Leveraging Seller Carryback Financing on Your Next Commercial Property

Seller carryback financing is a fancy term for funding the purchase of a piece of commercial property through its owner. This means the property deed will be transferred into your name, and you will make your monthly mortgage payments directly to the previous owner. He or she is the one financing the deal, not a financial institution. This works well for commercial property acquisitions for many reasons.

It Cuts Out the Middleman

First of all, neither you nor the property’s owner may want to deal with the hassle bank involvement might entail. If you have a down payment and payment plan that is acceptable to the property owner, you might be able to come to a financing deal between the two of you and cut all the paperwork required in a bank loan application process. This is one reason why investors leverage this type of financing; it just makes things easier for both the buyer and seller.

It Makes a Deal that Works for Both of You

There is more flexibility with seller carryback financing which means that you and the property’s owner can make a deal that works for you both. The two of you determine the down payment, interest rate, monthly payments, and amortization duration. If the owner is having difficulty selling his or her property, you might find him or her more willing to strike a better deal than a bank would. He or she wants to offload the space and are open to negotiating, which leads to…

It Finances Within Your Cash Flow

If you approach a traditional financial institution for a commercial property loan, you’ll need to cough up 20 to 25 percent for the down payment. That’s a hefty chunk of change, and you may not have that sitting around in your bank account. If you work directly with the property owner, you may be able to negotiate a smaller down payment and interest rate, which saves you money over time and gets the property off his or her hands—exactly what you both want.

These are just some of the advantages of this type of financing. You and the property owner have complete control over the sale of the commercial space, and that can only benefit you both. If you find the right piece of property and an owner who is willing to work with you, you’ll see why many investors leverage seller carryback financing when they acquire commercial property for their portfolios.

When Should You Use This Strategy

Even though this type of financing can be negotiated with a seller on any type of deal, it's best utilized when financing distressed properties with an upside potential. Similar to the BRRR strategy, repositioning a commercial property can be very lucrative once you have rehabbed units and have placed sound tenants in place. Once refinanced at the new appraised value, you can potentially pay off the sellers note, recoup your original down payment, possibly pocket more cash for your next project and continue to cash flow with the new financing in place.  If you can explain to the seller you have plans to refinance the property after a set period of time, you can easily negotiate them holding a note for you because they won't have to wait the full term you originally agree upon.  You pay them off sooner than expected and use the proceeds to scale your portfolio. It's a win-win for everyone. 

Add Capital Connex to your toolkit of financing options to help scale your Real Estate Investment Portfolio.