CHAPTER 6
Adding Value in the Selling Process

This chapter is all about getting the best price and adding value when selling your commercial property. Discussed are why and how commercial properties increase and decrease in value, a power real estate broker's method of determining the highest sales price, 12 mistakes to avoid when selling, doing value-adding before selling, whether you should do a for sale by owner, whether you should owner-carry, and doing a master lease purchase.

DETERMINING THE MAXIMUM SALES PRICE

Let's start out by looking at six reasons why commercial property values go up.

First, there is an expectation that they will increase. From the moment an investor decides to buy a property, whether they intend a short- or long-term hold, they have likely been burning with desire for the property to skyrocket in value. You cannot underestimate the power of intention. Unfortunately, whether the property's value goes up or not has more to do with your ability to raise rents over time than pure intention.

The second reason is the innate drive of the investor to raise rents. However, the ability to raise rents is dependent on what the market can bear. Raising rents raises NOI, which raises appraised value.

Third, commercial real estate brokers add fuel to this fire. They know that if they want to get a listing that they have to drive the price up as high as possible. The best of them know they'll have to temper an attractive price with sales comparables in the market and cap rates. But if the property is an office or retail property, the limitations in the leases on raising rents and the quality of your tenants can put this fire out fast.

Fourth, the law of supply and demand affects property values. The more demand there is for a commercial property type during the expansion phase of the real estate market cycle and the scarcer new listings become, the higher the price will be. In many metros there are few, if any, new commercial lots left to build on. This intensifies the scarcity factor.

Fifth, interest rates are a factor. When rates are low, the net operating income (NOI) of the property will support a larger loan amount for the buyer and a higher sales price for the seller. Of course, the opposite is true if rates are high.

Sixth, today's replacement cost of building a property similar to an existing property is a factor. In an environment in which commercial land and construction costs are going up, existing properties will be worth more.

Now let's look at six reasons why commercial property values go down.

First, a recession occurs as a result of high unemployment and the purchasing of fewer goods and services, resulting in lower demand for rental units, which results in lower rents and occupancy. This lowers NOI, which raises cap rates which lowers property value.

Second, the recession has an immediate affect on financing as underwriting guidelines become stringent, resulting in fewer buyers that qualify. Often lenders lower loan to value and raise DSCR. This creates smaller loans, which results in larger down payment requirements, which creates a smaller pool of eligible buyers. This creates more supply than qualified buyers, forcing prices down.

Third, there are too many construction starts and units for rent during the hyper-supply phase of the real estate market cycle. This is when there are more units available for rent than the market can absorb. This lowers rents and encourages rental concessions, both of which lower net operating income which lowers property values.

Fourth is a decrease in economic occupancy during a recession. The property might have good physical occupancy but many multifamily tenants have lost their jobs and office and retail tenants have lost customers, resulting in poor rent collections. This mostly hits Class C properties during a recession.

Fifth, appraisers are pressured to lower valuations during a recession. Lenders no longer trust values from comparable properties that sold before the recession. They know values are coming down and this terrifies them. As the recession progresses, distressed commercial property owners need to sell fast and lower their prices to avoid foreclosure. Appraisers are pushed toward using recent higher-cap-rate comparables that lower property values.

Sixth, whenever interest rates skyrocket, commercial real estate prices come down accordingly, as the NOI of the property now supports a smaller loan amount. This brings prices down, as there is a smaller pool of investors that can put a larger amount down to support the higher prices.

Surprisingly, most sellers of investment commercial property do not dwell much on the likelihood of their property value's coming down someday. The moment they take title, most know that when they sell they are going to make a killing. If they do get caught in a recession, and cannot get their price, as long as they have the cash to ride it out most will wait until the real estate market goes up again to sell. From a nuts-and-bolts standpoint, commercial properties should go up in value because they have been physically improved, repositioned, or repurposed, resulting in higher rents over time. But if the real estate market takes a nosedive, lower rents, collection losses, and poor occupancy can bring those values down again. The good news is that history has shown that the bust periods are temporary. Going back to the 1865 recession, real estate prices have always recovered and gone up over time.

