Seller Fiancing as a retirement strategy

Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes

Quite often I hear people talk of seller financing as more of a last ditch resort when disposing of property that one might not be able to sell any other way. I'm sure that many of you have come across these kind of deals.

I have been a buy and hold investor for many years and through various means now have several paid for properties that have substantial built in gains. At this juncture in my life and business, I will be doing 1031 exchanges to build better cash flows and look for better opportunities for appreciation.

I have considered seller financing now, but don't see that as being quite as advantageous as exchanging properties. When I near retirement though, it may make sense to use seller financing as a way of deferring gains recognition. This type of sale would be treated currently as an installment sale which could be quite beneficial. I have a number of properties that between appreciation and depreciation recapture would yield large gains if sold traditionally.

I know that some of you have considered this strategy. I would appreciate hearing your thoughts, opinions, laughter, etc. Feedback is a great way for everyone to learn.

0 Reply

184 views

Most Popular Reply

Frank Adams

Loveland, CO · Member since 2008 · 1k+ posts · 123 votes

16y

Dan, it's an excellent idea IMO, one that I used and I've been happy with it. However everyone's situation is different.

Rich wrote; .

1. "Once you move out of owning, your future gains from principal reduction, tax benefits and possible appreciation stops instantly."

True, but in my case I owned everything free and clear, and lived in TX where appreciation isn't much of an issue. Since about the 1980s or so whenever someone says "tax benefits", they really mean LOSSES.

2. "Instead of tax breaks, you become taxed, taxed and taxed. First on the gain from sale, and then the income you receive."

See above regarding "tax breaks". Yes you do pay taxes, but you pay taxes on the rent you receive as well, moot point IMO.

3. "Most likely, you'll also lose equity from cost of sale, and commissions."

I've NEVER paid a commission on any seller financed deal I've done. When you ADVERTISE the benefits correctly you'll have your choice of buyers.

4. "You can continue exchanging up forever and change basis and grow your future estate."

That's OK if you're interested in an "estate". I have no interest in leaving an estate. I plan on ENJOYING what I've worked for.

5. "Just re-fi and get your money out to live on,,,tax free!!"

OK, to get access to MY OWN MONEY, I'm going to pay, points, closing costs, fees and then interest to get what I already own. And then have the hassle of my overworked wife writing checks each month. No thanks.

Once I knew that I didn't want to spend the rest of my life in Houston, or be a long distance landlord (IMO there does not exist a reliable, trustworthy property manager) I decided to sell my 16 rentals on a seller financed basis.

As the leases expired I gathered comps from agents and advertised as follows; 3/2 in Running Rat Estates, owner will finance with $2,000 (sometimes as high as $5,000) down.

By and large I was selling for 12-15% OVER COMPS. I generally charged about 1 1/2 to 2 % over the prevailing interest rate. I prepared the documents and charged for it. Closing was handled at my bank, they don't charge for notary service.

I've gotten a few of them back, but always resold at a higher profit and started the clock over.

The downside is that over the years some buyers have refinanced and some have sold so my income has dropped from $130K/year to about $45K. Although I did receive the balance on the sale and reinvested those proceeds.

I looked on this as my own "bond fund" or as my wife says a "FrankieMAE" fund. I've always adjusted the rest of my holdings to reflect this.

Frank

6 Reply

See this reply in the discussion

53 Replies

Jump to latestLatest

Sort by

Eddie Ziv
Investor · Mableton, GA · Member since 2009 · 1k+ posts · 465 votes
16y
OK Rich, fair enuff... however,
1, 2 & 4 - No more worries about vacancies...
#5. It's not irrelevant even if you plan your estate properly. People can still sue you, may not be successfully but it can cost you... :cry:
0 Reply
Account Closed
OP
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
16y
It seems to me that if you are a buy and hold investor that you have two basic choices when it comes to your properties in retirement.

1) Sell some or all over time. This can be very expensive and figuring out a way to minimize the taxes. When all is said and done you still have cash that needs to be put somewhere.

2) Keep your property and plan on ways to minimize estate taxes. This may require eventually finding someone as well that can manage the properties. It means some thought must be given to how the properties will be benefit rather than hurt heirs.
0 Reply
Eddie Ziv
Investor · Mableton, GA · Member since 2009 · 1k+ posts · 465 votes
16y
All my properties are my retirement plan. I don't make a living off my rentals. The cash flowing properties are paying for the not-so-cash flowing ones. I'm sure there are other ways to avoid capital gain somehow. I think that self-direct IRA is one of those ways although you would need to pay income taxes...
0 Reply
Account Closed
OP
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
16y
Eddie,

I agree that using a self directed Roth IRA or 401K can be a good way to build a retirement that will not be taxed in later years.

