Everyone knows that liquidity is king in commercial real estate. When you see a property you love, you need to make an earnest money deposit and secure a down payment for the property financing.
However, as all CRE investors and sponsors know, the cash to do those two things is not always available.
Yet, smart investors and sponsors don’t just throw their hands in the air; they explore how to buy commercial property with no money down, seeing opportunities where others see uncrossable hurdles.
In this article, we will cover six ways you can still pursue the property you love even when you are temporarily illiquid.
We rank these six methods by their accessibility and feasibility in the current real estate climate.
-
Specialized soft deposit financing
Paying a soft deposit has become normative in CRE deals, and it is usually the first hurdle that investors and sponsors have to cross.
When you are illiquid, you can explore various options to finance the soft deposit: traditional bank loans, bridge loans, hard money loans, P2P loans, and business line of credit.
However, in terms of accessibility and feasibility, specialized soft deposit financing providers are usually the most appropriate. These are companies like Duckfund that focus on providing earnest money financing for CRE investors, developers, and sponsors.
Evaluating accessibility and feasibility
Unlike traditional banks, specialized soft deposit financing providers don’t request credit reports or evaluate your application based on credit scores.
Also, the application process is quick, and you can get funds sent to the escrow within 48 hours.
-
Seller financing
When it comes to down payment, seller financing is usually the most accessible way to buy commercial property with no money down.
This is an arrangement where the property’s seller also acts as the mortgage financier. So, instead of making mortgage payments to a bank or other financing company, you make them directly to the seller.
In practice, the seller agrees to receive payment for the property in multiple installments (with interest) rather than as a lump sum.
Flexibility is one of the advantages of seller financing. You can negotiate the waiver of a down payment with the seller. Many sellers will agree to this arrangement in exchange for a higher purchase price or a higher interest rate.
Interestingly, if you have a previous relationship with the seller or if the seller is desperate to sell, you can get the down payment waiver at no extra cost.
Evaluating accessibility and feasibility
The high-interest-rate era that followed COVID-19 made seller financing popular.
Seller financing is accessible because there are limited bureaucratic processes involved.
-
Lease-to-own arrangements
A lease-to-own arrangement can be in two forms: a lease option contract and a lease purchase contract.
With a lease option contract, the seller gives you the right to purchase a lease property at a given future date. On the other hand, a lease purchase contract comes with an obligation to purchase.
During the lease period, a part of your monthly lease payment will be credited towards the down payment or the purchase price of the property.
Evaluating accessibility and feasibility
Arranging a lease-to-own agreement depends on the seller’s willingness.
Many sellers agree to it when they need a steady income stream or when the seller is motivated to sell, but interested buyers don’t have full financing yet. Some also embrace it as a way to delay capital gain taxes or negotiate a premium (higher than market price) for the property.
-
Partnerships or joint ventures
You can also explore the equity financing route when you are illiquid.
This involves acting as a general partner and sourcing other investors who would be interested in contributing money for the deal.
As a general partner, you can earn a share of ownership and profits without putting down cash by contributing your operational expertise and handling the structure and management of the deal.
Evaluating accessibility and feasibility
The feasibility of partnerships and joint ventures depends on your capacity to act as a general partner. You can make this work if you have the right connections, an eye for a good deal, and the ability to structure a deal in a way that makes multiple parties happy.
-
Subject-to existing mortgage
This is a creative financing solution where you take over the existing mortgage on the property instead of applying for a fresh one.
Many sellers opt for this solution when they can no longer make monthly mortgage payments on the property, or they have lost all interest in the property.
The mortgage will stay in the name of the seller, but you, as the buyer, agree to complete the payments in exchange for a title transfer.
Evaluating accessibility and feasibility
The property’s seller still needs to be compensated for the equity they have built in the property. However, since the seller is motivated, you can arrange to pay in installments or as a lump sum when you refinance the property.
Though subject-to deals are popular, they are risky for both buyers and sellers. If a buyer does not pay, the seller remains liable for the loan. Also, there is often a due-on-sale clause on most mortgages, which gives the lender the right to call the loan if the property changes hands.
-
Government-backed financing
The presence of government guarantees encourages many CRE lenders to be more flexible with CRE financing.
Also, CRE lenders are willing to take on more risk because the conditions for qualifying for these loans are strict: strong personal credit, strong business financials, 1.25X debt service coverage ratio, strong cash flow, etc.
Consequently, many lenders can reduce the down payment required or even waive the down payment requirement in a few cases.
Evaluating accessibility and feasibility
Though no-down-payment government-backed loans are possible, it is extremely hard to successfully secure one.
Moreover, the conditions for qualifying for these loans (with or without a down payment) are already very strict.
