Seller Financing: It Might Be Your Only Option

Posted by: Chris Shanks
Investment Analyst

775 336 4620
cshanks@naialliance.com

Chris is responsible for analyzing, valuing and marketing properties for the NAI Alliance Investments Team. He is also involved in the disposition and acquisition of investment properties for clients.

If owners truly need to get properties off their books they may have to carry back the note to get the transaction done.The media might be telling us that banks have received a plethora of money to facilitate their lending and continuing of operations, but that doesn’t mean they’re giving it out. Many bank managers will tell you that they’re ready to lend, which they will if you have property that has 90+ occupancy, strong in place tenants, and long-term leases. The only problem is the owners of these properties don’t want to sell them in a down market, and therefore they represent a small percentage of the properties on the market. If owners truly need to get properties off their books they may have to carry back the note to get the transaction done.

Banks are requiring debt service coverage ratios of at least 1.35 and above. Often riskier properties have to achieve even higher ratios than that. This ratio is causing lenders to lower their loan to value amounts forcing buyers to come up with more equity. More often than not buyers can’t justify a high equity contribution because it would drastically lower their internal rate of return, which in these times needs to be 20%+ to justify the purchase of a riskier property. What all of this means to the sellers of risky properties is that their building probably won’t sell until banks loosen up their lending practices or they (sellers) provide the lending themselves.

Often times the sellers of property don’t need the proceeds from their sale to be a lump sum. Carrying back the note will provide them with an initial “pop” in the form of the buyer’s equity, and then they can claim loan payments for the entirety of the note. Being the issuer of the note sellers can negotiate the terms that need to be present for the deal to get done. Obviously there is more risk with this procedure because the sellers will need to do the due diligence and underwriting themselves, as opposed to the bank’s staff. However, real estate professionals and attorneys can help with the underwriting and drafting of the loan documents. While there are more implications to this process than I’ve mentioned (tax, legal, etc.) seller financing can sometimes be the only way a property is going to change hands. So if you’re having troubles getting you property to “move” consider offering seller financing.