By: Nate Gant, SVN Cornerstone Advisor
As interest rates climbed in 2022 and Spokane rents hit a ceiling in September 2022, we observed that what buyers could pay for a property decreased. Despite this, Seller’s price expectations remained the same. To resolve this issue we began looking into two solutions, assumable mortgages and seller financing.
Seller financing is becoming an increasingly popular option for those looking to buy or sell commercial real estate. Although there are some risks associated with this type of loan, it can be greatly beneficial for both buyers and sellers.
So what is it, and how can you take advantage of it?
What is seller financing?
Seller financing is a type of loan in which the seller of a property acts as the lender. Owners can potentially sell at a higher price and they can also continue to receive similar cash flow, without the risks of maintaining the property or dealing with the day to day headaches of tenants.
There are several reasons why seller financing can generate a higher sales price. First, the seller is able to offer more favorable terms to the buyer, which may include a lower interest rate or a longer repayment period. This can make the property more affordable for the buyer, which typically leads to a higher sales price.
Who does it benefit?
Seller financing can be a great way for buyers to purchase a property without having to place the high 40-50% down payment required by many lenders. Although buyers may potentially have to pay a higher price, a lower down payment requirement and a lower interest rate could make up for it.
Sellers benefit because they can get a higher sales price, and they also may get potential tax benefits.
Why is it becoming more popular?
From 2018 until 2022 Q3 we saw historically low interest rates, low down payment requirements and rising rents. Cap rates became compressed and historically high sales prices per unit were reached.
What are the risks?
The risks associated with seller financing include the potential for the borrower to default on their loan, the possibility that the borrower may require the seller to do some deferred maintenance, and the fact that owner financing is for buyers that may not qualify for traditional financing.
One of the biggest risks associated with seller financing is the potential for the borrower to default on their loan. To mitigate this risk, it is important to carefully screen buyers and only offer financing to those who have an excellent track record as operators in the market and are well capitalized.
In Conclusion
It is important to remember that owner financing is not just for buyers who do not qualify for traditional financing. In fact, many times owner-financed deals are done with good, experienced, well capitalized multifamily buyers willing to pay a premium for the right property with the right financing.
Ultimately, due to its many potential benefits, seller financing is becoming increasingly popular among both buyers and sellers in 2023.
If you are interested in Seller financing, please reach out to me and I would be more than happy to assist you in the process or discuss if this is a good option for you to achieve your goals.
Nate Gant is an Advisor with SVN Cornerstone. Nate has been an active member of the Eastern Washington real estate community since 2010. He has brokered more than $100 Million in real estate transactions, specializing in land development, REO and investment properties. To get in touch with Nate, email nate.gant@svn.com or call 509.993.4440.