How do rents affect appraised values? If your property's rents have gone up, an appraiser will choose sold properties with a correspondingly higher rent per square foot as comparables. This will raise your property's value. Conversely, if the property has become more derelict over time and rents have been stagnant and expenses have risen, then the property will be compared with lower-quality properties, which will lower the valuation. It's strange, but in an up market, the momentum from property values going up and the scarcity of properties for sale will likely pull these fixer-upper properties up too.

POWER BROKERS ARE HIGHLY SKILLED AT PUSHING UP THE SALES PRICE

One of the greatest factors in raising commercial property values is something I call “the power broker force.” Top-producing commercial realtors consider it sport to raise property values in their communities. I have seen them do this in many of the markets I lend in nationally, and they do it with relish. They use their arsenal of tested recipes to push prices up and cap rates down.

Nancy Lemas is a power broker in Boise, Idaho. She reminded me recently about all the fun we had together closing $44 million in commercial properties in 2016. She was the listing broker on each deal. I'm not sure I would quite call it fun. For me it was very much like skydiving—exhilaration at the beginning followed by worrying about whether the chute would open.

My job was to create loans for four of her properties that carried record-breaking prices, and although it had been an up seller's market for close to seven years, I was worried that there were just not enough comparables that had sold at comparably low cap rates for them to appraise at their purchase price. We did close on all four purchases, which resulted in sales comparables that lowered cap rates and increased property values on future sales in this market.

I have personally witnessed Nancy push the envelope by increasing commercial property values above what they are logically worth. She does this with her intellect and her bold personality. She has the most thorough, and I think the most accurate, method of determining maximum sales price that I've seen. Here it is:

The Nancy Lemas Seven-Step Method for Determining Maximum Sales Price

  1. Do a market analysis to determine the initial value. Nancy starts by collecting the current rent roll and the past 12 months' income and expense statements on the subject property. She will then do an analysis of the best market comparables with the highest rents to determine the lowest market cap rate for the property type. She will then apply that cap rate to the subject property's NOI to come up with an initial value.
  2. Compute the value using potential rents. If the market rents are higher than the subject property's rents, she will do a second analysis on the subject property that reflects potential rents. This will increase the NOI, lower the cap rate, and raise the property value higher than the result from step 1.
  3. Compute the value for out-of-state buyers. Nancy does extensive marketing to out-of-state buyers who are looking for lower-priced properties with higher cap rates in less expensive states. Often these buyers are doing a 1031 exchange because their equity in an existing property has grown substantially over time. These buyers will pay the most for a property in a middle market like Boise, Idaho. She comes up with a higher sales price for this group.
  4. Adjust value for an up or down economic cycle. Nancy not only looks at the inventory of current sales of the same property type but also looks up all new and planned construction starts nearby to determine the demand now and the near future. If it's an up market and demand is high, she will push the price up accordingly. If it's a down market and demand is low, she will keep the price down.
  5. Compute an average sales price from steps 1–4. The sales prices calculated for initial value, potential value, out-of-state buyer value, and economic cycle value are averaged to come up with an average sales price.
  6. Know about the best financing available. Nancy will check on the lowest rate financing available with the highest loan to value and figure out what the annual loan payments will be for the buyer if they put down 25–30%. She then computes the buyer's return on their investment with these loan payments. If the return is too low, she will adjust the sales price down accordingly.
  7. Adjust the sales price to fit the buyer's expectations. Nancy puts herself in the buyer's shoes and thinks about what they would be willing to pay for the property and why. Buyers think in terms of earning a minimum of 5–6% minimum cash on cash return (CCR) on their down payment during their first year of ownership. If the CCR is less than this she will adjust the maximum sales price down accordingly. In an up market, Nancy will then add at least 10% to this price as a cushion to come up with the final listing sales price. She will then advise the seller to be prepared to come down 10% if needed.

