Advice on selling seller finance to older owners

Creative Real Estate Financing
6yFollow

Advice on selling seller finance to older owners

John Boyorak
Member since 2020 · 8 posts · 4 votes

I am looking into approaching a previous landlord with purchasing their portfolio via seller financing.  They are an older couple that owns multiple duplexes, and planned on passing down their properties to their children once they passed.  It is my understanding that their children are not interested in running a rental business, and would liquidate the assets once acquired.  As the years go on, the owners are less interested in managing their properties, but feel obligated to continue doing what they are doing for their children.

There are quite a few assumption on my end right now, but I think the right seller finance offer would be a huge win-win. My inexperience prevents me from understanding if it can be done and how to position it.  I think the right deal would give them the following:

1. Give them an out on managing the properties
2. Keep a steady income stream coming in for them
3. Allow their children to inherit what is deserved while avoiding large tax burden.

Has anyone done a deal like this?  Is it possible to transfer property right now, and avoid the tax burden once they pass or is that based off the date of sale?  Any input would be greatly appreciated.  

1Reply
44 views

Most Popular Reply

Daniel DietzPro Member
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
6y
Good questions. You might want to cross post over on the forum that has to do with Taxes too.

To my limited knowledge, if they sell to you now it will be hard for them to avoid the taxes.

From a tax perspective, my *understanding* is that it would be best for them to wait, as when an asset passed on, it gets 'stepped up basis'. Meaning if they paid 500K and it is now worth 1M and they have depreciated it all out, they would owe taxes on 1M if they sold now. If they both passed and it went to the kids, the kids new basis is 1M, in very rough terms. The kids owe no tax on passing, and sell it right away and owe no capital gains taxes.

We did get a similar guy in our town, a friend of ours, to sell when his wife passed on. The 'stepped up basis' ALSO occurs when just one spouse dies and passes their half on to the other. That way he could sell with virutally no CG taxes due. Same story, kids had no interest, but he did NOT want to seller finance. He was elderly and didn't want his kids to have to deal with the 'hassle' of getting payments for the next 30 years.

One thing you might want to look into is a Master Lease. There is a lot on here about it. You control the property with an Option to buy at a future date or event (death) at a set price (could be something like 100 times rent etc..)They still get to pass on to heir who pay no tax then sell to you at a predetermined price and pay no tax.
[email protected]608-524-4899
1Reply
See this reply in the discussion

13 Replies

Jump to latestLatest
  • Daniel DietzPro Member
    Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
    6y
    Good questions. You might want to cross post over on the forum that has to do with Taxes too.

    To my limited knowledge, if they sell to you now it will be hard for them to avoid the taxes.

    From a tax perspective, my *understanding* is that it would be best for them to wait, as when an asset passed on, it gets 'stepped up basis'. Meaning if they paid 500K and it is now worth 1M and they have depreciated it all out, they would owe taxes on 1M if they sold now. If they both passed and it went to the kids, the kids new basis is 1M, in very rough terms. The kids owe no tax on passing, and sell it right away and owe no capital gains taxes.

    We did get a similar guy in our town, a friend of ours, to sell when his wife passed on. The 'stepped up basis' ALSO occurs when just one spouse dies and passes their half on to the other. That way he could sell with virutally no CG taxes due. Same story, kids had no interest, but he did NOT want to seller finance. He was elderly and didn't want his kids to have to deal with the 'hassle' of getting payments for the next 30 years.

    One thing you might want to look into is a Master Lease. There is a lot on here about it. You control the property with an Option to buy at a future date or event (death) at a set price (could be something like 100 times rent etc..)They still get to pass on to heir who pay no tax then sell to you at a predetermined price and pay no tax.
    [email protected]608-524-4899
    1Reply
  • John Boyorak
    OP
    Member since 2020 · 8 posts · 4 votes
    6y

    Thank you Daniel for the reply!  I was not aware of a Master Lease option, and it sounds like a more appropriate avenue for this situation.

    Thanks again!

    0Reply
  • Daniel DietzPro Member
    Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
    6y

    Not sure if you have read many of the BiggerPockets books, but @Brandon Turner discusses it at length in one of his book, I think the one with "low and no money down" and how he used that to buy his first apartment complex. 

    There is also another technique called a Monitised  Installment Sale that is supposed to have the benefits of Seller Financing AND tax benefits, but when I looked into it it seemed way to complicated for my tastes, and I like the unusual ;-). There is a couple of guys on here that know a lot about them if you do a search.

