How Commercial Property Down Payment Assistance Works
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How Commercial Property Down Payment Assistance Works

Down Payment Assistance

Let’s start by first dispelling the rumor that Down Payment Assistance (DPA) is something for nothing. For commercial projects, the down payment may come from a third party, but is actually financed by the seller. This means that it is a creative way to allow the seller to cover the down payment and sometimes even the closing costs. This will allow a real estate investor to purchase an income-producing property for little or no money at closing. For any deal to work, you first need a motivated owner who is willing to cover the required DPA and the costs associated with it. The DPA is vendor funded!

Unlike residential programs, the DPA will come from a government entity, a bank (for CRA purposes), or a non-profit organization in commercial transactions, the assistance is always funded by the seller. No entity has a financial or other interest in giving people money to buy multi-million dollar income producing investment properties other than the seller.

Vendor financed DPA

Once you have an owner willing to use creative financing to assist in the sale of their property, you now have the first requirement for a successful creative transaction. Without a willing seller there are no creative financing deals. As a commercial real estate investor trying to buy a property using little or none of his own money, his first job is to find that willing and motivated seller. But they must not only be willing, they must be able to do it. This translates into equity in the investment property. Lots of fairness. If you hope to finance a project without using your funds, the property must have at least 30% equity. Sure you can do deals with as little as 20% equity, but financing options are greatly reduced and the buyer will at least pay closing costs, which would include substantial DPA fees.

Given a willing seller and an income-producing property with substantial equity, you now have the minimum requirements for a seller-financed assistance program.

How the DP program works

  • willing seller
  • Property with substantial equity
  • The contract is written for the value of the property (the seller will receive the agreed net amount)
  • The third party DPAC sends funds to the (buyer’s) closing escrow.
  • The escrow company sends the DP funds plus the fee to the third-party company at the time of escrow disbursement (from the seller).

Example:

  • Property Value: $1,000,000
  • Loan amount: $750,000
  • Net Seller: $700,000
  • Down payment: $250,000 from a third party DPAC
  • PAD Fee: $30,000
  • Return to DPAC from escrow: $280,000
  • Balance for additional closing costs: $20,000
  • Net to seller: $700,000

Finally,

You have the opportunity to purchase a property from motivated owners willing to use creative financing with seller-financed assistance for both closing costs and the required down payment. This is how the seller financed program works.

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