NEW YORK — Question: I want to purchase commercial real estate, but I can’t finance it on my own, what can I do?
Answer: It is not uncommon for a purchaser of commercial real estate to engage in some sort of commercial financing since it may not be possible to rely on traditional bank loans or conventional mortgage financing. Here are some popular methods of creative financing:
Seller financed: In this scenario, the seller acts as the lender allowing the buyer to make payments directly to him or her instead of obtaining a commercial loan. The benefit of this method is that there are no qualification hoops to jump through, the terms can be more flexible and lower closing costs. Often, a seller-financed property will use a type of balloon payment.
Lease to own: In a lease to own, a buyer leases a property but has an option to purchase it in the future at a predetermined price and terms. The benefit of this method is that it allows the buyer to fully try out the property before deciding to purchase it. Additionally, if the buyer operates a business, it gives her time to see if the business will be successful or not before committing to a purchase. Seller and buyer may decide to apply a portion of the monthly rent towards the principal balance of the purchase price.
Private money lending: There are a surprising number of people who are looking for a place to invest money. Real estate investments can be an excellent place for an investment due to the fact that the loan is secured — protected by the real estate itself. In other words, if the borrower defaults, the seller can foreclose on the real estate and use the proceeds from its sale against its loan to the buyer. The benefit of private or hard money lending is that it is faster to obtain, can have more flexible terms, there is less bureaucracy and may be used even if the buyer has a poor credit rating.
Joint ownership/partnerships: Everyone has a unique skill set. Joint ownership of real estate or a partnership allows the buyer to take advantage of varied skill sets while making a purchase manageable. For example, one person may have experience in commercial real estate, one person may have the financial backing to purchase and another may have experience in managing property. Buyers need to be careful to have a very clear understanding and joint ownership agreement or operating agreement that defines each person’s roles and responsibilities and options for buyouts of the other parties.
Each method of creative financing has its own risk. Be sure to consult a real estate attorney before creatively financing your first commercial property, as they will be able to save you from the common pitfalls.
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