In conclusion, your commercial property is worth what a buyer is willing to pay for it. Many properties are priced too high simply because the seller is not able to connect the dots on what the buyer's expectations will be or what outside drivers are (e.g., recession, market absorption rates, and sales comparables). These properties tend to stay on the market for a long time and experience many price reductions. Buyers can easily check to see how long a property has been for sale, and if it has been over six months, they are going to expect a discount. There are exceptions to this. For deals of $10 million and above and for newer properties that are in excellent condition, institutional investors and real estate investment trusts are often willing to pay more than the property is worth because they have a lot of cash just sitting. They are willing to accept lower returns on their investment, but the properties have to be turnkey with very low risk, a strong operating history, great tenants, excellent collections, and an outstanding location.

TWELVE MISTAKES TO AVOID WHEN SELLING YOUR COMMERCIAL PROPERTY

  1. Pricing the property too high. Yes, I know. The buyer is going to make a lower offer, so you should price the property high so you can come down a bit. Although there is substance to this logic, just be aware that if you price it too high you will likely be reducing the number of potential buyers. Buyers can do a lot of research on the Internet. Information on property values is abundantly available these days. If they find comparables that are priced lower, they will pass on your property. Do the math. If they put 25% down on your property and finance 75% at today's interest rates, what will their CCR be at your sales price? If it is 6% or more, you are likely good to go.
  2. Not knowing your prepayment penalty on your current loan. My client Arty was buying an apartment building in North Carolina. He was at the title company signing closing documents when the escrow agent told him that the seller had just canceled the sale. The seller had just seen the payoff on their loan, and they were shocked to find out that they had a prepayment penalty of over $400,000. Ouch! This created a legal quagmire that I am not going to take the time to go into. When I speak to commercial real estate brokers, I will often ask for a show of hands if they ever got burned because their seller did not know they had a prepayment penalty on their existing loan. Many hands will go up, followed by many war stories. Prior to listing your property for sale, double check your mortgage note to verify that you do not have a prepayment penalty looming in the background that can bite you.
  3. Not having all property financials prepared. It's just going to slow everything down if you do not have all the property financials and estoppels together before you list your property for sale. For starters, your real estate broker will need them to determine the sales price and prepare the marketing flyer. The due diligence period will most likely not start until the borrower has collected these. And the buyer cannot apply for a loan without them. To start with, prepare the last three years of income and expense statements and a current rent roll. The lender will likely ask for a trailing 12-month report (month-by-month profit and loss for the last 12 months). Be sure to start collecting estoppels on day one, as I have had this take months for national tenants. Only commercial properties that have business tenants need estoppels.
  4. Showing less income on tax returns than the property financials show. Okay, it is understandable that, like many commercial property owners, you want to pay less tax. You may have written off many capital improvements, which are not deductible, as repairs, which are a deductible expense. Now that you are selling the property, why not have your cake and eat it too? So you reverse the process by taking the capital improvements that were written off as repairs and put them back into capital improvements.

    Although this practice is not illegal (the IRS does not go after property investors that do this) it can be thought of as misleading to the borrower and their lender. Lenders and astute buyers quite often request Schedule Es from the seller's tax returns to verify income and expenses. If there is a discrepancy between the income and expense statements and your tax returns, don't be surprised if the buyer asks you to lower the sales price.

    The remedy for this is to point a finger at it. Just tell the buyer and the lender that this is what you have done. Most lenders don't care since the IRS doesn't care. And since you were honest about it, the buyer can't really ask you to lower the sales price. Be sure to give the buyer a separate list of capital improvements and their costs for three years.

  5. Not disclosing tenant defaults. Let's face it: if you have some tenants that are in default on their leases, how will your buyer know? It's not that you plan to lie to them, but if they don't ask, would it hurt if you just did not bring it up? Should you tell them?

    YES, you should tell them! And yes, the buyer will find out. Your real estate broker and the buyer will assume that everyone on the rent roll is in good standing unless you tell them otherwise.