There are disadvantages though. Enough cash must be maintained in the account to pay any needed expenses on the property. There are limits to the amounts that can be invested in the retirement plan. You have less control of a property in a retirement account.
0 Reply
Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
16y
I have structured my portfolio to mirror a very simple yet effective strategy Jimmy Napier told me about 25 years ago. Hold half your real estate portfolio in high yield notes for income, the other half in property for growth and inflation protection. While other strategies will work better in certain markets, I am convinced through experience that this offers the greatest benefits to a retirement scenario in our uncertain times.
Private Mortgage Financing Partners, LLC
Website View Page
0 Reply
Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
16y
Hi, well lucky for some I guess (LOL) my internet provided "Mediacom" is on and off again, so I've been off the air...I'll be changing that on Monday...

Holding or doing SF needs to be assed in the long range business plan. As with any portfolio, I suggest a blend of both. As tax laws change you are never grandfathered by any startegy. The best way to avoid capital gains is never sell the property. Since I've done over a 1,000 SF deals which included every type of property from Single family to industrial and recreational, I can assure you that a 1030 is not always the answer since your exchange needs to be "like kind properties"

Very good points made above, but consider this: If your LLC owns the property and you sell the membership in the LLC, to any degree, you have a different ball game. Default is payment is simply an action of "withdrawal of a memebr" with the Secretary of State, not a foreclosure action. The sale of the memebership can be structured to include appreciation so the is never an issue of capital gains. Interest rate risk is taken care of by an adjustable note rate. A buy sell agreement funded by insurance on a key man policy (owned by the LLC) takes care of transfers for estate planning. A retirement plan held by the LLC and made for the benefit of the "selling (retiring) member" can set aside many taxable issues. The retirement plan can also be set into the irrevocable trust prior to or at death, so if you have the issues pointed out a s Rich mentioned, that's taken care of as well.

The last time I did a 1031, I was down to the wire on finding my purchased property and I could have found something better if I had had more time! Last time I'll ever do that! If I were dealing in shopping centers on a natinoal scale, it might not have been such an issue, but I prefer to deal in properties that I can reach out and touch. To me, to say just get a kmamnagement company is just plain nuts as an owner. The PMs have a book on ways to screw over an absentee owner, fluff, vacancy scams, maintenance kick-backs, etc. so unless the PM is willing to be held to a max fee and work for nothing above and beyond that fee, I won't be signing a Management Agreement in another state. If you don't want the headaches, I'd suggest a REIT. There is much more to holding property than just hiring a manager, but then you only have to manage the manager.

As pointed out above, notes are more flexibile than deeds and transfers and assignments barely have expenses compared to the deed. There is a reason why the financial system ustilizes mortgages as the basis for all kinds of financial transactions and not deeds. I can make a note dance and accomplish more startegies than could ever be accomplished with a deed in a trust.

Frank, may I suggest ypou use a pre-payment penalty in the amount of the tax liablity. Also, I shoulkd point out that charging for processing, preparing, underwriting or closing a note may put you in violation of law and in the event you ever have a problem arise you will then be taking on a professional liability that as a note holder you don't need. It's easier to cover and justify your efforts as being included in the sale price than trying to break out gig fees on a seller financed transaction.
I'll stop for now, afraid Mediacom will shut down any second! Bill
3 Reply
Rich Weese
Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
16y
Good point on the mgmt screw jobs by mgmt companies. I prefer to hire and train my own. I have other detailed posts on here about training my daughters to manage my props. It worked well.
Currently , I only have one outsourced mgmt company, but I have a personal asst that oversees that company. My other mgmt staff in So. Tx, AZ, and FL are my hand picked and trained people. Rich
1 Reply
Account Closed
OP
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
16y

Thanks Bill for this suggestion. An LLC can be a useful means of transferring ownership, creating a retirement fund, borrowing money, or money other creative transactions. I want to research this more because I am quite aware of some of the rules surrounding related party transactions.

All the more reason to plan your retirement strategy. Failing to plan can be very costly and quite likely not lead you were you really want to go. My desire is to insure that I have a good income in retirement that will support all of the things my wife and I want to do. Currently my real estate provides a nice income that supplements our financial needs.

