Calling it quits and selling out via owner finance… Mistake?

Question

I am new the forum but have used BP for years. I currently own around 30 rentals, all free and clear, in the Houston area. In the past year and a half, I have grown increasingly tired of the in and outs of land lording and am having a harder and harder time dealing with tenants and finding decent labor. I had an investment group reach out to me and over the past few months we have gone back and forth regarding a potential owner finance deal for my 30 unit package. The group has the 10% down I am asking, is willing to pay 9.99% fixed IR and pay 90% of the appraised values per home. I am highly tempted to explore this deal as it would allow me to have a solid monthly income, remove me from the ‘game’ and the internet seems very attractive.

I have already spoken to an attorney who will draft the contract, note etc. and serve as the trustee.

Is there any downside to this type of a deal for a seller? I am 42 and am at the point where I am really losing interest in the business.Thanks!

I have already spoken to an attorney who will draft the contract, note etc. and serve as the trustee.

Is there any downside to this type of a deal for a seller? I am 42 and am at the point where I am really losing interest in the business.Thanks!

Corby Goade · Answer

Why? Don't you want to leave a legacy for your family or someone else you care about?

I'm always shocked when I hear these types of stories- why haven't you partnered with a property manager and let them deal with all of your headaches and tenant calls so you can sail off in to the sunset with all of your tax free income?

If you have 30 SFH, all free and clear, and your average rents are $1000, which I assume is quite low- you could pay a PM 9% and still put away 25% for capex, repairs, etc and have $20k of income per month without lifting a finger OR selling off your assets.

Honestly- you've got a set up here that is what almost everyone on these boards is dreaming of, why not move to South America or Mexico and let your PM handle everything? What's the benefit of selling that you don't get by holding? If you sell, you don't have the assets, you'll be paying income taxes and cap gains to some extent, and you won't own the assets any more. I mean- $20k per month at a minimum is enough to live on and have a pretty good, stress free life isn't it?

Chris Seveney · Answer

@James Landsford

In today’s environment I would want 10% down

What if this group completely mismanages them, values drop and they are in disrepair and hand you the keys back?

This happened to someone (we bought it from them) where the seller financed $500k of assets, the buyer never paid taxes, collected rent and stopped paying lender. Two years later they had $100k in taxes owed and units were trash. We bought three buildings for under $100k + paid taxes. End of day seller financing person basically got nothing

Just sharing some of the risks.

Bill B. · Answer

With half as many rentals as you I use a PM. I clear $200k/yr and work less than 2 hours a month. If you truly can’t see working 4 hours a month to make hundreds of thousands per year, hir an assistant, or pay the PM a little extra to do everything

Maybe it turns out 1-5 of them are all the hassle? Sell them for 100% of their value instead of 90% and keep the easy ones. Even if you only have $100k gain on each you are literally creating a tax liability of nearly 1/2 a million dollars out of thin air?

Anyway, it’s your money but 1) I wouldn’t sell, 2) I wouldn’t give 10% off, 3) I would want more than 10% down, that won’t even cover recovery costs if they stop paying

Good luck.

Henry T. · Answer

All to one buyer, no way. 10 percent down not enough, 20 percent. Make sure you have a hefty early pay-off penalty, 10 percent.

Jerry Ta · Answer

when you owner finance you basically set yourself up an annuity and when it's over, you may have nothing left to show for. of all my mentors, i would say the common denominator of things they wish they did, was keep more of the houses they had rather than sell them.

We're about the same age, i'd like to have a conversation if care for it.

Marcus Auerbach · Answer

There are many reasons why you should not sell, but if you really want to sell, then sell them retail one by one. What's ten percent discount? Half a million? A million?

Two options: list them as they become vacant. Treat them like a flip. If you have several, pick two agents and see after a few deals who works better. The issue are taxes and where to invest the proceeds. If you like the tax situation with seller financing, you can offer them to your tenants. I have done a few lease with option to purchase, that can be a win-win. But you are still on the hook for collecting a monthly payment and potential forclosure. Benefit of bank financing, they have to deal with that.

Theresa Harris · Answer

I agree with some of the others here.  If you don't like being a landlord, why not look into hiring a PM for some of the 'problematic' places?  You can also see who they hire to fix things and use them for your other places.  Or sell off some of the places that aren't doing as well.

I think offering you 90% of market value for 30 properties is a steal for the investors.  That is basically giving them 3 of your properties for free.  If you sell, list on the open market and talk to the listing agent to see if they will cut you a deal if you list a couple of places with them. I know some agents give a reduced commission if you sell your home and buy a new one with them.

James Hamling · Answer

I am confused @James Landsford.

Help me understand. Your entertaining selling an existing, performing portfolio, turn-key. With seller financing, at only about 1pt over market rate. And willing to accept the basement minimum of 10% down AND, on top of it all, sell them at a 10% DISCOUNT! Not a Premium.... a discount????

So in a world where lenders want a minimum 20%+ down, is there not a $-value in accepting 10% down?

Is there not value in fact it's a turn-key operation long established where a buyer get's to base things on factual accounting not on projections, hence removal of risk?

And with financing of such via standard outlet's is there not assorted additional fee's connected to financing, generally ranging 2-3% in additional expense possibly wrapped into financing? Your not charging that, where is value consideration for that?

And fact of giving away all these valuable considerations free of charge, and than to also DISCOUNT the properties, wow, wow-wow-wow.

So, I am left with 1 last question James; where do I send the check and how soon can we close? You think I'm joking, try-me. Because this is a no-brainer deal of the season.

You should be charging, at minimum, a PREMIUM not a discount for: seller financing terms, 10% down vs 20%+, turn-key.

It's just confusing. Your in a position where not only as some have mentioned of hiring a PMc, you could also hire in a GM to literally run everything to reduce your involvement to a 1-2hr meeting quarterly. Or retain Portfolio Services with Portfolio Manager effecting the same. You have so many options open, I just don't understand handing it away in a manner that is robbing yourself of valuable considerations.

But hey, as said try-me, I'm just as happy to accept a no-brainer of a deal. And how about I add a "Thank You" steak dinner for 2, monthly thorough term of it?     I joke, but I am also very serious. Unless there is some real nasty factors your not disclosing or in denial of, this is a deal I'd buy. Generally takes a lot to get me to book a "red-eye" and fast track due-diligence, this very possibly would do it.

Cody L. · Answer

Short answer:   No

I've sold a few of my smaller deals recently.  I've been happy to seller finance them.  I get a higher rate than I would with that cash in the bank.   And I have little to no risk as if they don't pay, I just take back the asset I'm already comfortable with (and keep the down payment)

In fact, last week I bought a large deal from a guy who has owned it for 20 years.  I was going to pay cash, then refinance later.  I asked him what he was going to do with the proceeds and he was going to buy 10 year treasuries.  So I suggested I could pay him a point more than a 10 year and he could seller finance.  His income would be the same and he was able to keep almost $1m in his pocket.With rates where they are, seller financing (or doing wraps, assumptions, subto, etc) is going to become more and more common.

Gustavo Delgado · Answer

Man, I wish I had your problems!

Calling it quits and selling out via owner finance… Mistake?

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