Why would a seller would consider seller financing

Question

I am selling a property I own outright. I don’t understand why an owner would consider seller financing. I can only think of reasons not to: capital gains tax, loan interest rate less than the property’s cash flow, risk… The only way I could make it work would be to identify a buyer I know will default. Then I could keep his/her deposit money and any capital improvements put into the building. This doesn’t seem very polite.

One way to answer my question is to give me a bulleted LOI with terms that would incite me to finance the sale.

Craig Parsons · Answer

Simple question what will you do with the cash from the sale? if you do not need the cash Can you get more money charging interest to the buyer and potentially a higher sale price. I think a guaranteed 7 or 8 % interest rate on a home loan is gonna generate more income than most other less riskier investments.

Scott Winter · Answer

I'm not totally following your reasons not to, so sorry if I'm misunderstanding your question. Here are a few reasons sellers might offer seller financing when selling their property. It's definitely not for everyone, so don't feel like you're missing out on something. LOI - I'll offer you whatever value we agree your home is worth, I'll give you a down payment if you want, and I'll pay you 8% interest on the balance of the loan until it is paid off or sold in 30 years. If you don't want to wait 30 years, we could amortize it over 30 years and have a balloon payment due in 10 in which case I'll refinance you out or sell the property.Why are you selling the property? Many sellers are tired of being landlords but wouldn't mind collecting a check every month still. As a lender, you don't have to deal with the tenants and maintenance, just collect the payment.What are you going to do with the money? Sure you could invest it in something else, but many real estate investors know real estate really well and are most comfortable in that space.What is your tax situation? Many people are at different stages of life and income may be high so selling outright may lead Uncle Sam to take a much larger portion of their income.

Spencer Speckles · Answer

Account Closed Your point is well taken and I’m glad you put it out there. I was being a little sarcastic. I’d never do an owner finance with someone I know will fail. That’d be “impolite” :-)

Lynn McGeein · Answer

It can be a great way to sell a problem property for a good price to someone who wants to own a house, has money for a down payment, but can't qualify for standard loan products. Just make sure you get enough of a down payment to cover issues if you need to take the property back.

Jaron Walling · Answer

Given the market conditions the two biggest reasons I see sub2 deals happening is if the seller has no equity in the home and is behind on payments. They may not be able sell their home using traditional on market methods, or even afford to pay off their loan. The second would be to spread out taxes instead getting hit all at once from Uncle Sam. Beyond that sub2 deals are few a far between right now. If the economy changes and it negatively affects RE then maybe these types of deals become more prevalent.

Katherine Blazer · Answer

You named a lot of them. Spread out capital gains over a few yearsMake more money on interest paymentsContinue to cash flowI am not sure about trying to structure with someone defaulting in mind.. that seems like bad karma. But you could always lease to own; that way, you control the property and do not need to worry about a foreclosure. What would be the pros to selling outright? 1031, more money upfront for the next investment...

Sean Ross · Answer

@Spencer Speckles, there are additional complications if you try to carry back a note while performing a 1031 exchange. Lots of tripwires from the IRS. If you're looking to do a 1031, this adds one more reason to shy away from the seller financing.

Spencer Speckles · Answer

Thank you for breaking it down. It sounds like I am not in a situation where it would make sense. For me, the buyer’s interest payments wouldn’t be close to the current cash flow and I’d have to pay capital gains taxes, so I’d lose even more. My other properties are commercial, non-residential properties where I make more with a lot less headache. I’d use the sales proceeds to 1031 into a commercial building. Your comments suggest that it’d be better for me to sell it outright. Thanks for your help.