In the next couple of years I want to have enough coming in from residential and commercial properties to comfortably live on.
0 Reply
Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
16y
Hi Charles, I have always dealt with planning issues in a "backward plan" strategy, meaning that I begin at the desired end result and work backwards to facilitate the end result, kind of like planning a trip and needing to be there by 1:00 PM on Tuesday, so when should I leave? If you look at where you want to be, income and tax wise, you'll find LLCs very useful. They can convert any asset, car, plane, home or a strip center from it's real life business form into a single, managable and transferable entity. Take the depreciation schedule for real property and personal property for example. These are issues that are the nature of the tax beast, not monetary losses, but they can be conslidated within the books of the LLC together with all other accounting issues and the end result will provide a net book value or net worth which can then be transferred easily from one party to another. It's kind of hard to split the value of your King Air, the Sea Ray and the Shaddy Dale Storage facility among your heirs without selling these asstes. The LLC can admit members to hold fractional shares in the LLC that owns the assets. Very simple concept and this is the basic use of holding all kinds of property in a Trust. But Trusts require a Trustee and corporate trustees usually will ding the trust with fees along the way which can eventually require that some or all assets must be sold inorder to pay expenses. A manager of the LLC may or may not be compensated and certainly does not need to be a corporate trustee type, like a bank.
The LLC membership (shares will call them for simplicity) can be sold to a new "buyer" and the sale of the membership share can be financed.

Not to venture from the OP, but a note: a residential property held in such an LLC can be sold through the share where title is not transferred until the share is fully paid without getting into a real estate seller financing issue if properly structured.

Income from properties in the LLC can also pay for premiums for health and life insurance as well as for contributions to a retirement plan. RE types are always concentrating on IRAs, but the retirement plan can be as simple as a self/private funded annuity from the LLC. The old Zero Coupon Muni Bond, a single pay life insurance policy or annuity can be incorporated in any future payout that might be reuired.
Instead of collaterializing real estate with a deed of trust, an assignment is made for the business assets together with a UCC filing as may be required. Removing a member is very simply who fails to live up to the agreements made, so there is no foreclosure.
LLCs are very flexible entities. They can own other LLCs or S/C Corporations. A Series LLC is a very good entity for RE investors, but is not used in my state, maybe in time. Which brings me to termination of the LLC. It's a simple filing and winding up process that allows property to be assigned out of the entity at it's current value. Since the value of the company includes the current value of the property, there is no capital gain issue. Estate taxes, if any, IMO, should be taken care of with like insurance if you want assets to pass unencumbered. Also consider that in the event any member (key person) dies that the value of their interest in any business entity will be due the surviving family memebers, so if you don't want to have your business partner's wife to become your new business partner, use a buy-sell agreement and fund it with insurance.
Lastly, we generally think of holding our property in a closely held entity for fear of other complicating our business or robbing us, but with a properly structured LLC, it is possible to team up with others. This eliminates the related business partner issues, not only with taxation but also liability and transactional issues. Partners can be a plus, but safeguards most be in place to ensure that all parties are protected. To use such a strategy, it will cost you since you'll need a very good attorney well versed in estate and business issues, but after that initial expense, it may be well worth it as your company can almost be on automatic pilot.

Some attorneys will tell you to use a trust and IMO there is a reason. Trusts need to be managed later on and issues can arise that will need to be litigated....so there you go! A properly drawn LLC can be perpetual as well or be limited for a certain time period and then renewed. Just some food for thought Charles....lol. Bill
3 Reply
Account Closed
OP
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
16y
Thanks Bill, always appreciate your well thought out and detailed responses.
0 Reply
Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
16y
Wow! What a fantastic thread!

I was going to comment on several different sub-threads and my head started to hurt so I figured I would address your original post instead. I am sure that this has been covered already, but below are my thoughts/comments from someone much younger than most of the other folks that have provided valuable insight.

Originally posted by Charles Perkins:
Quite often I hear people talk of seller financing as more of a last ditch resort when disposing of property that one might not be able to sell any other way. I'm sure that many of you have come across these kind of deals.

From a young whiper-snappers' perspective I see seller financing of SFRs as a way to control more assets than I could with the traditional rental model. We buy sub-to and do wrap sales....the only viable way to do it in Texas. The benefit of living in Texas is that it is a pretty swift process to get the deed back if someone stops paying you. I took a property back DIL last month and had to foreclosure this Monday to remove a federal tax lien....an easy process with a 21-day notice in Texas. DIL is often the best approach b/c your sellers could get pissed and pour concrete down the drains....your only recourse would be to sue someone with no money...a loser all day long and twice on Sundays.

