How does Seller Finance and Commercial Lending work together on a deal?
Sep 27, 2009
in
Commercial Mortgage FAQ
ok, this might be a rather dumb question. But how does seller finance work on commercial buildings? I outlined what I "think" it is below.
lets say you have a building for 1,000,000 at 6% Interest Only for 5 years.
Seller is willing to carry back 80% (800,000).
Lender is willing to finance the remaining balance with 20% down (So this equates to 40,000 cash you need to bring to the table) 160,000 is the amount the lender is going to finance.
I am assuming that the lender has the first position with his loan and the seller finance goes into the second.
What can be done to protect the seller should the buyer default on the loan?
Am I Missing something?
Any infomation is appreciated
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One comment
rich8259 on September 27, 2009 at 2:24 pm
Well, you’ve got the basic theory down but your execution is a bit flawed. First of all Seller financing can only be done if the seller owns the asset free and clear of any debt (he could have some debt on it but that would make it an AITD and totally different).
The lender would be foolish to allow the buyer to come in with nothing down thus 20% down would make for a vested interest in the property from the buyer. The Seller would then finance the 80% at an agreed upon interest rate usually interest only so as to avoid partial capital gains tax on the principal paid back. There would be no lender involved and the Seller would in effect act as the bank.
Using your illustration then, on a $1,000,000 purchase, the buyer would put down $200,000 and the seller would finance $800,000 at 6% interest only for five years. The Buyer would then make 60 installments of $4,000 and then have a baloon payment of $800,000 due at the end of the 60th month.
I hope that sorts it out a bit for you.