The Rise of Owner Financing

The challenges in the lending sector are also the foundation for creativity.

Creativity is the key to lending in a market rife with problems, and nowhere are those problems more evident than in the beleaguered office sector, where post-pandemic values have plummeted by some counts nearly 30% year over year. Just to have it said, the failure of workers to return to the office when they can choose hybrid approaches, a resultant decrease in space need on the part of corporate occupiers and the lingering inflationary market have all conspired to place enormous downward pressure on those values, and therefore on the banks that are underwriting them.

In what Moody’s Analytics calls a coming “wall of maturities,” some $1.4 trillion in commercial loans is set to mature this year and next, putting inordinate pressure on banks and borrowers. However, a trend to watch now is the growing number of owner financings that are taking place, a creative solution in a market with unprecedented problems, and a solution already being embraced by some of the largest lending institutions in the world, including such names as JP Morgan Chase, Morgan Stanley and Capital One Financial Corp, as the newsletter CRE Daily reports.

Essentially, owner financing (as opposed to lender financing, for all types of real estate) is a way to facilitate closing transactions during this period of limited commercial loan availability.

As CRE Daily reports, “Seller financing rates are currently around 5%, making them an attractive alternative for buyers who can save up to 50% compared to market financing.”

For the seller, this often means a faster closing and the collection of interest income as a part of the agreement. On the downside, the proceeds are considered part of the mortgage payment.

For the buyer, benefits include the relative ease of both qualifying for the financing and negotiating the terms. On the downside, the owner may demand a higher price than market rates and the above-mentioned ability to negotiate terms is at the discretion of the owner rather than by lender policy.

It is expected that the general economic situation and the inflated interest-rate environment will continue well into next year. Meanwhile, the office market has months, if not years, to go before it reaches its new normal–whatever that might mean.

So there is clearly still pain left to be felt. The good news is that challenges such as the one we are facing in the lending sector are also the foundation for creativity, such as those which lenders are now applying to their issues. Owner financing is certainly a trend to keep watching.

Article courtesy of Jonathan Hipp of GlobeSt.com

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