Owner Financing (Expert Advise Needed)

[Steven Baca]

Hi BP Brothers & Sisters!

I have a 2bd/2ba townhouse that my tenant moves out 8/15/23.  I've been leasing for 5 years and thinking it time to sell.  A townhome 2 houses down sold for $160k and I was shocked so I'm thinking of putting mine on market next week for $179k as my townhome is a corner home and only the corner homes have a yard.  
I know the benefits of selling but what are the benefits of Seller/Owner financing?  Any advise would be greatly appreciate!

[Chris Seveney]

@Steven Baca

Honestly - none. Many will disagree and I can counter every one of their arguments but Take the profit and move on.

Either rent it or sell it outright. Especially if you have an existing mortgage on it

Remember Rental income allows you to continue to depreciate the home while interest income is ordinary income and you know longer get those tax benefits.

Only reason to seller finance is if you have a turd you cannot sell and by offering seller financing someone over anxious buys it thinking they can polish the turd.

[Steven Baca]

Quote from @Chris Seveney:

@Steven Baca

Honestly - none. Many will disagree and I can counter every one of their arguments but Take the profit and move on.

Either rent it or sell it outright. Especially if you have an existing mortgage on it

Remember Rental income allows you to continue to depreciate the home while interest income is ordinary income and you know longer get those tax benefits.

Only reason to seller finance is if you have a turd you cannot sell and by offering seller financing someone over anxious buys it thinking they can polish the turd.

 I was under the impression investors do seller financing in hopes they get double the amount the homes worth if they actually have someone's who follows through.  If not they just keep recycling to the next person for that downpayment fee as wells as high monthly.  

i dont have a turd thought and I'm tired of leasing so I may just go with selling outright.  If anyone's interested hit me up, this unit is a golden egg.  I'm just selling to step up to a MDU and not refinancing due do the rates!

[Chris Seveney]

Quote from @Steven Baca:

Quote from @Chris Seveney:

@Steven Baca

Honestly - none. Many will disagree and I can counter every one of their arguments but Take the profit and move on.

Either rent it or sell it outright. Especially if you have an existing mortgage on it

Remember Rental income allows you to continue to depreciate the home while interest income is ordinary income and you know longer get those tax benefits.

Only reason to seller finance is if you have a turd you cannot sell and by offering seller financing someone over anxious buys it thinking they can polish the turd.

 I was under the impression investors do seller financing in hopes they get double the amount the homes worth if they actually have someone's who follows through.  If not they just keep recycling to the next person for that downpayment fee as wells as high monthly.  

i dont have a turd thought and I'm tired of leasing so I may just go with selling outright.  If anyone's interested hit me up, this unit is a golden egg.  I'm just selling to step up to a MDU and not refinancing due do the rates!

You do not get double what the house is worth, sometimes you can get $10k more or even more, but also selling for more than the house is worth if a borrower were to end up contesting it can be considered predatory lending - especially if you did not vet the borrower to confirm their ability to repay. Many will say you get one exception with Dodd Frank but many forget there are other consumer protection laws out there. Also "recycling" people requires you to go through a foreclosure, which they could still file bankruptcy, you go a year without getting a payment and they trash the place. 

Do not believe everything you read here on BP and Facebook. Its very easy for people to "say" one thing because of the fantasy world they live in.

[Don Konipol]

Take everything said by @Chris Seveney seriously.  Dodd Frank and the CFPB have thrown a monkey wrench into many previously profitable “strategies”.  This is the main reason I only deal with commercial properties.

With that warning, I am going to list the reasons that seller financing can be a benefit to the seller of a property. This is not restricted to residential properties, it also applies to commercial properties.  I still seller finance some commercial properties when I sell, and have “held the note” for a few BP members, all ending in mutually beneficial results.

1. You may be able to obtain a sale price as much as 20% over market.  This is because you have increased the pool of buyers to include those not able to qualify for a mortgage sizable enough to purchase the property. Further, you’ve increased the buyer pool to include those with a good size down payment, but credit issue, income issues, job time issues, and any other issues rendering them unable to qualify.  While they may bring increased credit risk, the higher price or higher down payment may be an offset.

2. Owner financing may make unsalable property salable.  Property may not qualify for financing because of condition, area, zoning, etc.  providing owner financing eliminates this obstacle. 

3. You may be able to charge an interest rate greater than what you would earn by investing the money elsewhere.

4. You own a note on a property you are familiar with, instead of investing in a note secured by a property you’ve never even seen

5. You may be able to avoid the impact of paying an immediate tax on “depreciation recapture”.  

6. The buyer may not have immediate  funds, but may be having cash come in in a few months time.  Rather than lose a sale you accept a down payment, and receive a short term note for the difference.  When the buyer “liquidity event” occurs, you get paid off. 

