Owner financing for commercial real estate/business

2 Replies


I would like to get an idea on how an owner financed commercial property deal might work in New Jersey - middlesex county and become aware of the pitfalls so I know what I'm walking into. I will be talking to my attorney next week but would still like to educate myself prior to the meeting so I would appreciate your replies

I own a one acre property with a 2000 sq ft building for the last 20 years. It operates now as a luncheonette/delicatessen. It's located in an industrial park and business is ok.  I was approached by a previous tenant who offered to buy the property  from me and we had some discussion on the  850k range. He claims to have 400k for downpayment (I have no reason to doubt that he does). I have a 250k low interest loan on said property that is going to be paid off in about 8 years. My plan was to keep the property untill its paid off and use it for retirement income as it is generating about 5k a  month in rent. I started to worry about it when my existing tenant started being late on his rent and think he might soon bail. I dont want to take over the business as I have other occupation at the moment and so im entertaining the idea of selling it and possibly financing the property for the buyer. Im aware of the fact that resent real estate laws might make this hard and costly but would like to hear specifics on the best way to structure this so in the event of a default from the buyer I can step in and foreclose in order to maybe fix and rent or resell. I dont have the funds to pay it off now and would need every penny that I can pull out of this for other investment. I bought he property about 20 years ago for 300k The property might appraise for about 500k from a bank but similar properties are listed in the immediate area and have sold for about 1 million.  

here is my calculations with a 400 k down-payment and 850k selling price. Please correct me if im wrong

down-payment: 400k

original note pay off 250k

RTF 8k

capital gains tax aprox 20% of 100k (400k-300k)gain ) = 20k

lawyer and fees 12k

Net cash on closing 110k

6% Trust Deed for 450k over 15 years will generate about 4k / month 

trust deed re-occurring expense or initial expense. is there one?

My more specific Questions:

Am I doing the calculations right? 

is this how the capital gains tax work (pay capital gain tax on down payment now and the rest on the monthly payments)?

is a trust deed the best option in New Jersey or can I do a land contract?

what happens in the event of a default? how long does it take or is it even possible to foreclose?

what happens if the buyer destroys or contaminates the property or uses it as collateral or doesn't pay the insurance etc

Can I ask for other collateral? maybe a personal residence or other real estate he might owns?

Do I have to financially qualify the buyer and where to find the guidelines to follow?

Its a lot to ask but I was hoping to get at least some answers to the above questions or maybe even more questions/concerns to ask my attorney when we meet next week.

Thank you in advance

Make sure your attorney is well versed in these and has completed many of them before. You do not want to be their (test subject) for a trial run.

You need to go over what if's and how expensive it would be to foreclose and what the timeline would be to get the property back and costs involved. You also may want to require in addition to down payment from the buyer 6 months to 1 year mortgage reserve payments in advance.

Do not set your interest rate below market or you could get hit with imputed interest charges on taxes.

No legal advice given.

Just a couple quick responses (and I'm no expert so you should probably verify with one if necessary):

If he doesn't pay and the building is collateral then you would have the right to foreclose, however, foreclosure in NJ can take a long time and be costly. I'm coming from the residential world so this may be different in the commercial world. 

If the borrower stops paying their insurance you can put forced insurance in place and back charge them for it until they get their insurance back in place.

I don't see why you couldn't request other collateral though it might thin your pool of potential borrowers and you might run into other legal challenges if they're putting up a residential home as additional collateral. I would think the more common route is to have them sign a personal guarantee so they would be directly liable for unpaid monies even if their business folds. 

And just to reiterate: don't take any of this as fact and make sure to verify with the proper people before going forward. Good luck!