    If you have late-paying or no-paying tenants and do not disclose this, I assure you that at a minimum, the buyer's lender will find out. And they will think you misled them and that your financials might be fraudulent. Underwriters are trained to look for discrepancies between rent rolls and income statements for rent collection problems. If they don't find out from these documents, they will find out for sure at least for the commercial properties where lenders require tenants to sign an estoppel certificate. These certify the lease terms, that there are no defaults, and when the rent was last paid. The tenant is committing a federal crime if they lie on a lender's estoppel certificate.

  6. Not disclosing rent concessions. Rent concessions are used to fill vacancies quickly. They are a discount in the rent for a period of time in exchange for signing a lease quickly. Quite often rent concessions are not disclosed to buyers. They will certainly be discovered by the buyer's lender because the rent roll will show more gross rent than the income statements. It's best to disclose this at the beginning and ideally be able to explain that the concessions are not ongoing. Again, you do not want the buyer to use these to lower the sales price.
  7. Having short remaining lease terms or month-to-month tenancies. If you have very-short-term leases, you could leave this as a value-add opportunity for your buyer. But the problem here lies in the fact that many lenders feel insecure with month-to-month tenancy for multifamily properties or with most other commercial property leases that have fewer than two years remaining. They are concerned that many tenants might move out at the same time, making it difficult for the buyer to make the loan payments. So this can present a problem for your buyer. Furthermore, with the exception of multifamily properties, the lender will not fix the rate of the loan for much longer than the average of all of the lease terms. So if your buyer wants a five-year fixed rate mortgage or longer and the remaining lease terms average fewer than three years, the rate will likely be fixed for only three years.
  8. Disclosing some or all known repairs to the buyer. Telling the buyer about everything that is wrong with the property prior to signing the purchase contract might seem noble and honest, but this is not how it is done. Most experienced real estate brokers will suggest not disclosing the physical needs of the property during the offer negotiations, as this will just slow down getting the property under contract. The buyer will want to bargain with you on the sales price at the beginning and then again after they get their property inspection report. It is smart business to just handle this once, based on the property condition report. It is accepted practice to place the onus on the buyer to do a thorough property inspection, thus determining the physical condition of the property.

    I've worked on hundreds of real estate deals and I have never seen a property inspector find that nothing needs repair—even on newer properties. They do need to earn their fee. For the majority of purchases I have worked on, the buyer will request a reduction in the sales price for a variety of reasons just prior to the due diligence period being up. From the seller's perspective, it makes sense to negotiate repairs along with other price-reduction requests at the same time. Major repairs, such as the need to replace the roof, should be disclosed to the buyer at the beginning.

  9. Not sprucing up the property. Just as when you sell a car, give the property you are selling some shine. Maybe a new coat of exterior paint. Some new landscaping can do wonders to revitalize the property. And don't forget the parking lot. Having it resurfaced and restriped can make the property look 10 years younger.
  10. Not time-managing the deal. I have a saying that my staff at the office probably gets a bit tired of but that they agree with: “Time is not your friend on commercial real estate deals.” My colleague, Albuquerque real estate broker Rob Powell, says this better: “Time kills deals.” Both buyer and seller are finicky. The longer the deal takes, the more “what ifs” are asked. The fact is that the longer it takes, the less likely it is that the deal will close. At my firm we have noticed that for every week the closing is delayed beyond the date specified in the purchase contract, the chance the deal will never close increases by 10%.

    As the seller, if you do not provide the property financials quickly, the due diligence period will take longer. If the buyer is not preapproved for financing correctly at the beginning, they will likely not get their loan approved. They will then have to start the loan process all over again with another lender. This will add an additional 45–60 days to the closing or even kill the deal. Check in with your real estate broker often and make sure they are time-managing these 10 critical dates:

       Ten Critical Time Management Dates

    1. Due diligence start date: The due diligence period usually starts when the buyer has been provided with all of the property's financials, leases, and a copy of the survey.
    2. Loan confirmation date: The date the buyer starts their loan.
    3. Estoppel receipt and due dates: The date on which tenants receive their estoppel and the date they must turn in the estoppel. Not being able to obtain a signed estoppel from a tenant has killed many deals in our firm over the years.
    4. Appraisal deadline.
    5. Environmental report deadline.
    6. Property inspection completion date.
    7. Financing contingency date.
    8. All due diligence and financing contingencies are met date: The earnest money goes hard.
    9. Final date to negotiate changes in the sales price.
    10. Closing date.

