Sell or lease option? Seller finance? Something else?

Question

What advice would you give? My sister and her husband are in the enviable position of being able to retire early, move onto their sailboat, and float around the Caribbean until they choose to do something else. Originally, they thought they would have to sell their house (in the San Francisco Bay Area) to do it, but now they are considering other options.

Zillow estimates the house’s current value at $1.2 million. They still owe a mortgage. The values in the area are rising, and Zillow estimates that this area will appreciate by 4.6% over the next year.

Would you sell? Or would you offer a lease option to try to capture some of that future appreciation? Sell but carry a second? What else would you consider?

Thanks for your ideas!

Cheers~

Tara

Aaron Montague · Answer

Switch to Direct TV is Bill's true takeaway here :)

Bill Gulley · Answer

@Tara Piantanida-Kelly Please ignore non-governmental sites except perhaps those of a law firm who do NOT sell RE programs* on the SAFE Act or Dodd-Frank. Also ignore guruized sites spammed here constantly by some members, none are 100% correct for every area. As Robert mentioned, Zillow is not a reliable source for property valuations. Don't base your sister's plans on haphazard estimates. If the property is 1.2M, any buyer in any seller financed arrangement will need to qualify under the new laws. I would think that in reality, anyone who would qualify going through a mortgage originator for a seller financed deal at that amount should be able to walk into bank and just buy it. The are only two advantages really for your sister on seller financing is the deferred tax benefit and a higher rate of return on the equity being paid as an annuity. While there are other benefits to SF deals, like marketability aspects, at this price level such are not significant. Robert is also correct in saying seller financing isn't always the best option in every case, in fact not even in most cases. I too have a financial planning background and while I'm a big advocate of seller financing, it's not always the best way to go. I didn't mention this before as I didn't concentrate on the value of the home, but if that is a close valuation I doubt SF is a viable option really, a buyer may need to go that route but usually those buying at that price level are not simple minded with bad credit, I'd think most would be more astute and certainly not first time homebuyers or new to business dealings. It also sounds like there is reluctance in selling, trying to capture future appreciation. If there is any intent to come back to that home, doing the old sell-finance-get it back ploy, the chance of being sued for any tortuous conduct will be much higher at that price level as your buyer won't be stupid and they probably can afford an attorney. Speaking of having means, your sister has the means to obtain professional financial planning advice and legal advice, I suggest they do so and not rely on the types of opinions you get off the internet. Thanks for the post, it's been a good discussion, but they need to do some more planning before they take off with professionals that can consider their entire situation, not just a property, especially at 52! Additionally, having been there, rolling in cash and an income, retiring at 52 needs to be examined carefully, when you retire too young you get bored. When you get bored you end up posting on the internet. When you post on the internet you'll be giving advice and when you give advice you're going to have your advice rejected. Don't end up having to live with rejection in your older years, get back to work don't retire too young! :)

Robert Leonard · Answer

Whoa now, thanks for your opinion on my job, but I'm not anybody's agent in this conversation. Read up, my advice was what I would tell my sister. I happen to use my judgment as somebody who knows a little bit about real estate to give specific advice based on each individual situation. You can come up with what ifs and the answers change for different scenarios. I'm not writing a book to cover ALL options, just offering to help based on the given information. I hope something that's been covered here helps @Tara Piantanida-Kelly. That was my intent. :-)

Robert Leonard · Answer

@Brian Gibbons I am an investor with a realtor's license. ;-)

Robert Leonard · Answer

@Tara Piantanida-Kelly if it were my sister, here's what I would tell her: If you have a significant capital gain on the property and they were originally planning to sell out of necessity, they should consider selling because of the tax free capital gain opportunity. They can have up to 500k of capital gain tax free (federal, not sure about CA?) if they are a married couple and they've lived there for more than 2 out of the last 5 years! I use Zillow, but I would never quote a Zillow value. If it's worth anywhere near $1M, ordinarily that's not going to be a positive cash flowing rental property. However we are talking about CA, a very unique place in the REI world. :-) So get opinions from trusted local real estate professionals that you know or come highly recommended by someone you know well, about whether or not renting this property is a good idea. On the other hand, if they have one of those awesome 3.25% locked in rates, that might make it worth renting? If they would love to come back to this house after sailing around the world and they are very confident in their PM arrangement while away, it might be worth holding? Decisions, decisions ... You need to know what the Safe Act is and how it affects any type of seller finance or lease option deal. I would recommend an outright sale if you choose to sell.

Brian Gibbons · Answer

I don't think Bill Gulley has a TV so he won't understand the joke..

Brian Gibbons · Answer

Originally posted by Bill Gulley: - under any option or installment sale appreciation goes to the buyer, it can not be retained by a seller, even in CA. An option must have a stated price, charging more than it's market value as of the date of the contract takes you into predatory dealing. well Bill can't you tie the option price to a new appraisal in the future? I know you you dont approve of that. Or use a ROFR (Right of First Refusal) ? BTW, if they are 62, they might check into a reverse mortgage, you can go on vacation but the property needs to be owner occupied legally, they can have a "house sitter" or "care taker" on premises. An option, not a recommendation. Ever see AARP on Reverse mortgages? http://www.aarp.org/money/credit-loans-debt/info-04-2013/are-reverse-mortgages-helpful.html If they plan on coming home, the need to lease it and forget the option stuff. Selling as a Sub-to is another option, search that here for the pros and cons, significant cons BTW. :) My rule - Buy on Sub2, never sell on Sub2. You can't get the house back unless you foreclose.

Tara Piantanida-Kelly · Answer

Thank you, @Brian Gibbons, @Bill Gulley, @Andrew Syrios and @Robert Leonard! I told my sister that the real estate investors on BiggerPockets would come through with some really good information, and you guys didn't disappoint! Thanks so much!

Brian Gibbons · Answer

Your job as an agent is to show ALL options, not what you think they need. Period.

Robert Leonard · Answer

@Brian Gibbons I'm not against seller financing. I just offered a warning that the new SAFE Act requirements made it more complicated than it was in the past. While I'm not against seller financing, there are times and situations when it's not the right option for different sellers, like just about everything else. You are introducing a new seller with a different situation in your "what do you do ..." scenario. I understand what you are saying, but it doesn't apply to the question at hand.