If I had the equity you guys do in my properties I would prefer to take the tax bite and sell...especially with capital gains as low as it is right now. An exchange would be better if you were keeping property instead of diversifying your holdings. I am a bit believer in spreading my assets across asset classes though...and not just being solely reliant on real estate.

Holding long-term fixed debt from a carryback is a loser in my book. Who wants fixed-rate debt with a long lock-up period with the possibility of elevated inflation?! Negative real interest rates on my bonds (notes) is pretty scary to me.

Originally posted by Charles Perkins:

I have been a buy and hold investor for many years and through various means now have several paid for properties that have substantial built in gains. At this juncture in my life and business, I will be doing 1031 exchanges to build better cash flows and look for better opportunities for appreciation.

That is the best strategy IMO. As long as you are still willing to deal with the brain damage of owning property or managing inept managers this is definitely the right course of action. Exchanges have always seemed fraught with risk to me though...especially if the seller knows they can extort you because doing so can potentially trigger a huge tax liability for you. Make sure you write your contracts carefully!

Originally posted by Charles Perkins:

I have considered seller financing now, but don't see that as being quite as advantageous as exchanging properties. When I near retirement though, it may make sense to use seller financing as a way of deferring gains recognition. This type of sale would be treated currently as an installment sale which could be quite beneficial. I have a number of properties that between appreciation and depreciation recapture would yield large gains if sold traditionally.

Quite beneficial? Eh...You are deferring the gains taxes, but you are also deferring the liquidity that you can put to work in a much better place than holding paper that competes with Fannie/Freddie-backed notes. This seems like a net loser to me...converting equity to fixed-rate debt. If you do it I would have it be a floater past some year and let a servicer deal with the brain damage of the amortization schedule. If you do fixed-rate debt then throw in a balloon in case inflation ravages your real returns.

Originally posted by Charles Perkins:

I know that some of you have considered this strategy. I would appreciate hearing your thoughts, opinions, laughter, etc. Feedback is a great way for everyone to learn.

I think seller financing is a winner when you can wrap your debt around Fannie/Freddie fixed-rated debt and a loser when converting equity to notes. The reasoning is b/c the notes have to compete with Fannie/Freddie debt for prime borrowers....If you do non-conforming loans your buyer's cash flow stream is likely shakier. In a place like The People's Republic of Kalifornia where it takes a year to foreclose on a deadbeat this is most certainly a loser. In Texas it is less of a loser, but still non-optimal even after tax considerations in my book.

Stick with the exchanges...That is the best way to go.
0 Reply
Account Closed
OP
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
16y

While I agree that holding a long term debt is not great solution, I would think twice about selling property and taking the tax hit all at once. I'm inclined to look at other solutions. I expect in the not to distant future that capital gains treatment will go away and you will see 40 to 50 percent tax brackets.

I prefer to find a way to manage any tax implications. Seller financing can at least spread the tax hit over many years. If I was to do seller financing, I would probably do a 5 year note amortized say over 20 to 30 years. I would be willing to renew the note every 5 years at market rate interest. I would also want someone that could put at least 10% down and had good credit.

I'm now looking more at how I might use my LLC to transfer assets and to manage any taxable distributions. Bill Gulley has offered up several ideas that I am pondering.

I have know problem deferring liquidity as long as I insured a decent return on allowing someone to make payments. Taking a lump sum distribution means that I still need to invest it somewhere and I have little desire to invest in stocks or bonds. There may be other investments that make sense, but I am comfortable with taking a small gain every year. I could still manage the remaining real estate and minimize my taxable income.

I'm still giving thought to any other retirement alternatives as well.

0 Reply
Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
16y
How about investing some of the liquid funds in seller-financed notes? You can get those at a discount, which will eliminate some of the inflation erosion.

I hope that makes sense...BP is turning me into an insomniac so I am pretty tired right now...must resist surfing more!
0 Reply
Account Closed
OP
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
16y
Bryan, I need to investigate buying notes. This is something I know nothing about. I understand the value of discounting, but have no idea where to find notes and how best to minimize any potential loss from note purchases.

I would want to understand foreclosure laws as well, before investing.
0 Reply
Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
16y
You should just seek out an experienced note guy that wants to broker some product when he is cash-strapped. My understanding is that most note buyers broker a lot of their stuff too....you won't get the best notes, but you can still be choosy and get good product at a discount.

