Commercial Property Subordination Strategies
BATTLECALL GUEST EXPERT: Tony Seruga, Maverick Real Estate & Contributor
There are many strategies in which to purchase commercial property. You can borrow money with a first mortgage, use a private investor's money, use your personal money, or use seller financing. Seller financing is also known as subordination.
In commercial real estate, you must learn to optimize purchase strategies as there are many differences between the properties themselves and the owners who are selling them. What works for one seller, may not work for another. The more options you have, the easier time you will have purchasing property.
Subordination occurs when the seller agrees to take back a second mortgage for a certain amount, often the remaining amount of the purchase price, after there has been paid a substantial down payment to the seller, and the new owner has already taken out a first mortgage on the property. In some cases, when a seller is extremely motivated, he or she may be willing to take back a second mortgage for far more than the remaining amount of the purchase price, even with no money down!
With some properties, it can take a few years to develop, build and lease out a property, and actually see a substantial profit. This profit may come from refinancing the property when it has greatly increased in value, selling it at a much higher price, and, therefore, generating a large amount of income. The seller who is subordinating is usually willing to wait a few years for this process to unfold, and take the money for the property later. The seller must trust the new owner, and often will verify that they are credit worthy to make this intended process happen successfully.
Sellers who are willing to subordinate may take exceptionally different terms. For example, some sellers may only finance with a substantial down payment such as 50% of the purchase price for a total of seven years, with interest only payments. Another seller may finance with only a 10% down for only two years with a balloon payment at the end of the term. A seller may know exactly what terms they require to consider financing, and other sellers may not even understand the option. It is a good idea to build a relationship with the broker or agent selling the property, so they can better explain the option to their sellers. Once the seller understands how it works, and how they will get paid for the property, even if it takes a little longer, they will be more open to it.
As you can see, seller financing, or subordination, is a great way to purchase a property. There will always be the owners who want to cash out of the deal at closing, meaning they will not consider seller financing at all, and just want their money for the property when the deal closes.
However, there are many people who will consider subordination, as it can offer great savings on income taxes! Remember that, because the seller is taking out a second mortgage, they are the first to default if the financing is not met. This can harm their credit, so always be sure that you follow through with your promises and take care of the debt within the time agreed. It is your responsibility as the purchaser to create the money in the property to pay off the financing.
Got an opinion? We want to hear from you. Post your thoughts or comments here in our Mortgage Warrior Forum. Come join the conversation and say hello...onward mortgage warrior!
|
Join Now Warriors Wanted
