Long-Term Seller Finance - Pros and Cons

[Tom Horan]

Hello BP - Happy post-Thanksgiving forum browsing.

I have a potential seller finance deal on the line and I'm looking for your thoughts.

This is a 2-unit property in Denver Metro that I'm trying to structure a deal on. The owner is around 65 years old and she doesn't want to use a realtor, doesn't want to be a landlord anymore, is free and clear on the property, and wants to finance the property for her retirement income.  Kind of the ideal motivated seller that I've been in search of. 

The monthly payment is the big deal for her and she wants that payment for as long as I'm willing to keep her around as the financing. In the terms, I would certainly give myself the option of refinancing her out of the deal - but I want to weigh the pros and cons of a long term seller financed deal.

I'm seeing the pros of a long term seller-finance like low down payment potential, locking in a low interest rate long term, and not having the pressure of refinancing if the market turns.

My questions are - what are some other pros of a long term seller finance deal, and maybe more importantly - what are the potential cons that I'm missing?

I'm also looking for some advice with creative structuring. Does anyone have some creative ways to finance a deal like this?  Just looking to make this deal attractive to the seller, and work in my favor as well. I was looking through the forums and didn't see much out there specific to long-term seller finance deals. Thanks in advance for any insight. Much appreciated.

[Bill S.]

@Tom Horan I am not really sure what you are asking. You have most things covered. In your shoes I would ask the seller what she wants in terms of income and work backwards from that. She should know that she can't expect more income from the property than the rents coming in would support. Don't forget to remind her there are expenses (taxes, insurance, repairs - new carpet etc) and vacancies so rents can't equal the payment. Once you agree on the payment, then you work on the terms of the loan. I would have no problem doing a 30 year fixed. Make sure it is assumable so that if you want to sell it, someone can assume the loan from you and still make payments to her. That should be an easy sell. The other sticky item is the down payment. I would approach that from the standpoint of the more I put down, the lower the monthly payment would be since it reduces the amount financed. Each time I have done owner financing, I have gotten 100% financed. Your mileage may vary. Don't be shy to ask for what works best for you. If they say no, then figure out a solution.

Personally, I don't see cons to owner financing. Perhaps they don't send you a 1098 for your interest payment. 

Most of the cons on seller financing are for the seller. They have the brain damage of a foreclosure if you don't make payments. There is also the tax liability of recaptured depreciation. That is why most sophisticated sellers want some down payment so they have money to make their tax payment. 

Personally I have found the owner carry to be advantageous for both parties when the seller doesn't need or want the lump sum of funds. By spreading out the principal payments they spread out their tax burden and if they pass before the loan is paid off, there are no capital gains owed by the heirs (it's passed to them on the stepped up basis). Another advantage of owner carry is that often you get a chance to pay of the heirs at a discount. Instead of them collecting the loan payment for x more years you offer to pay them a lump sum at say 80% of outstanding balance. Everyone smiles at that point. Fixer Jay DeCima discusses this in his book on "Investing in Fixer-Uppers"