Creative Real Estate Financing Solutions

All right, so the other day, I got a buddy reaching out to me asking about some creative financing solutions that he could come up with for selling a piece of real estate. He has a guy lined up to buy one of his buildings. He has a lodge, and it’s been struggling for the last couple of years in terms of its operations. So he’s just looking to get rid of this property and wants to be out from underneath of it. Now, a lot of times when people come to me asking for a creative financing solutions on how to get real estate deals done, they’re on the opposite side of the equation. They’re typically trying to buy the real estate, and so arming them with tools that they can go to a seller with to present different options for getting this deal done in a creative manner that suits everybody. That’s usually the angle we come from this. It’s not very often that I have people coming and saying, I’d like to sell my property with some creative solutions, but here we are.

So I wanted to share with you, I listed out three different ways my buddy could structure this type of a deal, and I wanted to walk through these with you guys, because if you’re trying to get into real estate, right now is a great time in the market cycle to get into real estate. But one of the problems is there’s still this price disparity between buyers and sellers. The prices on properties haven’t really come down to meet sellers where they’re at, or, I’m sorry, buyers where they’re at, because the buyers, they have this increased cost of capital due to the debt markets being so high. So if I’m going and trying to buy a building at 2 million, but my interest rate is 6.5%, well, that’s a very different monthly mortgage payment than it was three, four, five years ago when I could get the same loan for 3%. Right. So buyers are having to be creative because the interest rates are so high, they can’t afford to pay the very high purchase prices that sellers are looking for. So we have an opportunity to get creative and say, what are some ways that we might be able to meet in the middle here? And because not every deal needs to go the traditional 75% of the loan or the purchase price coming from a bank in the form of a mortgage, and 25% coming from the seller or the buyer. I’m sorry, in terms of the down payment, there’s other ways that we can structure this.

So in this property in particular, the purchase price would be about 3.9 million. So we’re just going to round up and say 4 million. He’s looking to sell this building for $4 million. He has $2 million of debt left on this property. So that’s very important, because no matter what creative financing solution you’re looking for, if you have a mortgage on the building currently, then that’s going to handcuff you a little bit in terms of what you. How creative you can get if you don’t have very much equity in the building. Let’s say my buddy is trying to sell this building for $4 million, and he has three and a half million in debt on the building. Well, then he couldn’t give the buyer $2 million of seller financing.

Right. Because there’s just not enough equity in the building to substantiate that. Right. But he’s in a good position here because, roughly, he’s at a 50% loan to value. So that means $2 million of debt on a purchase price, around 4 million. So there’s a couple of interesting things that we could do here. Here’s option number one. Option number one is that the buyer could go get some bank financing for the 2 million so that they can pay off your loan.

Now, let’s say they go to the bank and they get an interest rate of, like, six, six and a half percent. That’s not great. But what you could do, instead of making them come with 25 or the other 50% in the form of a down payment, you could sell or finance the remaining $2 million at whatever interest rate you think is fair. So let’s say you land on 4%. So now, their blended average, if they’re getting, you know, 6% from the bank and they’re getting 4% from you, and that means their blended interest rate is around 5%. That’s better than if they were to get the full 75% of the loan from the bank at a six or 6.5%. Right. So that’s a great deal for them.

Now, in example two, that’s not necessarily a great deal for you, though, as the seller, FYI. Right. Because you’re not getting anything at closing in this scenario, they went and they got $2 million of bank financing. They are getting $2 million in seller financing. You’re getting a 4% interest rate into however long, like however you structure the term, but you’re not getting any kind of lump sum payments at closing. So all you’re really getting is 4%, which, on $2 million, that’s not great. You don’t actually have any recourse if they were to default on the property, because you’re not the primary lender, the bank has senior position. So if they go into forbearance, the bank is going to take back the property and you’re going to be kind of sol.
So that’s not the greatest position for you. It’s great for the seller. That’s probably the best case scenario for. I’m sorry, for the buyer. That’s best case scenario for them. I’m getting. It’s all mixed up buyer, seller right now because I’m used to being on talking to students who are on the other side of the equation as the prospective buyer, not the seller. So I’m, like, getting those mixed up.
Anyway, here’s another option. They go and they get bank financing at 2 million at 6%, just like we said in the previous example. In this example, though, they put down 25% in the form of a down payment. So they’re bringing a million dollars to closing. You could finance the remaining 25% of the remaining balance to bring their loan to value up to 75%. You could finance that 25%, that $1 million, at a rate of 4%. So this is a better deal for you because now you’re getting the loan paid off, you’re getting a million dollars at closing, and you’re getting 4% interest on the remaining $1 million. That’s a pretty good deal for you.
And it’s not a bad deal for them either, because they’re getting a slightly better blended interest rate in this scenario, because it’s 6% on the first 2 million to the. To the bank, and it’s 4% to the. To another million to you. Right. So they’re getting a better blended interest rate than if they had done the full $3 million loan through the bank at 6%. So it’s a little bit better for them, but it’s still not like that one’s not a fantastic option. It’s better, though, for you. Now, the third option is they get bank financing at 2 million at 6%, just like we said before, and you sell or finance 40% at 4%, and they just put down a 10% down payment.
Now, in this option, at 10% of the 4 million, you’re getting $400,000 at closing. Huzzah. You’re getting a good, like, good lump sum right there. They’re getting an incredible blended rate. So they’re getting 6% on the first 2 million. They’re getting 4% on the remaining 40%, which is what is that’s like 1.8 million or so. Oh, no, it would be 1.6. Yeah, 1.6 million easy.

