In my last blog, “We Buy Buildings, Too!” I mentioned option to buy or contract for deed as a way to get into commercial spaces. Both give the buyer the exclusive option to purchase a property within an agreed price and time period. Contract for deed is like a traditional mortgage, except instead of paying a bank, the buyer pays the property owner directly. The buyer takes ownership after the final payment is made.
Option to purchase deals are unique. They can be structured in four different ways: straight option (certain time, certain price), letter of credit (issued from buyer’s bank to seller), interest option (during due diligence, amount of interest a seller would earn on the price or appraised value is paid by buyer) and rolling option (division of property into small parcels).
All options have pros and cons, but each could be a way to get a unique or niche deal done. Here are five things to consider:
1. A contract for deed is a payment process that may benefit a seller with taxes. If the seller is looking for a lump sum to invest in another property, this isn’t the way to go. Having a tenant that has an ownership stake, could benefit the property. It can be negotiated that the tenant/buyer takes full responsibility of maintenance, relieving a potential headache for the owner. Plus, a monthly payment that includes a purchase component is higher than just rent.
2. For buyers, an option to buy a property is a great way to invest in their business and reach long-term goals. This option could fit a buyer that doesn’t have the money but has a clear picture where they want their business to be in five years––and the will to make it happen.
3. Option to buy can also be a first step in CRE investing. It’s a way for those that don’t have the money get their first deal. But you’ll need a willing seller––someone who is vested in seeing the buyer succeed in the new venture.
4. Contract for deed does have its risks. A buyer that falls behind on payments could lose equity built if the owner terminates the contract.
5. Connect with your financial advisor to be sure you understand what the tax implications could be if a lease option is treated as a sale.
If you think you might want to explore any of the options in more detail, I’d be happy to discuss them with you. At CEG, we’re here to help! Reach out to our team today if you have any questions. Or you can find me at 612-788-1552 or jeff@cegspaces.com.
Jeff Salzbrun is the managing partner of Commercial Equities Group (CEG). As a veteran-owned real estate brokerage, CEG has been involved in thousands of sale and lease transactions, ranging from single offices to 250,000+ square foot buildings. At CEG, we get your deal done. We know space, and we know the CRE business.
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