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Lane
Lane, JD, CFP, MBA, CRPS
Category: Real Estate Law
Satisfied Customers: 10142
Experience:  Advising Businesses and business owners for 30 years
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What is minimum down payment % to quality of real

Customer Question

What is minimum down payment % to quality for sale of real estate?
Submitted: 1 year ago.
Category: Real Estate Law
Expert:  emc011075 replied 1 year ago.
Hi. May name is ***** ***** I will be happy to help.
Can you be more specific? Are you trying to sell your home? There's no down payment required if you are selling real estate you own.
Customer: replied 1 year ago.
This is a proposed sale of commercial real estate held by a not for profit entity. The proposed buyer is a non-related not for profit foundation who currently leases the land.
Expert:  emc011075 replied 1 year ago.
Ok. This is a real estate not tax question. I will opt out so somebody in real estate can help you.
Expert:  Lane replied 1 year ago.
Hi,
There are no LEGAL minimums here.
If you're asking about how much a LENDER might require, that will vary depending on the underwriting process of each lender.
Commercial loans, UNlike residential mortgages, aren't backed by a governmental entity such as Fannie Mae. So most commercial lenders charge higher interests rate than on, say, the same sized residential loan. S
Some lenders go a step further, scrutinizing the cash flow and other assets business AS WELL AS the commercial property that will serve as collateral for the loan.
Traditional lenders require 3-5 years of financial statements, 990's and any other documentation of how the loan would be serviced, as well as...
Leases
Asset statements
Original non-profit's charter
And even, Personal financial records of the responsible parties for personal guarantees.
As to LTV, it is generally 20% or 25% down, at that amounts of 2 million or more, many lenders may want 30% down.
However, that might be done with a combined loan to value meaning a seller could carry back 15% (20%), buyer has 10% down and finance 75% (70%).
And there ARE other arrangements can be made; Pledging other assets, could put you at 100% (no doe=down payment) ... or a lender might allow an assumption of an existing loan keeping the original lessee on the note.
But this is a lender policy issue, not a set number by any statute.
Let me know if I've understood your questions correctly...
Lane
If this HAS helped, I'd appreciate a positive rating, using the smiley faces or stars on your screen ...   that's the ONLY WAY I'm credited for the work here.
Customer: replied 1 year ago.
I think the missing answer is for GAAP purposes isn't there a minimum percentage that must be part of a down payment for the seller to recognize the full sale transaction.
Expert:  Lane replied 1 year ago.
OK thanks for that clarification.
The primary source of accounting for real estate sales is the Financial Accounting Standards Board's (FASB) Statement 66.
Sometimes realtors get confused by Statement 66 because its focus, rightly, is on the economic SUBSTANCE of the transaction.
But in that venue, there is only the sales contract (the standard CONTRACT for sale and purchase — usually approved by the state association of realtors and the state bar association) and the CLOSING.
But lots can happen between those two things, so 66 comes into play at closing time.
What 66 does for the real estate world is tweak the accrual method by expanding the basic accrual method to the full accrual method, requiring the following:
The sale is consummated;
Initial and continuing investments by the buyer in the property are sufficient;
All the risks and rewards of ownership reside with buyer;
There is no continuing duty or involvement by the seller post-sale (after closing); and,
There is no future subordination of any buyer receivable (seller financing cases).
Generally, a down payment of at least 20% is required. If not, then at least 90% of sales contract has to be be collected in full IF those contracts are not cancelled within six months of their recording.
What this does is ensure that contracts satisfy the full accrual method.
And this is not an exhaustive listing, but the revenue is recognized at closing if the Statement 66 conditions for the full accrual method are met.
Then if not, there are prescribed methods;
Deposit Method ... Where no revenue is recognized and no buyer’s receivable is recorded at the closing date. Instead, the seller entity continues to carry the property on its financials primarily because of the uncertainty of the seller’s investment.
Cost Recovery Method ... The seller does not recognize any revenue at closing but only when the buyer’s total payments (including any principal and interest on assumed debt or the seller receivables) exceed the seller’s cost of the property.
Installment Method ... No revenue is recognized at closing except for any initial payments. Subsequent revenue recognition is based on a gross profit ratio. (Probably the most widely used where the sale doesn't qualify for the full accrual method of accounting under Statement 66, and the sales price is paid through seller’s receivable or assumptions.), and
Reduced Profit Method ... wherea discounting technique is used. The buyer’s receivable is discounted to the present value of minimum annual payments due over 20 years for land debt, or over a normal term for other realty.
Here's the full FASB statement:
http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175820909975&blobheader=application%2Fpdf
Hope this helps
Lane
If this HAS helped, I'd appreciate a positive rating, using the smiley faces or stars on your screen ...   that's the ONLY WAY I'm credited for the work here.
Expert:  Lane replied 1 year ago.
Hi just checking back in ...I think we finally got there.
other questions?
If so let me know, and we can drill down further on this
If not, I'd appreciate a positive rating, using the stars or faces on your screen. (That's the only way I'm credited for the work here.
But again if you need more or more specificity... I'd be glad to help
By the way, here's a good summary of FASB 66
http://www.fasb.org/summary/stsum66.shtml
Let me know,
lane