Creative Financing for Commercial Real Estate

Creative Financing for Commercial Real Estate


It's really important that you know how to structure deals that no one else does. What if you don't have enough of a down payment? How do you close that deal? What if you find a great deal that's distressed? How do you finance something like that? What if the seller has a great property with great upside, but has no financials? How do you creatively structure and close that deal?

Well, in my experience, real estate agents are not the best source to learn how to be creative in commercial real estate. They're more concerned about the commission, and rightfully so, because they have to make a living, so they're not a good source. Also, in my experience, nearly ninety-five percent of all sellers have no clue how to creatively structure anything creative. They're not a good source either. Who's left? It's you. It's going to be up to you to learn this topic very well. In this video, I'm going to dive deep into details on how to show you how to creatively close deals that you otherwise would have possibly passed on.

The Power in Knowing How to Structure Creative Financing for Commercial Property

1. Leverage
Don't you agree that there's power in knowing how to lower your down payment? Right? There's power there. Don't you also agree that there's power in learning how to avoid banks and lenders and creatively structuring your commercial deals? There's great power there.

You have the cash, but not the credit or experience. These guys have recovered well from the recession. They have built up a little bit of savings, but they have no credit, and they have no experience. They're not favorable to the bank.
How do you structure a deal like that? They found a great property, they have the money, but they don't have these two requirements here to get to commercial property. There's power in knowing how to do that.

3. Commercial Wholesalers

Or, those of you wanting to wholesale commercial properties out there for big dollars. We teach that in our company here how to structure wholesale deals that are small and on the large side. If you were to structure a creative deal, let's say with a master lease, where the seller carries second mortgage, seller carry first mortgage, all those type of things that are really, really cool, that I'm going to teach you in a few minutes. If you were to structure a deal like that and take it to your buyer, it will immediately give the impression to your buyer that you're deal is unique and very desirable.

4. Knowing How to Structure Creative Deals

It gives you a way to finance distressed properties that a bank wouldn't touch. You're going to run across quite a few of those as you jump into commercial real estate.

5. How to Deal with a Seller Concerned About Capital Gains Taxes

How do you deal with that? You're going to run across quite a few of those sellers, and you must know how to structure deals where you can, "Avoid or delay," their capital gains returns. I'm going to show you how to do that, an example in a few minutes.

6. Dealing With a Seller Who is Ill, Elderly, or Burnt out

How many of you know a seller who is ill, elderly, or burnt out? Either residential or commercial?
I'll bet a lot of you have seen those type of sellers. All right? How do you deal with those? I bet some of you have unknowingly passed through or passed on quite a few of those deals because you had no clue of how to handle those sellers. Well, after this training, you're going to know how to deal with them.

7. FUN
Putting together creative commercial deals is just plain fun. It's so fulfilling for me and for my students. I would say that roughly half of the deals that we do have some type of creative component, so it's just a lot of fun.

One Secret to Seller Financing

There is power and importance of knowing how to creatively finance commercial real estate deals. The one secret for creative commercial financing is to ask. There is power in asking. In life, if you do not ask, you do not get. That's how it works. In real estate, the same thing. Especially when you're doing something creative, you must ask the seller.

Here's How You Ask

You would say, "Mr. Seller, would you be open to any type of seller financing?" You see? Pretty simple, right? Now, if the seller says, "Yes, what do you have in mind?" You would just say, "I'm not sure yet. I just want to see if you're open to it. I'll get back to you." That simple. If the seller says, "No," to us, no means not yet or yes to something else. That's the mentality you have when dealing with sellers with seller financing. No means not yet or yes to something else.

One Rule When Asking

One rule I want you to follow. The one rule is never ask for seller financing on their first phone call. That will tell him that you have no money and you will scare him away.

Three Fundamental Strategies of Creative Commercial Financing

1. Owner Carry First Mortgage

The owner is carrying the first mortgage. He is being the bank for you.


Let's say the purchase price of a property is a hundred thousand dollars. I'm just making it up, and the down payment is ten-thousand dollars. That means the mortgage is going to be ninety-thousand dollars, so the seller is going to carry the mortgage for you. This is great for properties that are owned free and clear.

2. Owner Carry Second Mortgage

Like the first, the owner's carrying a second mortgage for you. That means the first mortgage is with the bank, the second mortgage is with the owner. Here's a quick example. Let's say that the bank is requiring a twenty-five percent down payment, which is quite typical, right? Now, but you only have fifteen-percent of the twenty-five. What happens to the other ten percent?

Now, in this strategy, the owner can carry that shortage, that ten percent for you. The bank will carry the fifteen percent mortgage, and the seller will carry the ten percent mortgage, equaling twenty-five percent. It's a great way to leverage and to increase drastically your cash and cash return.

