Adjusting Purchase Price and Interest Rate with Seller Financing

[Eben Rohling]

“A property is worth what someone is willing to pay for it”

If you can secure seller financing, would it make sense to offer a higher purchase price in exchange for zero percent interest? If you adjust correctly, you could end up having the same monthly payment and principle balance 3 years down the road, except that it will look like you have more equity in the property to refinance.

What would be the downside to this approach?

Is it even legal?

Hopefully I explained it correctly and it makes sense.

[Carl Fischer]

@Daniel Dietz 

There are several reasons people make different deals. If you do an installment sale you push closing costs to the end of the deal and some people feel it is easier to foreclose than a straight purchase. If you raise the purchase price and lower the interest rate the interest portion (which is taxed at ordinary gains tax rate) is traded for (capital gains tax rate 20%) which could be a savings of almost 20% depending on the sellers tax bracket. It also makes the buyers basis higher when they sell in the future and the depreciation higher each year.  There are many ways to do it -you want to marry the buyer and seller needs to determine the best approach. 

$1m purchase price $100k down $900k  @ 5% for 15 years is $7117/month or total payments $1.281M

$1.29M purchase price $100k down $1.19M @ 1% for 15 years is $7120/month or total payments $1.281M

Basically both examples end up the same $$ but taxes for seller could be reduced and the buyer gets more depreciation but less interest deduction yearly and a higher basis. The choices are infinite and the variables can be adjusted to fit almost any situation. Cash flow, down payment, interest rate, amortization term, sale price, buyer and seller tax brackets, etc. 1031 exchanges sometime need to meet certain thresholds, banks sometimes get into jumbo loans, appraisals also get affected. The bottom line is sophisticated RE investors make it work for the situation each party is in. Some people get it and some don’t. I hope it helps.