Unlocking Creative Financing in Commercial Real Estate

Micah Thorson -Loam Commercial Real Estate 1/2/25

We use the term so often in and around our brokerage that to most of us it's common knowledge. I forget, that it wasn't all that long ago that I heard "the C word" for probably the first time and couldn't believe what I was hearing. That "C word" was creative financing. To most non real estate professionals, most aren't familiar with the term. We offer it on a number of our listings if and when a seller is able to. If you're one of the people who has clicked on one of our listings and seen "Creative Financing Available" and thought, what the heck is that? This article is for you!

To begin, I should say that while I hope to provide a broad explanation of what creative financing is, the term is a wide umbrella and numerous articles could be written on the various types and nuances of what classifies as creative financing. My hope is that after reading this, your first instinct upon seeing our next listing with creative financing available is one of excitement rather than confusion or fear.

When one typically has interest in purchasing a property, they would need to obtain the funds for the purchase from somewhere, most often that source being a conventional loan from a bank. This would require you as the buyer to still come up with typically at least 20% of the total purchase price as a down payment with the remaining 80% coming from the bank. Likely this will still mean that the bank must evaluate you/your business's credit score and you would still need to pay to have an appraisal completed on there property so that the bank or lender can justify the loan. If any of the previously listed items don't line up, there is a chance that your deal falls apart.

This is where having a broker who is not only familiar but skilled in creative financing can make or break the deal. Could the seller hold back a portion of the total sales price to be used as the down payment? Could the seller do a contract for deed and still require a downpayment but create favorable terms for the buyer? Could the seller lease the property to the buyer and then sell it at a predetermined price and time? The answer is yes to all of these, and there are many more examples of how buyers have been able to acquire properties with little or no money down, less than ideal credit scores, and high interest rates at the bank. Best of all, to many people's disbelief it's all legal, recorded with county records, and not at all sketchy or under the table.

So it seems fairly obvious why a buyer might have interest in buying using creative financing, but what is in it for the seller? Depending on which route of creative financing they go with, they might be able to ask for a higher sales price, earn additional income through interest payments made to them, avoid triggering a larger tax hit (at least at first), achieve a quicker closing, as well as open themselves up to a larger buyer pool who might be excluded for one reason or another if forced to use conventional financing. So let's look at a couple of examples of creative financing at work.

Contract for Deed: This is a popular form of creative financing as it is fairly straightforward and easy to understand. Rather than having a mortgage and making payments to a bank, you will have a mortgage and payments to the seller. While the buyer takes physical possession of property, the seller holds the legal title until payment has been satisfied. You might say, "well why would a seller want to wait 30 years to get their money?". Often times, it is written into the legal document that outlines the transaction that the contract will only run for 3, 5, or maybe 10 years. At that time, the buyer will need to either acquire a bank loan, or have sufficient funds to pay the seller in full at that time. This is what we refer to as a balloon payment. Similar to a bank loan, the seller has protections in the case that the buyer can't make their monthly payments. I believe each state's laws differ, but within a short period (often 60 days or less) the seller could terminate the contract and retake possession effectively meaning the buyer loses out on any downpayment, regular payments, or equity they might have been building in the property. That is why it is still essential to keep on top of your payments, and have clear and honest communication with the seller in the event you might be late or miss a payment. So what might an example like this look like? I'll use made up numbers, but I myself purchased my first duplex on a contract for deed. For simplicity sake, we will say the purchase price was $100,000. In this case I would need roughly $20,000 as a downpayment as well as the property needing to appraise for $100,000 and meeting all the credit requirements. I was a young man just out of college and so I didn't have the money for a full 20% downpayment. It just so happened, that the appraisal also came in slightly lower than what the seller was hoping to get in the sales price. So, with the help of my broker Jay Christenson, we struck a deal on creating a contract for deed. The deal would go through with the seller getting slightly less than what they hoped for, we will say $98,000, I only put down $5,000 and my interest rate was at .5 % higher than what it would have been at the bank to help incentives the seller as well. I now had 3 years to come up with enough money for the downpayment or create enough equity that a downpayment wouldn't be require. As fortune would have it, no additional money was needed at the end of my three years. To this day, I still can't believe I was able to get into a property like that.

Seller Holdback/Seller Carryback - This type of creative financing has hints of the contract for deed mixed in with conventional financing. In this situation, the seller will "hold" a portion of the sales price in a note separate from the bank. It could be as small as the downpayment, or as large as several hundreds of thousands of dollars. The advantage in a seller hold back would typically be that they might be able to achieve a higher than normal sales price, as the disadvantage is they are in a slightly weaker position than in a contract for deed. If the buyer can't make their payments, typically the bank will be the party in the first position/loan and therefore better positioned to reclaim their funds if the property falls into foreclosure. Again, the sky is the limit here for creativity. The seller might be able to achieve thousands over what the purchase price might otherwise have been, but on their note, they may not charge interest, or the buyer only has to pay interest only payments until a balloon is later due. The key here is finding a solution that will allow the buyer to succeed as well as keep the seller happy and willing to take on some level of risk. Let's put this to another example. This time, the purchase price is $1 million dollars. Normally, the downpayment would be $200,000 but in this situation the seller will be loaning it to the buyer. The seller will receive $800,000 at closing with funds from the bank. They will also receive monthly pre agreed upon installments on the $200,000 they kept back to help the deal go through. The buyer will also still be responsible for their monthly mortgage payment on the $800,000 payment to the bank. This might work well on a large income producing property such as apartments where the buyer could use forced appreciation to build equity quickly, refinance the loan, and cash out the seller.

These are just two of MANY forms of creative financing. Perhaps with additional articles, I can highlight more examples of this tool at work. Depending on the property, seller's situation, and buyers needs, creative financing can be tailored to fit the deal and the needs of all involved. It is beneficial to have a knowledgeable expert in your corner however to avoid potential pitfalls and answer questions along the way. If you're curious on learning more about creative financing, wondering if as a seller creative financing might be something you're interested in, or more examples of this at work, then please reach out to the Loam Commercial Real Estate team. Our brokers are experienced in using these financial tool sets, and can help navigate the waters of buying or selling commercial real estate in the Rochester and SE MN market.