Never do math in public. That’s why. So they’re getting a great blended rate between those two options, and they’re not having to come with as much money out of pocket as they would if they had gone just to the bank to do 75 25. In that situation, they were going to need to bring 25% to the closing table. Right. So this is a. That’s. That’s the difference between bringing a million dollars to the closing table or in this scenario, only bringing 400,000.

So it’s a much better deal for both of you because you’re getting a lump sum at closing, you’re getting a solid interest rate into perpetuity. It’s still not risk adjusted because you’re not sitting in the primary seat, but it’s overall a little bit better. Right. So those are the levers that you really have to push and pull when it comes to a creative financing deal, is that you’re trying to figure out what’s the down payment, how much are they bringing out of pocket, what’s the interest rate and what’s the term? How long do they have to pay the thing back? And depending on how you push and pull those, if you want to have more of a down payment at closing, then maybe you give them a better interest rate and longer term to pay it off. If you’re bringing less to the down payment, like they’re not bringing anything really, then you’re going to want to have a higher interest rate and maybe a shorter term, like you’re going to play with these different variables. But right now is a great time to be getting creative in your financing solutions with prospective sellers or buyers or whatever side of the equation that you’re sitting on. Because the interest rates are just so high, going the traditional route through a bank doesn’t necessarily make a lot of deals. Pencil out the best way possible.

So if we can get a little bit creative, do a little mix of, you know, seller financing with a little bit of bank financing, that can be a great solution. The other thing to think about here is that there’s a fourth option, which is just a contract for deed. They stay that you as the seller stay on the loan, but they take over the operations of the asset. So the loan is still tied to you. They are going to go in there, operate the asset, and then they’re going to pay you out based off of the profits that the asset generates. And this is how a lot of small businesses get sold is I’ll come in and say, buy your, your plumbing business for $3 million. But I’m not actually going to buy it for 3 million. I’m just going to take over the operations and pay you out of the monthly profits until we’re all kosher.

The beauty of that situation is that if I screw up as the operator coming in and the thing isn’t living up to the expectations, you can come back in and take the asset back. So that’s a great scenario. Whereas in the previous three seller financing options that I listed, there is a bank involved on the first 50% of the loan, which means you’re not going to be sitting in the primary position to be able to take back the asset if it was to go into forbearance or something like that. So those are some options. And if you want to read more about creative financing solutions on real estate deals, my buddy Bill Ham wrote a book a number of years ago called Creative Cash. Very highly recommended. Go check that out. This is not my area of expertise like financial or like creative financing solutions.

We’ve done a fair amount of it over the years at Invictus Capital. But I just wanted to share that, because when it comes to business, not just real estate, often you don’t lack for resources, you lack for resourcefulness. And if we can find solutions that serve both parties, usually it means we have to think outside the conventional paradigm. And the more that we can get outside the box and think creatively about solutions, the more likely we are to get deals like amazing deals done. That’s typically how amazing deals get done is not through the conventional routes. So hope this brings you a little bit of value. If you have no clue what I was talking about in this episode, I apologize. It was very highly technical and very specific within real estate.

So I apologize for that. But hopefully you found it interesting. You got some value out of it. So that’ll do it for me, guys and gals, we’ll catch you in the next episode. But until then, stay hyper focused, my friends.