the hundred thousand dollars down. If done right, not all the time because it depends on the laws or whatever state, if the loan goes bad, and let’s face it a hundred thousand dollars on a million and a quarter that the odds of that have increased. If the loan goes bad, they can then sometimes even avoid foreclosure, they just take the property over using the land contract and whatever is required legally in that state. They may not even have to go through the foreclosure process formally, okay? The other thing that happens is this: the buyer may say why on earth would I go through these hoops? Let me give you the best reason. They were going to be paying the payments on the underlying five hundred thousand that is on there by the seller’s father. Even though that interest rate is only 3 1/2, the payments are quite a lot because it was amortized for twelve years. If they do it my way, the sellers of the property can sell it this way. If you do it my way where you’re paying 4% amortized for ten years on the million one fifty, it’ll be about six hundred and fifty to sixty dollars a month cheaper than if I just carried a hundred and fifty thousand second and you assume the first. Once they look at that what that really means is they’re saving just short of seventy-nine hundred dollars a year in cash flow by doing it that way. Why wouldn’t you do it that way? They’re already a tenant in the building. In this case they’re taking the most square footage of any tenant, which means they’re not going to benefit from the rent they would have paid so this transaction is actually going to increase their cost of doing business no matter what it is. By cutting it by six-fifty or more per month, we’re actually helping them quite a bit, which I think will be very attractive to them. Next time we’re going to discuss what if they structured it differently and maybe a little bit more traditionally.