3. Master Lease Agreement

Examples of Each


Owner Carry First Mortgage

Let’s say you have an eight unit apartment building, and the purchase price is five-hundred thousand dollars as an example. You found this property. Now, just quickly compute the income and the expenses. All right, so we had eight units at eight-hundred dollars a month, times twelve months is equal to seventy-six thousand dollars, eight-hundred, okay? Now, we have the income. Next is the expenses. Now, we're going to take away thirty-five percent for a typical and normal expenses. Thirty-five percent of seventy-six thousand, eight-hundred for expenses. Do that subtraction and I come up with forty-nine thousand dollars. Income minus expenses equals forty-nine thousand dollars. That's by the way the net operating income, very important term.

Now I have the income, I have the expenses, what's next? You got to figure out the mortgage. In this deal, we have negotiated a ten percent down term. Why? Is because the owner owns it free and clear and he can be the bank, so we're going to offer him ten percent down on this property Ten percent of five-hundred thousand dollars is fifty-thousand dollars, so your mortgage is going to be four-hundred and fifty-thousand dollars. Now, let's figure out what the payments will be. I'm going to make this up again. Payments going to be five percent with a thirty-year amortization. Pretty typical. Those payments will be about twenty-four hundred dollars a month, which would be about twenty-nine thousand dollars a year. We have mortgage payments at about twenty-nine thousand dollars per year. Mortgage payments. What I do next is I'm going to subtract my mortgage payments from my NOI. If I do forty-nine thousand dollars minus twenty-nine thousand dollars, equals twenty-thousand dollars per year in cash flow.

That's my cash flow, twenty-thousand dollars per year. Now, to do ROI calculation, or a cash and guess calculations, basically you would divide your annual cash flow by your down payment. Twenty-thousand dollars divided by fifty-thousand dollars, that's a pretty good cash and cash return.

That's only possible because you put down ten percent. It's only possible because he owns the property free and clear. Owner carry first mortgages are great for free and clear properties, very useful. The next time you find an owner who owns his property free and clear, check out this strategy and see if it works with him. You now know how the math works. It's also useful for distressed owners. It's also useful for when you have little cash, no credit, or experience. Why? Is because if you have little cash, let's say you wanted to buy this property, from a bank it would probably cost twenty-five percent down payment, but because he can be the bank for us, we're able to put down ten percent.

You don't need credit or experience because the seller is the bank. There's no credit requirement other than what the seller wants to see.

Installment Sale
Next is, this is really cool, if the owner needs to delay paying capital gains taxes if he sells. The owner carry first mortgage works really, really well for that. In fact, that little technique is called the installment sale. Installment sale is a very, very effective technique if the seller needs to somehow split up his capital gains taxes over the course of years.


Let's say that he owns this property free and clear, and he's about to make a huge profit. He doesn't want to pay one lump some of taxes, you can do an installment sale with the owner carry first mortgage, and you can buy his property over the next five years, twenty percent at a time. Something like that, so you can be creative as you can be on this type of strategy. Now you know how to calculate the cash flow, the cash and cash return, and this is what it's useful for.

Owner Carry Second Mortgage.

Let's say that you have an eight unit apartment complex, commercial property, five-hundred thousand dollar purchase price. The down payment from banks are typically is going to be twenty-five percent on average. Twenty-five percent of the purchase price of five-hundred thousand dollars is a hundred and twenty-five thousand dollars. What if you couldn't come up with the entire one-hundred and twenty-five thousand dollars, but the seller's motivated? He wanted to sell, but all you had was fifty-thousand dollars, but the bank wants a total equity of a hundred and twenty-five? What do you do?

What you do is you have the seller, the owner, carry a second mortgage in the amount of seventy-five thousand dollars. He carries the seventy-five, you have the fifty, you meet the bank's a hundred and twenty-five thousand dollar equity requirement. The bank is happy, you get the buy the property, and the seller gets to sell his property.

One of the small but important detail I need to add is when you do your calculations on cash flow, don't forget that you're making a second mortgage payment, you're making a interest only payment on the seventy-five thousand dollars of the seller. That means that you're going to have two mortgages to pay, so make sure the numbers work out.

How It’s Useful

Now, again, let's say you have a motivated seller, but you only have fifty-thousand of the one twenty-five. Well, this is useful for when you need to leverage. You're leveraging your fifty-thousand dollars into this deal, because you have a down payment shortage, so it's very useful for that.

You need to have a motivated seller for that to work. When you have a motivated seller, and a ready and willing bank that will allow a seller to carry second, you can leverage your fifty-thousand dollars into a five-hundred thousand dollar property. Now, what it does is when you're putting down fifty-thousand dollars, that's your outlay, your investment. Instead of the one twenty-five, basically it's going to increase your cash and cash returns. In this case, your ROI, your cash and cash return is going to more than double than would be if you were to put down the hundred twenty-five thousand dollars.


