Benefits of Seller Financing

Often times one will see a commercial real estate opportunity that offers Seller Financing. The question is then asked by the Purchaser, "what is the benefit of Seller Financing if I still have to pay the same price?" To answer this we will have to walk through two financing scenarios: one that involves a "conventional financing" process and one that involves seller financing.

Example One: Purchaser has $50,000 in which to invest in commercial real estate. She has located a property that is for sale for $300,000. Purchaser has talked to several lenders and has discovered a lender that will loan her 90% of the purchase price at 8% over a 20 year amortization. The payments for the loan are $2,258 per month. The purchaser must come up with the other 10% or $30,000. Closing costs are estimated to be approximately $5,000. The Purchaser would like to make some improvements in order to attract a tenant. She finds a contractors who estimates that the improvements should cost about $6,000. The purchaser only has 4 months to find a tenant before her remaining $9,000 has run out! This does not allow her much flexibility.

Example Two: Another Purchaser has the same $50,000 in which to invest in commercial real estate. He is looking at a different property which is also $300,000. He talks to the same lender who offers the same loan terms of 90% of the purchase price at 8% interest to be amortized over a 20 year period. The Purchaser will still have $5000 in closing costs and $6000 in improvements. This purchaser then approaches the Seller of the property and asks if the Seller will finance the remaining $30,000 of the price at 10% interest over 5 years. The Seller would like to receive the additional money from the interest and agrees. This is an additional monthly payment of $637.00 per month. Although this Purchaser will have a monthly note of $2895.00 for the first 5 years, this purchaser still has $39,000 in cash in which to cover expenses or 13 and 1/2 months of mortgage payments. Big Difference!!!

The extra cash on hand can cover anything from mortgage payments to repairs to the purchase of other properties. Always ask if the Seller would be interested in owner financing. It may benefit both of you.