Creative Financing on the SELL Side

[Don Konipol]

We think of creative financing as be beneficial to the buyer; almost never do we think of seller benefits (except for the “illusionary” so called “benefits” gurus suggest buyers use to entice sellers into “creative” situations). 

BUT, my experience has included numerous situations where I utilized creative financing as a seller for my (and arguably the buyer’s) benefit).

Rather than relate specific situations or experiences, I’ll list the premises upon which these deals were based; and the RESULTS of my actual transactions

1. In certain circumstances, ESPECIALLY with special use property, property not eligible for financing (usually because of condition, location, or use) and property attractive to non credit buyers, selling with OWNER FINANCING can increase the selling price significantly, and provide an above average interest rate on the loan.  I’ve sold properties for 20 - 35% ABOVE cash price and obtained interest rates 6 -8 points above prime rate.  

2, selling with “wrap around” financing can not only accomplish #1 above, but also provide “profit” in the form of the differential between the underlying interest rate and the interest rate charged on the wrap loan.  Last year we sold a retail center we owned and wrapped an existing $650,000 loan at 4% into a $1,2000,000 note at 10%.  We “netted” the difference between 10% on the underlying $650k ($65,000 per year interest) and the $26,000 in interest paid out, or $39,000 PER YEAR.  On the total loan we received $120,000 in yearly interest and paid out $26,000, so $94,000.  

3. Before sale refinance for largest loan possible at lowest rate, and sell with note remaining in place.  This lowers the down payment for a buyer significantly and opens the buyer pool to include buyers who otherwise wouldn’t qualify for financing.  Experience has shown a 15 - 20% increase in selling price over the “cash sale price” is common.

4. Combine with any of the above, accept a first lien or good second lien on other property the buyer owns in lieu of a down payment.  Again,, 15 - 20% greater selling price.  I’ve done this a few times - but an investor I know has done it literally dozens of times. 

5. Partnership.  Okay. This one’s a little tougher.  But with property you want out of, and someone lacking sufficient capital and or credit capacity, but good experience and knowledge wants to purchase - consider a partnership with the “buyer” having the right to gradually obtain full ownership.  We entered into such an agreement 5 years ago.  Due to Covid related issues the2 year timeline became 5 years. BUT, the “partner” fully bought us out last week, and we still ended up with an 82% gain on our investment.  Meanwhile, over the 5years we had few management headaches, no “capital calls”, and ultimately a successful investment during trying times.