How common is seller financing in CRE?

Question

On BP, I read of deals such as 70% bank financing, 15% seller financing, 10% downpayment.Are these more of the exception, or are deals like this fairly common?

Bill Gulley · Answer

Always nice to better define "commercial" as to which area......but;

Seller financing is very common in commercial, smaller multi-family deals are common. Restaurants are very common, almost the only way to sell some mom and pop joints, smaller non-franchised motels, retail stores/business.

It's very common in business only transactions and assuming leases.

C-stores/grocery stores are another good seller financed industry.

It's not that banks won't finance small commercial (or even larger one) but financing can be tough under 1M, even harder under 500K. The LTV drops and most buyers of small business usually won't have cash.

Very common when partners buy out another partner, often it is the best way due to taxes.

Same issue with small multi-family complexes, again, banks want in at an LTV in 1st position as low as they can, when a buyer has less management experience, the deal is a little thin, the way to swing the deal is with the seller carrying back.

About 25% of my loan servicing was in commercial notes/contracts but the dollar volume was about half the portfolio, meaning the average dollar amount was much more than residential transactions.

Terms on commercial can be about the same as residential, 3-5 year balloons, it's more complicated to underwrite and set up the financing strategy.

I don't really agree with Tim's assessment overall, but it certainly depends on the type of property, the buyer and alternative financing sources.

One issue that is common is the lack of management abilities of a buyer, when you have a business manager type, like a C-store manager trying to buy out the owner, there are many areas of ownership that are beyond the expertise of a store manager and they usually are weak on the down payment side as well. Seller financing is a very handy tool, especially for a retiring business owner.

Anyway, that's what I enjoy doing more than anything, putting commercial deals together.

The OP is a little off on your math, but banks usually want 10% as skin in the game, 15% is better, the bank may take 75/70% or less with the seller making up the difference. Again, depends on the lender's taste for the type of property, business, and the buyer. I've had no money in some deals with a seller taking back 25/30%, but that is not common. Just depends. :)

Chris Winterhalter · Answer

@Alex Silang

Bill Gulley is spot on...it's very common for smaller sized transactions on many specialized real estate classes (i.e. small non-branded motels, restaurants, car washes, multi's, mixed use, etc).  However those assets tend to be more difficult to sell in the first place, making seller financing a necessity especially when the seller is trying to get a decent price.

It's not going to work for every seller, buyer, or situation.  And the chances are that if it works for the seller it probably won't work for the buyer and vice versa.  But when it does work it can be a great situation all around.  It's another tool in our tool belt for financing & deal structuring.  It should always be considered but not always used.

I successfully acquired a 64 unit complex with seller financing (10% seller 2nd @ 5%, fully amortized for 6 years).  Bank loan was 80% & we brought 10% to the table.  However we were only able to bring so little to the table because of our strong banking relationship.  We had the ability to bring 20%-25% to the table with reserves.  I doubt it would have been approved otherwise.  And the deal worked better for our situation with 10% down.  It's really tough to get commercial bank financing with less than 15-20% skin in the game.  Many banks will want 10% minimum but that standard is for strong borrowers with existing relationships.

If the goal is to purchase a property with seller financing (exclude SFR's) because you don't have the means to purchase it otherwise, then I feel like you will be sadly disappointed, by either finding very few deals, finding out that you are unable to close, or getting into the wrong property.  The exceptions might be with specialized asset classes as mentioned.  But those are more operator driven in nature and come with a whole other set of risks.

Tim Shoultz · Answer

I don't think it is very common or advisable.  Commercial deals don't tend to be as short lived as many of the residential deals people invest in, thus you are at more risk for vacancies or economic downturn.  I've bought deals with as little as 7% down and the seller carried the entire note, however, I owned a business that was filling the remaining 32% of the building so my cash flow was very strong (low risk).  I later refinanced as the rate I got on seller financing was not very good.

In general, I do not advise buying properties in this manner.  It is a great way to give a property back IMO!.

Martin Z. · Answer

in our area, it's rare, but i've seen it happen seldom when  a seller has a less desirable property to sell, or they're making loads of profit on the deal. Most people who sell, want to cash out and move on .

James Wise · Answer

In my experience they are more common than in residential but still not the norm.

How common is seller financing in CRE?

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