In commercial real estate, you must learn to optimize purchase strategies as there are many differences between the properties themselves and the owners who are selling them. What works for one seller, may not work for another. The more options you have, the easier time you will have purchasing property.



Subordination occurs when the seller agrees to take back a second mortgage for a certain amount, often the remaining amount of the purchase price, after there has been paid a substantial down payment to the seller, and the new owner has already taken out a first mortgage on the property. In some cases, when a seller is extremely motivated, he or she may be willing to take back a second mortgage for far more than the remaining amount of the purchase price, even with no money down!

With some properties, it can take a few years to develop, build and lease out a property, and actually see a substantial profit. This profit may come from refinancing the property when it has greatly increased in value, selling it at a much higher price, and, therefore, generating a large amount of income. The seller who is subordinating is usually willing to wait a few years for this process to unfold, and take the money for the property later. The seller must trust the new owner, and often will verify that they are credit worthy to make this intended process happen successfully.

Sellers who are willing to subordinate may take exceptionally different terms. For example, some sellers may only finance with a substantial down payment such as 50% of the purchase price for a total of seven years, with interest only payments. Another seller may finance with only a 10% down for only two years with a balloon payment at the end of the term. A seller may know exactly what terms they require to consider financing, and other sellers may not even understand the option. It is a good idea to build a relationship with the broker or agent selling the property, so they can better explain the option to their sellers. Once the seller understands how it works, and how they will get paid for the property, even if it takes a little longer, they will be more open to it.

There is a risk to the seller, however, with subordination. The seller is taking a second mortgage, so it is the first to default if the money commitment is not met. If it does, then it can greatly harm the seller's credit, and this is not what you want to occur. You want to be a purchaser of integrity and be responsible to your commitments as previously agreed by you and the seller.

Another great advantage of seller financing is the savings that the owner can make on income taxes. Have the broker or agent explain this to the sellers who may not completely understand seller financing, or sellers who are not sure if they want to take the risk.

Having this strategy in your book of strategies can maximize your success in this business. Always consider all your options to determine the best strategy.