With commercial real estate sales volumes down 60% nationwide, it seems as if almost every market is slowing down. Lenders are being significantly a lot more conservative … and sellers are hesitant to accept that their properties are now 5 to 10% less valuable than this time two years ago.
Here is a tool that may possibly assist you be the “Larry the Cable Guy” in your local marketplace and “Git a Deal Done”. You know it already…
It’s called the “Owner Carry”
The owner carry is when your Seller (the present Owner) “Carries” component of the debt you use to purchase their property. This is normally in the form of a note that sits in second position behind the Mortgage.
When you buy a property with an Owner Carry, you basically have two loans. The 1st loan is from the bank or other lender and is generally the largest, the second loan you owe to the Seller.
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Power-Play:
If you discover a Seller who owns their property totally free and clear, you can negotiate for a 100% owner carry. In this scenario, you supply a down payment and the owner carries a single loan. You do not even require a bank for this transaction.
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How to negotiate an Owner Carry …
When discussing an Owner Carry with the Seller it completely imperative you comprehend the advantages the Owner Carry gives THEM. You should establish the Owner Carry as a win-win proposition. You win because it lowers the quantity of dollars you must borrow and the money you need to put into the deal.
The Owner/Seller wins in 3 techniques.
1) No Carry … No Deal …
In several instances a considerable Owner Carry is the only way the deal makes sense in the current marketplace – it may be the only way you will complete the purchase and the only way they can sell the property.
With our credit crunch in full swing, negotiating an Owner Carry may be significantly less difficult than getting a bigger mortgage. And when you run your investor’s pro forma you may possibly see that an Owner Carry offers the only way for you to hit your ROI numbers.
Rule of thumb is this:
- The less they owe
- And the much more motivated they are to sell – for whatever reason …
The more likely you will be able to negotiate a favorable Owner Carry
2) Maintain an Income Stream …
An Owner Carry permits the seller to maintain an income stream from the property without the hassles of property management. They get Passive Income, You manage the property. For a Seller in trouble who has negative money flow and is “feeding the beast”, selling with an Owner Carry actually reestablishes positive money flow for them.
3) Defer Cap Gains Taxes …
An Owner Carry defers the Seller’s Capital Gains tax payments on the quantity of the loan.
Summary:
An Owner Carry advantages the Seller since:
- It gets the Deal Carried out
- It gives them Passive Income
- It defers Cap Gains taxes
Ask for it upfront…
If you require an Owner Carry make sure you ask for it in the LOI. Follow up the letter with the call directly to the seller and tell them why you really feel the Owner Carry is a win-win structure. And make positive you let the Broker know this is the only way you will purchase the property. They turn out to be an ally in convincing the Seller to accept.
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Power Tip:
If the numbers make sense, you may possibly wish to present a Two-Part Supply:
A higher price with an Owner Carry and a lower price without 1. You will basically give them full price, in exchange for favorable terms on the Owner Carry.
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Carry Back Terms:
Ask for as lengthy a note as you can get. Typical time periods are 3, 5, 7 and 10 years. Offer a reasonable interest rate — some thing around 6% in today’s market. And try to make the Owner Carry co-terminous (end at the identical time as) your underlying mortgage.
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Yet Another Power Tip:
If you require dollars for rehab, here is how you can use the Owner Carry to get that cash from money flow at the property…
When you and the seller agree that rehab is important, you can ask the seller to defer payments on the owner carry back for a period of many months.
The terms may well look like this: a five-year note for ,000 at 6% interest with no payments for the initial six months. This would give 00 a month for a total of 00 you can use for improvements … taken appropriate out of the property’s money flow.
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Those are the basics of the Owner Carry. Make sure you review and comprehend the concepts. The Owner Carry may be the key to your next Commercial Property buy.