    [email protected]608-524-4899
    0Reply
  • John Boyorak
    OP
    Member since 2020 · 8 posts · 4 votes
    6y

    I have read "The Book on Rental Property Investing"  by him, and the one you mentioned is on my list...I kind of just forgot.  Starting it now :).  Thank you

    1Reply
  • John Boyorak
    OP
    Member since 2020 · 8 posts · 4 votes
    6y

    Thank you @Account Closed I appreciate any help!

    A little update: I talked with the owner on Thursday.  She said they have a few parties interested in individual buildings, but no one has approached them about their entire portfolio.  She needed to talk it over with her husband but is definitely interested.  

    Going through public records, the properties are currently mortgaged but look to have a lot of equity available.  I'm not sure if it's proper to go through all the exact numbers on the public forums, but I estimate their portfolio to be valued around 2 million

    With a mortgage, I know seller financing is going to be a bit more difficult.  I have a few thoughts:

    Option 1:
    A. Raise enough cash to finance their mortgage OR assume their loan if possible
    B. Have them as a second lien holder, seller finance the remaining balance.

    This seems a bit complicated, and I think would scare them off as to be a second lien holder.  I am not sure exactly how well this would work either.  The more I think and as I type this out, the more I really dislike this option.

    Option 2:
    A. Propose a master lease with option to buy.
    B. Purchase properties individually until I can pull enough equity to pay off mortgage.
    C. Seller finance the remaining OR repeat step B until all properties are owned

    This is a bit more simple than above but still not as cut and dry as straight selling financing.  This would still allow the owners to sell their properties, and secure someone who is interested in purchasing everything and not just one or two buildings.  They would still receive monthly income and be able to retire.  I don't know if it's possible, but I could even work out making sure the current mortgage taxes and insurance are all taken care of.  

    Option 3:
    A. Purchase enough of their buildings to pay their mortgage off
    B. Seller finance the remaining.

    Much more straight forward.  If the owners would be willing, and I'm extremely confident I can raise enough cash to purchase 2 of their buildings.  This is my favorite due to how simple and straight forward it is.  We could even choose certain properties to help them avoid taxes.

    Option 4:
    A. Find investors to go on the deal with me and purchase the properties outright.

    This is the least work on the owners end and give immediate results to them.  They would be subjected to immediate capital gains(which I think is going to be quite a bit, they built these properties themselves).  I wouldn't get as much of the deal, but any part of the deal is better than no deal.

    Out of these, option 3 is by far most favorable to me, and I think it would be to the owners too.

    Any thoughts and suggestions would be greatly appreciated.  

    0Reply
  • Account Closed
    Real Estate Agent · Arlington · Member since 2016 · 162 posts · 100 votes
    6y

    Option 3 is definitely a solid choice. If other people are inquiring then make the deal really appealing to them and then you can exercise the option of refinancing at a later date maybe a year from now. People will say, "Yeah, but you don't know what the lending environment is going to be like so you can't bank on that" - there's some merit to this, but if you can make this work now with the seller financing arrangement then you're ahead. Even better if you can eventually refinance to a set of better terms. The goal right now should be to acquire to own the assets, look into how this can benefit you from tax perspective, and then keep your eyes open for refinancing options.  One thing we can definitely look forward to is the gov't bailing out mortgage companies (given their unprecedented activity lately) as well as long-term low rates (which the Fed confirmed recently they have no intention to raise rates any time soon).

    1Reply
  • Tyler Bushey
    Investor · Biddeford, ME · Member since 2017 · 282 posts · 180 votes
    6y

    If you're interested in assigning some of the buildings I'd definitely be interested! 

    1Reply
  • John Boyorak
    OP
    Member since 2020 · 8 posts · 4 votes
    6y

    @TylerBushey That is an option that I was thinking too.  I'll DM you

    0Reply
  • Chanda Wa
    Specialist · Member since 2018 · 19 posts · 5 votes
    6y

    @Jonny R. Would you be willing to chat about your experience with seller-financing?

    1Reply
  • Daniel DietzPro Member
    Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
    6y

    @Account Closed I would be interested in a DM too.

    Thanks, Dan Dietz

    [email protected]608-524-4899
    0Reply
  • Daniel DietzPro Member
    Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
    6y

    @John Boyorak how much total debt do you think they have on the 2M of properties? And does it look like individual loans or a portfolio loan? 

    In general when there is high equity but existing loans a good plan might be to come up with enough down to cover their loans, and I think to cover their current taxes dues on the sale too (some don't look into that and are shocked). That way they can 'satisfy the loans' and own it clear of any mortgage and the essentially 'finaace the equity they had' to you with seller financing.

    [email protected]608-524-4899
    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free