Again, as @Chris Seveney has stated, you will need to engage the services of an attorney specializing  in real estate.  This is not a “download form from internet and fill it out your self” project, like you would do for something simple, like a divorce. 

[Eliott Elias]

Quote from @Chris Seveney:

@Steven Baca

Honestly - none. Many will disagree and I can counter every one of their arguments but Take the profit and move on.

Either rent it or sell it outright. Especially if you have an existing mortgage on it

Remember Rental income allows you to continue to depreciate the home while interest income is ordinary income and you know longer get those tax benefits.

Only reason to seller finance is if you have a turd you cannot sell and by offering seller financing someone over anxious buys it thinking they can polish the turd.

I don’t agree with this. Seller Financing is one of the most powerful ways to sell property. First of all, you give a chance to those who never were able to get a loan to be homeowners. Second, you are making principal and interest every single month. You can charge anywhere from 8 to 12% and you don’t have to put a single penny in the property in maintenance. If you do it right, your cash flow will be more than a rental.

[Chris Seveney]

Quote from @Chris Seveney:

@Steven Baca

Honestly - none. Many will disagree and I can counter every one of their arguments but Take the profit and move on.

Either rent it or sell it outright. Especially if you have an existing mortgage on it

Remember Rental income allows you to continue to depreciate the home while interest income is ordinary income and you know longer get those tax benefits.

Only reason to seller finance is if you have a turd you cannot sell and by offering seller financing someone over anxious buys it thinking they can polish the turd.

I don’t agree with this. Seller Financing is one of the most powerful ways to sell property. First of all, you give a chance to those who never were able to get a loan to be homeowners. Second, you are making principal and interest every single month. You can charge anywhere from 8 to 12% and you don’t have to put a single penny in the property in maintenance. If you do it right, your cash flow will be more than a rental.

 Respectfully disagree, in most states there are usury laws that do not allow you to charge double digits. I can tell you 100% of the time if you cash out of the property and use that money to buy another property that you turn into a rental you will win EVERY time because a rental appreciates and a loan depreciates in value (note this is the guy who has a note investing fund for a living). 

We have bought and sold over 500 loans and the reason we do it is because we can buy them at a discount but we NEVER originate an owner occupied loan unless the property needs rehab and someone cannot get conventional financing. 

Will agree to disagree. 

[Marty Sprong]

Quote from @Don Konipol:

Take everything said by @Chris Seveney seriously.  Dodd Frank and the CFPB have thrown a monkey wrench into many previously profitable “strategies”.  This is the main reason I only deal with commercial properties.

With that warning, I am going to list the reasons that seller financing can be a benefit to the seller of a property. This is not restricted to residential properties, it also applies to commercial properties.  I still seller finance some commercial properties when I sell, and have “held the note” for a few BP members, all ending in mutually beneficial results.

1. You may be able to obtain a sale price as much as 20% over market.  This is because you have increased the pool of buyers to include those not able to qualify for a mortgage sizable enough to purchase the property. Further, you’ve increased the buyer pool to include those with a good size down payment, but credit issue, income issues, job time issues, and any other issues rendering them unable to qualify.  While they may bring increased credit risk, the higher price or higher down payment may be an offset.

2. Owner financing may make unsalable property salable.  Property may not qualify for financing because of condition, area, zoning, etc.  providing owner financing eliminates this obstacle. 

3. You may be able to charge an interest rate greater than what you would earn by investing the money elsewhere.

4. You own a note on a property you are familiar with, instead of investing in a note secured by a property you’ve never even seen

5. You may be able to avoid the impact of paying an immediate tax on “depreciation recapture”.  

6. The buyer may not have immediate  funds, but may be having cash come in in a few months time.  Rather than lose a sale you accept a down payment, and receive a short term note for the difference.  When the buyer “liquidity event” occurs, you get paid off. 

Again, as @Chris Seveney has stated, you will need to engage the services of an attorney specializing  in real estate.  This is not a “download form from internet and fill it out your self” project, like you would do for something simple, like a divorce. 

 Just a heads-up on Depreciation Recapture that many people don't realize - Per IRS Pub 537 on Installment Sales under the section Depreciation Recapture Income, "If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year."

Best,

Marty

[Jessie Dillon]

i recently sold on creative financing. i was thrilled because i didn't have to go through the hoops of a 1031 exchange, got a higher purchase price (45k more than my best traditional offer), am getting monthly checks, and will get a balloon payment at a good time (kid graduating, want to get her into a multifamily). i was only willing to walk away with a certain profit on the property, no less, and this was the only way i could do that. hope this helps!