The owner carry second mortgage is a great way to not only leverage, but to just go through the roof on your cash and cash and ROI. When you see this language here, let's say that you're on LoopNet, or any other type of online community where you see commercial properties, or even maybe in a flier. You see this language here, "Seller financing available." You see that, or you see, "Owner may carry."

That is code language for motivated seller, for seller needs to move this property. This is code language for, "Bring me something creative." Now you know what to bring them. You see this language, you bring them an owner carry second mortgage offer

Why Would a Seller Consider Creative Financing

I'm going to share four reasons of why that may be possible. I am going to answer the question, "Why would a seller even consider creative financing? Why wouldn't the seller just go ahead and just put their property on the market and just sell it? Why wouldn't he just pull in the cash buyer and sell the property for the price he wants and be done with it?"

Well, in many cases, he may not be able to. The reason why is because of these four reasons.

You guys have just learned how to put together, conceptually, a seller carry first mortgage, a seller carry second mortgage, and a master lease. You can now take those three strategies and see if your seller falls in one of these categories or reasons, and apply what you just learned.

1. The first reason why a seller would even consider creative financing is if this property has high vacancy, is in poor condition.
These days, if a property is eighty percent occupied, it's considered distressed these days, all right? A bank wouldn't want to qualify the property for a loan, so how could you sell it for top dollar with high vacancy? Same thing with poor conditioning. The property's in poor condition, same situation as this here. If a property suffers from this, and the seller still wants to sell the property, the only way to get his price is to do creative financing.

2. Let’s say the property is in good condition, condition's okay, but the seller's not. What if the seller kept no books and records on the property? Amazing as it sounds, a lot of commercial owners keep very poor records of their income and expense. It doesn't allow you to validate how much the property makes.
If it doesn't allow you to validate it, the bank is going to have the same problem, so the bank is not going to give you the dollars you need to buy the property. The banks may do that, but they may want to ask for a large down payment to protect their downside, and the deal makes no sense. When the property's okay, but there's nothing to substantiate the pricing, that's when creative financing may come into play.

3. Let's say the seller has concerns about paying capital gains taxes if he sells. Where you already learned from previous video about the master lease, which is a creative financing technique. You also learned of the owner carry first. In both situations we can mitigate his concerns about paying taxes when he sells. We can mitigate it by spreading out over time his capital gains taxes. You can look at an installment sale. You can look at a master lease. You can look at an owner carry first mortgage as a way to mitigate this.

4. The seller needs a quick sale because of a life situation.
For example, if the seller is ill, going through divorce, or being relocated, he needs to sell the property quickly. Sometimes, for privacy's sake, a seller does not want to list a property on MLS or online, and wants a quick sale. In any case, when a life circumstance requires a quick sale, the best way, the best way is to do creative financing.

Most Important Mentality to Have When Structuring Creative Commercial Deals?

Here it is. It could be summed up in one sentence. "Mr. Seller, I will give you your blank if you give me my blank."
This is going to set your posture moving forward when you structure anything creative in commercial real estate. Watch this. "Mr. Seller, I will give you your price if you give me my terms." That's your posture. Always. That's the single most important mentality to have when you're structuring anything creative. If the seller wants his price, you get your terms. When you want to put together anything creative, like the seller carry first, seller carry second, or master lease, this is your posture. "Mr. Seller, I'll give you your price, but I want my terms."

"How do you come up with the terms?"

  • The terms will come up via the seller's motivations. We do, we ask the seller a bunch of questions, we visit the seller, we look at financials, we do an evaluation, we listen very carefully, and we come up with the seller's motivations.
  • We take those seller's motivations and we structure the creative deals.
  • Terms come from seller motivations. I'm going to give you a quick example here of how that works.
    Here you have one question, but two potential answers, and it will put together how you come up with the terms from the seller's motivations.

Three quick examples.

Example 1. If the seller inherited their property that's in high distress and wants a quick sale, what's most likely to work? A, is it a small down payment, ten day due diligence, and fifteen day close? Or, is it a large down payment, with a sixty day close?

The answer is A, Because what's the motivation? He's distressed. He needs to quick sell, so a small down payment may be okay. Ten day due diligence as opposed to sixty would be great, and the fifteen day close. That's how to measure the motivations versus the terms.

Example 2. If the seller wants to delay paying capital gains if she were to sell. What's most likely to work? An outright sale with a wealthy cash buyer and close in seven days? Or, a master lease term over an extended amount of time that you and the seller agree upon?

The obvious answer is B, the master lease where you extend a deal out, because their motivation is what? She doesn't want to pay, or she wants to delay her capital gains. Again, what's the motivation? We set the terms

Example 3. The seller wants to sell, but would like to maintain some type of monthly income from the property. What's most likely to work? A master lease where you structure a monthly payment plan to him over and above paying his mortgage? Or, B, a master lease, a joint venture, where he shares in the profits when you sell the property years down the road?

The answer is A, a master lease where you structure a monthly payment to him over or above the mortgage payment.

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