The added advantage is that note brokers can tell you specifically what the note is worth, the liquidity, and how they should be structured so that you are meeting your needs.

Jeff Armstrong is a great note guy that I have taken courses from. I am sure others on the forum can recommend other great note folks. I am happy to introduce you to Jeff if you would like to pick his brain.
2 Reply
Account Closed
OP
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
16y
Bryan, that would be great. This is one area that I would like to learn more.
0 Reply
Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
16y
Hi Charles, Before you buy any note it's critical that you understand how you will get your borrower out of the deal, refinaning it. Most private notes with short balloons fall through initially and if they are not foreclosed upon they need to be modified. As the rules are changing, it's imparitive that deals be properly underwritten in the first place. Any note broker is not the answer here. Note brokers buy and sell existing notes and can tell you what they can get at that time under given circumstances. If you are selling, it's a big mistake in my opinion, to do your first note sales with one brokerage just because they were recommended. You need to understand too, that many "investors" or others in real estate have all kinds of arrangements with people they recommend, from money incentives to just other business relationships, so I never take a recommendation and go deal with one broker in anything. Shop the deal with several brokers.

As to writing a note, most brokers are nothing more than loan processors, they never have had loan authority under a structured loan program. SOme do with private money, where they set the loan terms, but it's what ever the idea might be that they sold to the money investors, so to say "underwritter" they really aren't if they have the ability to change the rules as they go along....see the difference? Anyway, seller financing IS NOTa structured underwriting situation and you don't write loans for the purpose of selling them they should be written to be paid as agreed first. Seller financed deals must be viewed as obligations that must be met in the future, rather than today. How will the borrower pay it off in three years for example, not where he is today so much, other than can he reasonably meet the obligation as agreed. No real thought at all is given to future requirements in conventional financing, it is assumed if someone qualifies today, they will in 5 or 7 years. Seller financed deals are generally made to those who can't meet secondary rules, who don't have the credit or other requirements, and these issues must be addressed. There are also many who will do a seller financed deal who might be excellant borrowers, the loans are cheaper to put in place, rates may be competitive and LTVs may be higher than what a bank will do att the time, I have used seller fina ncing myself as a borrower just for these reasons, not because I couldn't get other financing. So there are two sides of this market.
If you are building a protfolio for retirement, longer amortizations can be handy.
As to tax issues, these can be avoided as pre-payment penalties. In the event of any prepayment, the payoff can include the tax liability arising from such esarly payoff.
If you foreclose at a sale, the proceeds will be your amount to be taxed under the note as it is paid off. If you accept a deed in lieu, the entire balance will become income from the past sale and the basis is increased for the property taken. It's a wash, but is an expense at that time.
Your notes can also be structured so that only the payments are sold (or financed) receive a lump sum today for the annuity assigned, but not the note. You'll find that this type of assignment is easier for the note holder and usually they get a better price, as it can amount to basically, borrowing money and pledging you assets for collateral, you can get that deal at most any commercial bank! Later, Bill
1 Reply
Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
16y
I can assure you I don't have any arrangement with Jeff Armstong and that he is an expert in the field...shop around and see who you are comfortable with. Do your due diligence!

PM me with your email address and I will send an e-introduction.

I disagree that longer amortization schedules are "good" or handy. It really depends on what you are trying to do. A short amortization schedule will drive a higher loan constant...or yield for the note. The duration is driven by cash flow patterns, and more specifically, the balloon date.

I am most certainly not a note expert. You should get advice from folks that are and talk to several reputable investors before you do anything. I would suggest looking into notes in Texas too because our foreclosure process is VERY investor friendly. I would steer clear of most of the left-leaning states where the process is more arduous on the note owner UNLESS you can get a huge discount on the note because of the brain damage involved. Everything makes sense at some price, but your time is valuable and educating yourself should be factored into the discount rate if you buy notes in the leftist states.
0 Reply
Account Closed
OP
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
16y

My thought in using seller financing is to create a long term stream of income that can fund retirement. As you stated the ability to transfer the note is not my concern. In selling property in this way, it is a way to manage taxes and provide a decent return over time. This would be much better than an annuity.

Obviously there are a number of concerns to be addressed. The ability of the borrower to repay over time. A change in market rates of interest over time. A borrowers change in ability to pay over time.

If the note can't address these issues it may not be a viable option.

