Why Purchasing Commercial Real Estate with Cash or Seller Financing Can be Dangerous

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Why Purchasing Commercial Real Estate with Cash or Seller Financing Can be Dangerous

While buying commercial real estate and other property without using a bank or credit union to finance it seems like a great deal, we have been seeing repeated examples of where it can come back and bite the new property owners.

Over the past couple of years, we have seen several instances of where property owners have bought properties at a discount from sellers either via cash or seller financing, both of which usually don’t require much due diligence. Where we have seen concerns recently are for higher risk properties (gas stations, dry cleaners, industrial sites) but sometimes seemingly lower risk properties. The problem is that even though they might be comfortable with the risks, they often will look for financing from a traditional lender in the future, who WILL require some form of environmental due diligence which may reveal issues at the property that will reduce the likelihood of getting a loan or at the least, increase the cost of getting the loan.

Another consideration is the exit strategy for the property. While a buyer of a property may not need financing, a potential buyer down the line most likely will need financing and will be under more scrutiny by a potential lender than the owner was at the time of the cash buyout.

Therefore, regardless of the method of purchasing a property, it makes a lot of sense (and potentially lots of dollars) to consider what a lender requires for due diligence to make sure your property is as marketable to sell by being easy to finance for future users and buyers of the property.

Interestingly, we have seen an increase in CRE investors reaching out to ORMS asking for our opinion of the “financeability” of a piece of property in their portfolio. Basically, they want to know if a buyer will be able to get financing in the future. We find this to be a wise course of action with respect to their CRE asset.

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