    Also be aware that delays caused by legal counsel for the buyers, lenders, or sellers are one of the top reasons closings are pushed past the drop-dead date. Property insurance that doesn't meet the buyer's lender requirements is another. These items need to be time-managed too.

  11. Not mandating on the lease that the tenant has to provide financials. Often for office, retail, and industrial properties, your buyer's lender will need to approve the quality of the tenants' financials. Failing to have this provision in your leases can create a problem for you or your buyer in obtaining financing. Most national tenants are used to providing this information but often procrastinate. Most other tenants just do not want to comply with this provision, even if it is in their lease. This can kill your buyer's loan.
  12. Choosing the wrong real estate broker. Very few commercial properties are so fabulous and priced so affordably that they just sell themselves. Having the very best real estate broker will make this very technical process much less technical for you. Most of all, their experience will keep the deal from crashing and burning.

    If you do not already have a broker that you have worked with before, how do you choose one? Unfortunately, usually the real estate broker who says they can get the highest price is going to win your business. If they don't show you the market analysis that proves that price is attainable, be wary.

    What is much more important is finding a broker who is actually working diligently to sell properties and not just to land deals. These brokers will be experts in their field and will likely already know someone who is interested in buying your property. They will also know many of the other major commercial realtors in the area and be willing to share their fee with them. They will have many methods of marketing, including various online platforms. They will have a long referral list of satisfied customers who you can talk to. Their marketing flyers and online property brochures will be outstanding and based on facts. They will screen every buyer carefully for verification of down payment, experience, and financing. These realtors have enough experience to know if the buyer's financing has holes in it, and they get involved in plugging those holes. And they likely know where the best sources of financing for your property are and are bold enough to get involved with the buyer on this. They will answer the phone most times you call and make you feel like you are their only customer. Most of all they will tell you what they really think and not just what you want to hear.

    Lastly, do not use a residential real estate broker who does not have commercial real estate experience. This is like going to a veterinarian to have your gallbladder removed. They could probably wing it, but you're not going to do that. Commercial really is a different animal than residential real estate. A commercial property is income based and has a different due diligence list.

VALUE-ADDING BEFORE SELLING

Most buyers are trying to find a commercial property with an upside. So as the seller, why not create this upside and increase the property value for yourself? If your property is currently worth a million dollars at an 8% cap rate and has an annual NOI of $80,000, increasing the bottom line by 15% can increase the value of the property by $150,000. The best way to achieve this is to tackle it from both ends by increasing rents and decreasing expenses.

Major value-adding is called repositioning. Go to Chapter 7 for a lot more on this subject. Repositioning value-adds can be divided into three categories:

  1. Operational, which cost little or nothing and consist mostly of increasing rents and decreasing expenses.
  2. Cosmetic, which are moderately expensive and include improvements such as a new coat of paint or new floor coverings.
  3. Construction, which are expensive and include improvements such as adding more square footage or doing a major rehab.

Try to stick with low-cost and low-risk operational value-adds. If cosmetic work is needed, try to confine it to light cosmetic work: paint the ugly cabinets instead of replacing them.

Compare your rents with your competitors to determine if they can be raised.

Have an experienced property manager review your expenses for where there can be decreases. Often decreasing expenses can be as simple as shopping for cheaper insurance or lowering your property tax bill. Going through all your expenses and trimming a percent here and there can really add up.

Any leases coming due? For office, retail, and industrial properties negotiate longer-term leases before you put the property on the market. This represents a minimal expense and can make your property worth more simply because it lowers the buyer's risk, which means they can qualify for much better financing. For multifamily properties, raise rents to the max whenever you can. It is unlikely that a tenant will move out for a $50 increase given the cost of moving.

