A New Reputation: Seller Finance as the Best Solution

Quick inbox check: yeah, I still have 2,102 emails asking if the seller will finance that property I have listed. And not just on the cheap properties – $10M+ as well.

As a commercial realtor, I get these inquiries in a constant stream and it is easy to discount them as unqualified the minute they hit my inbox. With the influx of online educators who press seller finance as the solution for buyers with no money or the “don’t qualify” dilemma, this reputation has taken root.

However, in today’s restrictive lending environment, with low LTVs, high interest rates, and tight standards, it is time that this stigma is set aside to have the discussion about seller finance in a meaningful way.

The Essence of Seller Finance

At its core, seller financing – also known as owner financing or seller carryback – represents a financial arrangement where the seller assumes the role of the lender, providing financing directly to the buyer. In essence, the seller becomes the proverbial bank, extending credit to facilitate the sale of their property. In order to do so, the property must be paid off, with the seller having no mortgage with a bank.

How Seller Finance Works

There are two ways seller financing can be structured:

1 – Sale with a Note/Mortgage
This takes place as a traditional sale would, where the deed to the property transfers ownership, and the seller takes back a Note & Mortgage for the amount of the sale, less the down payment. In this arrangement, the seller replaces the role of a bank in the deal.

  • Pro: This arrangement allows the seller to be completely removed legally from ownership, and have a passive stream of income still in place. The buyer benefits from more flexible terms.
  • Con: Should the buyer default, the seller must go through the foreclosure process, just like a bank would, which can take significant time and money.
  • Con: The seller may need to pay the taxes due on the sale of the property, but may not have the funds to pay the tax, as they’ve financed the property for the buyer. Proceed with caution if you have significant tax implications on sale.
  • Works best for: When the seller does not have a large capital gain, and knows and trusts the buyer.

2. Land Contract/Sales Installment Agreement
Sometimes referred to with different terms, the essence of a Sales Installment/Land Contract is that instead of the deed transferring with a “Settlement”, an Installment Contract is put in place where the buyer makes payments just like they would with the previous arrangement. However, the deed does not transfer unto the buyer’s name until the balance due to the seller is paid in full, either over time or with a refinance in the future.

During this time, the buyer becomes the “Equitable Owner” with all the rights and obligations. For all legal purposes, the buyer assumes the rights and benefits of ownership, including paying taxes and taking depreciation deductions (in most cases). The buyer is free to do anything with the property, just like they would with a traditional sale, and has the right to sell the property whenever they choose. The seller can require a prepayment penalty if they prefer not to transfer too soon.

  • Pro: This arrangement protects the seller from needing to go through the foreclosure process should the buyer default on the payments.
  • Pro: The seller has the opportunity to spread out their tax consequences as they receive the payments, rather than all at the time of sale. This can help lower their taxable income for the initial year of sale & delay picking up income throughout the course of receipt of payments. Consult with your tax advisor to determine while approach would be most beneficial.
  • Con: The buyer is making payments on a property that they have not yet received the deed for. It is essential that the parties work with qualified legal council to make sure that their interest is protected and that the SIA is recorded to that the seller cannot place another lien on the property.
  • Works best for: This is ideal when the seller has a larger capital gain, and wants to spread out taxes while continuing to enjoy passive income payments.

Benefits and Considerations

In today’s reduced lending environment, seller financing is a solution that can benefit both parties. There are many who say it is too risky, but it provides prospective when you consider the possible benefits.

SELLER PERKS

If you are a seller, and you sell your property with a traditional buyer and mortgage process, what will you do with the proceeds? What if you put it into a NNN property – let’s say Rite Aid 10 years ago. Well, now your Rite Aid is gone, and you have a building that is worth less than what you paid for it. Wouldn’t it have been better to keep your income coming from a property you know, without the hassle of managing it anymore? That is the beauty of seller finance.

  • Income stream without managing or supervising a manager
  • Delay/reduction of taxes
  • Do not need to worry about placing funds in another investment

Sellers should exercise prudence in structuring the financing arrangement to safeguard their interests and minimize exposure to potential risks. This may involve conducting a comprehensive assessment of the buyer’s financial stability and creditworthiness, as well as implementing appropriate safeguards such as requiring a substantial down payment.

BUYER PERKS

If you are the buyer, well, a lot has been said about the benefits of seller finance for buyers. Some center around the premise that if you have bad credit or no money, then seller finance is your solution. This may give buyers looking for a seller-financed deal a bad rep. However, there are lots of reasons why qualified buyers should seek it as well.

  • Flexibility of terms – need interest for only a year or two? How about 30 year AM? Want a floating rate, so your payments go down if interest rates drop? Anything you and the seller can agree to is on the table, making the arrangement ideal on terms for the buyer.
  • Taking out the bank from the equation can remove requirements for reserves, deposits, reporting, etc. that can hamper some deals.

Buyers should conduct thorough due diligence on the property and the seller to ensure transparency and mitigate the risk of undisclosed liabilities or encumbrances. Additionally, buyers should carefully review the terms of the financing agreement, including the interest rate, repayment schedule, and any provisions for default or early repayment.

Conclusion: Redefining Real Estate Transactions

Finding solutions to problems is where any successful entrepreneur thrives. With the lending environment we have currently in 2024, seller finance can be a solution that helps to create value for both the seller and the buyer. It’s time to give seller finance a good reputation again.

Want to talk through our past experiences in seller financed deals, either as a seller or buyer? Call us for insight into past successful sales.

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