Subordination
Property owners may be asked by the buyer to subordinate. What does
that mean? It means they will be asked to carryback some of the purchase price
in the form of a note that will be recorded in a lower lien position, usually
in second position. This will affect the order in which a subordinate creditor
can collect if there is a foreclosure. The first lien holder will be paid
first, etc.
There are pros and cons for subordination on both sides of the transaction. Sometimes it makes sense for a property owner to subordinate. It often makes sense for a buyer to have a property owner subordinate. Each party is highly advised to consult a qualified tax consultant and/or attorney before determining whether the property owner should subordinate.
Subordination may be the only way to conclude a deal in a buyers' market. When the supply of properties is high and there aren't many buyers, willingness to subordinate may get your property sold before your neighbor's.
On the other side, subordination may not be on the table in a seller's market. Buyers may not have this option as readily available as in a buyer's market.
Commercial Investment Properties
New investors to commercial real estate need to understand that it's the
property that gets the attention. You and/or your company still need to qualify,
but the focus of attention is going to be on the property and whether it
can perform or not.
Financiers of commercial property will concentrate on the gross scheduled income, fair market rents, actual operating expenses, vacancy rates, rate of return, percentage of down-payment, location of the property, zoning, etc. in their decision-making process.
Options
Seasoned buyers know there are a number of options to financing development
or investment projects. Some take the traditional route using a bank or mortgage
company. Some use the resources of private investors or partners. Some may
use hard-money lenders. The decision is usually contingent upon the type
of project, length of time required for the financing, credit issues of the
principals, etc.
Investors in residential real estate generally can use a residential mortgage company for financing of up to four-unit complexes. Five units and above generally require a commercial loan. In either event, new investors should be aware that interest rates are higher than for a primary residence. Don't think you will get a four-plex at the lowest-advertised rates. Unless you are going to owner-occupy one of the units, you will be paying investor interest rates.
There are other issues involved such as recourse vs. non-recourse loans. You should consult with a qualified lender before proceeding. Call me at 801.554.9988 if you need a referral.