My interest in possibly buying notes is a side interest. I can see where these could be good investments and be useful. I don't see this a retirement strategy for handling the assets I currently have.

0 Reply
Vikram C.
Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
16y
This is a great thread with lots of wonderful ideas.

I generally hate holding debt instruments because inflation erodes their value, as some previous posters have pointed out. One possible solution would be to structure the note to have a rate that varies with inflation. For example, the interest rate can be the previous year's CPI change + a certain percent. Since it is a seller-financed note, I would suspect that you can draw it any way you want as long as it is not unreasonable from the buyer's perspective.

I noticed that some people have mentioned the high cost of a foreclosure. In Arizona, there are trustees who do non-judicial foreclosures pretty cheap and I am sure other trustee-sale states (e.g. WA) have similarly cheap trustees. I don't think you should worry that much about the cost of a foreclosure.

In addition, if the foreclosure occurs after a significant amount of the principal has been paid off (or the property has appreciated in the meantime), you may end up taking back a property with some built in equity and then resell it on another note.
2 Reply
Morgan Michaels
Springfield, MO · Member since 2010 · 11 posts · 2 votes
16y
Actually, therre are laws to follow so you can't just do what ever you think is something you can get away with that day. I found this out the hard way, no, not as the lender but as the borrower. I sued his butt off for wrongful foreclosure and now have a judgment for more than the loan was originally made for. All the thanks to someone on here who made it possible, but I have been told not to mention his name, so I won't! You can't just write anything.
0 Reply
Vikram C.
Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
16y
Morgan, nobody is going to do a loan without discussing it with their attorney. What we're trying to do in this thread is come up with different ideas that might help the OP to come up with his plan and then get legal advice on how to make it happen.
1 Reply
Karl V.
Real Estate Investor · Asheville, NC · Member since 2010 · 7 posts · 7 votes
16y
I think that we've all overlooked a giant obstacle that makes this whole discussion nearly moot: The Safe Mortgage Lending Act.

If you invest in real estate, you'd better read up on it, because it COMPLETELY changes the rules if you seller finance.

Because of the whole mortgage mess, the government is going to step in and pile on a whole bunch of regulations. But the mortgage industry had a big part in defining those regulations, and one of the things that they're trying to do is kill the private lending industry, making them the only game in town. Under the Safe Act, you can only seller finance an owner-occupied property. That means that investors that own multiple properties will not be able to seller finance them when they sell them.

In it's current form, the states are allowed to define their own rules, as long as HUD approves of them. In North Carolina, they have a rule that you can seller finance up to 5 properties a year even if you don't live in them. Ohio only requires that you pass a mortgage originator certification to do as many as you want.

HUD is getting ready to issue national standards, which will replace all of the states' current rules. Those rules could be released as early as July 1, 2010, but they don't seem ready for that date. I suspect that it may be another year before the federal standards are defined. Until then, the state rules are in force.

But the point is that these rules are already in effect. Ignoring them can result in hefty fines (more than $20K per violation if I remember), and I also wonder if the mortgage couldn't be invalidated, and you lose the whole investment. Ugly.

Hope this helps.

Karl
0 Reply
Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
16y
We're on it Karl, Lot's of alternatives. The mortgage is defined as having a security interest in the property, so, don't have a security interest in the property! You can also see a mortgage originator. It does not effect a lease arrangement. Assets can be swaped too. Let's not get too excited until they define waht is to be accepted or forbidden. It usually takes about a wekk to circumvent what the government puts together in a year, so give it time, no rush! Let's see exactly what is done. Bill
1 Reply
Account Closed
OP
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
16y
I'm sure that there are many buy and hold investors that either are or will be considering what they want to do at retirement.

There are several issues as I see it.
- Managing any Taxes
- Managing the cash that will not currently be needed
- Managing the estate for heirs
At this point, my greatest concern is making sure that my wife and I can do what we want to after we retire. We both enjoy traveling and have many other interests. I am an artist and look forward to having more time to paint.

I would love to have something left over for children and grand kids. Over time we will develop a plan for insuring that any money left is a supplement rather than something they become dependent on.

If one or more of the children or gran kids seems to have an active interest in real estate we will look at ways of helping them out.

Now seller financing on a property that I own free and clear seems like a viable way to manage taxes, spread income over the retirement period and make it a little easier to manage. Obviously caution needs to be given in how the note is structured so as to take advantage of the fluctuating interest rates.
1 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.