Getting Your Commercial Property Purchase Closed: The "Owner Carry" By Monte Lee-Wen At Isnare.com Ezine Articles

With commercial real estate sales volumes down 60% nationwide, it seems as if almost every market is slowing down. Lenders are being much 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 help you be the "Larry the Cable Guy" in your local market and "Git a Deal Done". You know it already...

It's called the "Owner Carry"
The owner carry is when your Seller (the current Owner) "Carries" part of the debt you use to purchase their property. This is usually in the form of a note that sits in second position behind the Mortgage.

When you purchase a property with an Owner Carry, you basically have two loans. The first loan is from the bank or other lender and is usually the largest, the second loan you owe to the Seller.

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Power-Play:

If you find a Seller who owns their property free and clear, you can negotiate for a 100% owner carry. In this situation, you provide a down payment and the owner carries a single loan. You don't even need a bank for this transaction.

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How to negotiate an Owner Carry ...

When discussing an Owner Carry with the Seller it absolutely imperative you understand the benefits the Owner Carry gives THEM. You must establish the Owner Carry as a win-win proposition. You win because it lowers the amount of money you must borrow and the cash you need to put into the deal.

The Owner/Seller wins in three ways.

1) No Carry ... No Deal ...

In many cases a significant Owner Carry is the only way the deal makes sense in the current market - 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 much less difficult than getting a larger mortgage. And when you run your investor's pro forma you may 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 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 allows 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 cash flow and is "feeding the beast", selling with an Owner Carry actually reestablishes positive cash flow for them.

3) Defer Cap Gains Taxes ...

An Owner Carry defers the Seller's Capital Gains tax payments on the amount of the loan.

Summary:

An Owner Carry benefits the Seller because:

- It gets the Deal Done
- It gives them Passive Income
- It defers Cap Gains taxes

Ask for it upfront...

If you need 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 feel the Owner Carry is a win-win structure. And make sure you let the Broker know this is the only way you will purchase the property. They become an ally in convincing the Seller to accept.

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Power Tip:

If the numbers make sense, you may wish to present a Two-Part Offer:

A higher price with an Owner Carry and a lower price without one. 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 long a note as you can get. Typical time periods are 3, 5, 7 and 10 years. Offer a reasonable interest rate -- something around 6% in today's market. And try to make the Owner Carry co-terminous (end at the same time as) your underlying mortgage.

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Yet Another Power Tip:

If you need money for rehab, here is how you can use the Owner Carry to get that money from cash flow at the property...

When you and the seller agree that rehab is essential, you can ask the seller to defer payments on the owner carry back for a period of several months.

The terms might look like this: a five-year note for $200,000 at 6% interest with no payments for the first six months. This would give $2000 a month for a total of $6000 you can use for improvements ... taken right out of the property's cash flow.
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Those are the basics of the Owner Carry. Make sure you review and understand the concepts.The Owner Carry may be the key to your next Commercial Property purchase.

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