Ultimately you are going to have to carefully weigh the cost and time involved with value-adding to determine if it is going to be cost effective. And if you are doing some rehab, be sure to include your loss of income due to the lost rents when you have to vacate spaces while improving them.

With the exception of multifamily and hospitality properties, costly cosmetic changes that just make the property look better do not necessarily raise rents and increase the property value. Take a look at your competition. If they are getting higher rents than you because they have better interior finishes, floor coverings, and fixtures, then maybe you should follow suit. But it could be they are doing better just because they have a better location. For an apartment property in a low-income neighborhood, there is a limit to what your tenants can afford to pay. So be careful to not overimprove the property. If you have an apartment or office building built between the 1960s and the 1980s, it will always be a Class C property that won't command the higher rents of a Class B property, no matter how much you improve it. Keep in mind that appraisers will always constrain the value by comparing it to other Class C properties.

WHY YOU SHOULD DO A FOR SALE BY OWNER

  • You'll save the real estate commission. With an average commercial real estate commission of 6% on deals of $5 million and under, this should be a no-brainer. You should get paid well for your time when selling the property yourself. On a $2 million sales price, you'll have $120,000 more in your pocket. Why pay a middleman?
  • You know your property better than anyone. You and you commercial property have grown up together. How often is the listing broker going to ask you to answer questions the buyer has about the property? Why not have them go straight to the horse's mouth themselves?
  • You can sell the property yourself online. There are many online platforms that feature commercial properties for sale by owner. Unfortunately the largest commercial-property platform, LoopNet, does not allow by-owner listings, but they do allow commercial properties for sale by owner if they are also owner-carry. Here are some online platforms that allow for sale by owner listings:

    You can also advertise to commercial real estate groups on Facebook or list the property for sale on Craigslist.

WHY YOU SHOULDN'T DO A FOR SALE BY OWNER

No matter how great your property is or how organized you are, selling a commercial property is a very complex and technical endeavor. If you have sold a home yourself successfully, you might be tempted to do it with commercial real estate. Even if you are selling a simple single-office property zoned commercial, it might appear to be as easy as selling a residence, but it is not as easy. The difference is that with commercial property, you are selling an income stream with the brick-and-mortar attached. Unless you have done it many times before, selling your commercial property yourself, in my opinion, is like an elementary school teacher trying to teach a graduate level university business course.

BENEFITS OF WORKING WITH AN EXPERIENCED COMMERCIAL REAL ESTATE BROKER

An experienced commercial real estate broker can help a seller through:

  • Analyzing the sales price correctly. Commercial real estate brokers are experts at determining the market value of your property and the maximum sales price, as I illustrated with the Nancy Lemas system above. They have access to services such as CoStar and REIS that can supply them with the latest comparable commercial property rent and sales data. You can subscribe to these too, but it is expensive. They also can get rental comps directly from property managers they network with.
  • Verifying the buyer's financial strength and experience. Commercial realtors are not shy about doing this. They will ask for copies of the buyer's bank and/or security statements to verify that they have the down payment plus closing costs. Are you comfortable doing this?
  • Negotiating and writing up the offer to the seller's advantage. An experienced commercial real estate broker will know how to write the purchase contract correctly. This is huge, especially when negotiating the contingencies for financing and due diligence contingencies for property financials, property inspection, review of leases, and more.
  • Marketing. Commercial real estate brokers know a lot of people that invest in the type of property you are selling and can pitch your property to them. Through multiple listings or just through relationships with their colleagues, you will have enlisted many commercial real estate agents to sell your property, especially if your listing broker is willing to split their commissions, which most are willing to do. Your property will be advertised nationally on LoopNet, the largest online platform for selling commercial real estate. If your property is in a state with higher cap rates, low-cap-rate buyers from states like California will be interested. As mentioned, LoopNet does not allow for sale by owner listings unless they are also owner-carry deals.
  • Time-managing the deal. Commercial realtors are experts at time-managing a deal's critical dates that were mentioned earlier. They are also experts at making sure ahead of time that there is a clear title and that the buyer and their lender get the property's financials on time.
  • Negotiating a sales-price reduction prior to the earnest money going hard. Almost all buyers are going to request a lowering of the sales price because of property condition or discrepancies in property financials. What if the property does not appraise at the purchase price for your buyer? Are you confident you can negotiate with the buyer yourself and keep the sales price up there? Experienced brokers do this all the time. As a third party they can just say, “My seller is not going to accept that. Here is what I can get them to accept.”
  • Solving problems and closing issues. There can be problems with clearing the title and issuing title insurance, surveys, commercial endorsements, easements, and disagreements between the buyers' and sellers' legal counsel. Commercial realtors are not only experienced at solving these problems, most love the challenge.

