Commercial real estate sale: what do I need to know?

[mshan]

My dad is about to retire and is going to sell the small office building he works in.

He's got a private buyer who wants to use a 5 year balloon mortgage with 25% down.

What does he need to know about private real estate transactions in general, and about balloon mortgages and what to look for in a lawyer to write up the sale agreement?

 

[Fern]

I don't know about where you live, but there are plenty of R/E lawyers around here. Shouldn't be hard to find one.

There are different knides of deeds of transfer (varies by state law) that affect foreclosure etc in the event of default by buyer, or whether they can put other (second etc) mortgages on the property. The lawyer also needs to record the lien on the property.

He'll likely need the lawyer to write up the mortgage note too (e.g., what happens when a payment is late etc). He'll need an amortization period (unless it's interest only) and an interest rate.

Fern

 

[mshan]

Any potential pitfalls he should be aware about being that he is the mortgage holder, especially if something bad or unforseen happens (buyer seems very reputable; just trying to make sure he's aware of all risks).

 

[Tom]

why does your Dad want to become the mortgage holder ? In retirement ?

If you're Dad needs the money, sounds risky to me.

Can't the buyer get a mortgage from a bank ?

 

[NogginBoink]

There's tons of potential pitfalls. Your father shouldn't even consider this transaction without the guidance of a real estate attorney, IMHO.

 

[mshan]

Buyer wants a 5 year balloon mortgage wtih my dad as the mortgage holder.

Someone told me that it's hard to get a commercial loan for under $500,000, so that may the reason (I don't know actual reason why he asked that my dad be the mortgage holder).

 

[FelixDeCat]

Your thread title says, "Private real estate" but this is actually a commercial property. If he hasnt already hired someone to market the commercial property, I think he should check into it. Just writing a note can be risky if you dont have experience. Even hiring a real estate lawyer to handle it is risky because you rely on his expertise and experience.

Then of course theres collection issues if he falls behind in payments, his personal /business background that should be checked out, etc. Otherwise, I think youre better off finding a more qualified buyer through a broker who can secure bank financing.

If you dont mind mentioning, what rate & loan amount are we talking about? Does he intend to continue on running your fathers business? Does he own other businesness? Whats his credit worthiness? Has he filed for bankruptcy 7/11/13 in the past 7 years?

Find a bank who will make him the loan or get a broker.

 

[mshan]

Private because there are no realtors involved.

Buyer is a busy dermatologist, so I don't think he should have a credit worthiness problem. My dad is retiring, so it would only be the building and land being sold.

Someone told me it's hard to get a commercial loan under $500,000 (this transaction would be under that), so I'm guessing that might be the reason(?) Or do you think this guy just doesn't want to take any risk he doesn't have to?

He hasn't looked at any loans, but I think he said 25% down, 5 year balloon mortgage, and trying to get 7.5% commercial loan rate (I think my dad mentioned that buyer said he something about 8% interest rate).

 

[mshan]

More info:

My mom said reason the buyer asked for my dad to be the mortgage holder is that he has only been in practice for 3 years, so mortgage terms would be very stiff for him. He does have a very busy practice and appears to be honest. Buyer's wife is also a physician.

 

[Tom]

maybe your Dad should rent it to them until they can get a loan.

being in the lending business, with only one customer, sounds incredibly risky to me, and that is what they are asking your Dad to do.

 

[mshan]

What types of risk is my dad exposing himself to? (I think he said he would also hold the title?)

 

[mshan]

Dad wised up and is going to ask the potential buyer to get a mortgage in his own name.

 

[NogginBoink]

There are plenty of advantages for the seller in seller financing. There's nothing wrong with seller financing. As a seller I'd much rather have the buyer paying me interest than paying interest to a bank.

I'd just ensure that I consulted a competent real estate attorney before going into the transaction.