SELLER FINANCING VS. THIRD PARTY BANK FINANCING

Assisting Houstonians in Purchasing & Selling Businesses And Commercial Properties 

Seller financed transactions occur more often in commercial transactions than in residential transactions. Seller financing can exist in either a sale of a business and its goodwill and/or the sale of a commercial real property. Because many Buyers may not have sufficient credit or liquidity, banks often do not finance the entire purchase price. Banks usually require a large amount of down payment, at least 20-30% or more, to protect their interests in commercial real property transactions. In addition, if the Buyer seeks to purchase only the business, its fixtures, and goodwill, it would be very difficult to obtain a bank loan because of the lack of security (collateral property). Thus, in these situations, the Seller usually finances part of or the entire loan. The Houston Seller Financing Attorneys and the West Houston Commercial Transaction lawyers are experienced in drafting documents for Seller financed transactions. Please contact one of our Houston Commercial Real Estate Attorneys for more information.

There are positive and negative aspects in a Seller financed transaction for all parties involved. You need to know what these are and leverage them in your negotiations. On the positive side, this financing instrument allows the Seller to transfer the property to a Buyer that otherwise would not be able to purchase the business or property. In addition, the Seller would be able to obtain interest on the principle of the loan. The Buyer in Seller financed transactions is able to obtain a loan at a commercial rate, which sometimes may even be better than bank-rate, depending on negotiation with the Seller. At the same time, with Seller financing, the Buyer would be able to obtain credit in a depressed market even if the Buyer does not have much liquidity.

There are also risks involved in Seller financed transactions. First, as a Seller, you assume a lot of risk in financing the purchase price of the business or commercial transaction. These risks increase dramatically when there is a third party bank is involved in the financing. The Bank will want to take the first lien, and the Seller would have to take the second lien. Thus, if Buyer defaults on the bank note, the bank can foreclose on the property. If you want to protect your interest, as a second-lien holder, you would have to pay off the first note to the bank or to bid on the foreclosure at auction. As a Buyer, your risk comes in the terms or requirements of the down payment. If for any reason you default on a seller-financed loan, the Seller can foreclose on that property either judicially, by filing suit in court, or non-judicially by simply taking back the property or business.

The Houston Commercial Transaction Attorneys and the Houston Commercial Real Estate Lawyers at the Law Offices of Steven Tuan Pham will assist you in drafting and reviewing the financing addendums to protect your interests as Sellers or Buyers. The money you spend up front, including attorney’s fees, is a good investment in a risk-reduction strategy that will pay off in the long run. Please contact one of our Houston Real Estate Transaction Attorneys or our Northwest Houston Real Estate Financing Lawyers for personal consultations.

DISCLAIMER

The information above is NOT intended to replace a personal consultation with our Houston Real Estate Transaction Lawyers and our Spring Houston Real Estate Litigation Attorneys. Readers should not construe the information as a consultation. There may be other legal issues based on the specific fact of each case. Every case is unique and our Houston Real Estate Transaction Attorneys and our North Houston Real Estate Litigation Lawyers need to review the facts and circumstances of each individual case in order to provide a meaningful personal consultation. Please feel free to give us a call at 713-517-6645 or complete our Contact Form.

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