SHOULD YOU OWNER-CARRY?

In commercial real estate, owner-carry mortgages are sometimes a marriage between a buyer who doesn't have much money or experience and a seller who owns a distressed property. Yes, this can get worse if the buyer has weak or bad credit and cannot qualify for a loan elsewhere. Now, does that sound like a match for a good long-term relationship? As the seller, do you really want to be legally tied to someone who needs something from you—like a handout? Maybe that seems harsh, but I'm calling it the way I see it.

The flip side is that if you are willing to prequalify the buyer as a bank does, this can be a good marriage. Also, you are almost certainly going to get a higher sales price.

As the seller, you usually need something too. The property is often underperforming, having too many vacancies or some tenants not paying rent. It might even be 100% vacant. Sometimes it is just in a very isolated small town, which makes it difficult for a buyer to get conventional financing. The property often will have a long list of neglected repairs due to lack of money, poor management, or both. These properties often do need new blood. At a minimum they need new management. Most often they need to be repositioned. In most cases the owners just do not have the energy or funds to tackle this.

Don't get me wrong, there are some good, decent people out there that need an owner-carry, and have the experience, drive, and commitment to make this a success for both parties. Some of them just do not have the net worth or experience required by a conventional lender. If their credit score is 640 and above and they can put at least 20% down, this might be a good fit. Be sure to verify that the buyer will not be broke after closing (that they will have some post-closing cash). The most important thing to owner-carry borrowers is a smaller down payment than required by the bank and monthly payments that the property can afford. Interest rate and loan maturity doesn't seem to be a major issue for them.

ALTERNATIVE TO OWNER-CARRY: THE MASTER LEASE PURCHASE

If your property is distressed, or just having difficulty selling right now and you just need to get away from running it, consider selling it using a master lease purchase. A master lease is most often used when a seller/lessor wants to lock in a higher price today than the property is worth based on its occupancy, net income, and/or condition. In most cases, the seller does not have the financial means or motivation to improve the property. In exchange, the buyer—who likely does not have the down payment for traditional financing—has an abundance of motivation and energy to improve the property. There is no loan involved, so both parties need not worry about that.

The buyer/lessee can take from two to four years to reposition the property—remodel it, re-tenant it, lower expenses, and raise rents. The lessee makes monthly payments to the lessor. At some specified future date, the lessee has the right to purchase the property for the amount agreed upon when the master lease was signed. When the lease is up the property will usually qualify for quality permanent financing, and the buyer will have raised the down payment from the property value increasing. The buyer/lessor gets the benefit of appreciation. The seller/lessor has the benefit of getting more for the property than it was worth today and the disadvantage of having sold the property for less than it will be worth when the lease expires.

It is standard for the lessee to put as little as 10–15% down when signing the master lease. These funds are credited toward the purchase price for the buyer as long as the future sale goes through. The buyer/lessee loses these funds if they choose not to buy the property. One great benefit of a master lease for the seller/lessor is that you keep legal title to the property. If the buyer/lessee defaults on the lease, it is easy and fairly quick to take the property back since you still own it. The lessee has equitable title, not legal title, which allows the lessee complete authority to run the property and benefit from the property's income, appreciation, and depreciation.

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