DOES ANY OF THIS SOUND FAMILIAR?

* “I’m tired of managing property and dealing with tenants.”

* “I’ve got tenants/family members that don’t pay me enough, but I just don’t have the heart to raise their rent or kick them out.”

* “I refuse to pay all those capital gains . . . and I don’t want to exchange into another property.”

* “I need more income . . . this property is supposed to be my retirement!”

* “I like my tenants and I would worry about them if I sold the property.”

* “I want to give my children a good inheritance. I’m leaving the rental properties to them and we already have a trust set up.”

If you hear yourself in any of the above, keep reading. Below are more options than you may have previously thought possible.

Its not a new concept: Owner financing, occurs when the seller of a home finances all or a portion the sale of his or her own property. This is often referred to in real estate ads as “Owner Will Carry” or similar wording, meaning that the owner of the property will, in effect, act as a bank and loan the purchaser all or part of the money needed to purchase the owner’s property.

There can be several advantages to the seller for “carrying a note”, as it is also known. There can be tax advantages in spreading out the time over which an owner receives the money from the sale of a property. Seller will be able to spread capital gains profit out over time rather than receiving all of it during one year. When the seller receives the installment payments, he has to first make payments on the existing notes before he can pocket the rest. Seller will pay capital gains on the down payment received, and then on the amount of principal received in each subsequent year. The tax advantages are considerable. With the recent liberalization of installment sale provisions by the IRS, sellers have great leeway in how contracts are set up for maximum tax benefits. A competent tax accountant can spell out the detail.

But consider, When someone in California sells a non-owner-occupied investment property, they will incur a 25% capital gains tax liability. For example, someone who makes a $400,000 profit on the sale of their rental may immediately owe the government $100,000 right off the top. This leaves them with only $300,000 to invest. That $100,000 is no longer available to work for them. To get around this, many people use the 1031 exchange. They can defer capital gains indefinitely using this technique, moving from one type of investment property to another. But what about people who don’t want any more real estate to deal with? Is there a way for them to defer capital gains? YES! Again, Seller Financing allows Sellers to defer capital gains as Seller only pays capital gains on the amount of principal collected each year and don’t pay tax on the interest made from the Investor.

The advantage to the real estate investor is that he does not need to come up with a large cash down payment Frequently a moderate amount down will close the deal. In addition, the interest rates acceptable to sellers are usually far below conventional market rates for new financing.

Also, many owner/sellers simply like the idea that they can receive a monthly income from a property even after they have sold it – and no longer have to worry about repairing leaky roofs or replacing dead water heaters.

There is a nice monetary inducement to the owner to carry paper as well – the owner can charge the buyer (likely tax free) interest on the money that the owner is lending to the buyer. In this way not only does the owner collect a monthly mortgage payment on the property he or she has sold, but the owner collects interest as well, in effect increasing the owner’s overall sales price of the property. The advantage to the Seller is that the interest rate on the total wrap-around contract provided by the Investor will be higher than on the Seller’s underlying loans especially because both Seller and Buyer can work between interest rates that out compete with what banks would offer. Therefore, Seller will be making an interest spread on the underlying part of the note – not a bad deal for a seller-turned-lender.

This means if the owner is financing all of a sale then a borrower does not have to qualify for a loan at a traditional financial institution. Even if the seller only finances a portion of the loan the borrower benefits by having to qualify for a smaller loan from a traditional mortgage source.

Additionally, when a seller finances a property there are no points or closing costs for the buyer to pay, saving the buyer potentially several thousand dollars on the transaction. And again, while the seller of the property may charge the same interest rate that a bank or other financial institution would charge, it is sometimes possible for a buyer to actually end up paying a slightly lower interest rate if the seller finances the sale since more aspects of the sale are open to negotiation than may be possible when dealing with a traditional bank lender.

In order to protect themselves, some sellers/homeowners require that the investor/borrower/buyer make their monthly payments into an escrow account held by a bank or other lending institution, and they require the borrower to place a Quit Claim Deed into the escrow account with instructions that if a payment is late by a certain number of days then the escrow officer will automatically file the Quit Claim Deed, restoring the house to the former owner instantly.

If this were to happen the buyer would not only lose title to the property but would also lose any and all payments already made on the property. This is a powerful incentive for the buyer to make all payments in a timely manner.

A more pragmatic reason, perhaps, why some homeowners agree to carry a note is to increase the universe of potential purchasers for their property. The way this works is easy to understand. If the homeowner is making a portion of the loan on the property then the borrower will need to qualify for a smaller loan from a bank or other financial institution, meaning that a larger number of people will be able to qualify for any bank loan that might be required to purchase the property. If the seller finances the entire selling price of the property then buyers do not need to qualify for a bank or other financial institution loan at all. This can greatly increase the number of people who are interested in buying a piece of property.

BUT THE BEST REASON TO HAVE SELLER CARRY IS: That the buyer/borrower/investor doesn’t have to start paying property taxes at the current rates until the title is transferred to them by the seller/lender/owner. Imagine buying an old building the seller bought 40 years ago? Since seller carries the property, the property tax stays the same until the title transfers.

Many factors can influence whether the seller of a property is willing to carry all or a portion of the sales price on a piece of property. In many cases, however, the determining factor is the overall condition of the market itself.

When homes become difficult to sell – when it is a buyer’s market, in other words – then sellers are more inclined to do whatever is necessary to increase their chances of a sales and so owner financing is more readily available.

Conversely, when homes are selling quickly and it is a seller’s market, then sellers have little incentive to carry back a mortgage.

So your chances of finding an owner willing to carry back a mortgage are largely dependent on the current housing market. But regardless of prevailing market conditions, it never hurts to ask if an owner is willing to carry paper.

RECAP: the benefits of Seller Financing:

* Defer capital gains
* Maximize the sales price by offering terms
* Keep your equity working for you, often at interest rates higher than a bank CD
* Get a good cash down payment now
* Collect hassle-free monthly income for years
* Your note is secured by a property you understand and whose value you know
* Sometimes you get more each month than you could collect in rent
* Never worry about dealing with tenants or maintaining the property
* Pay no more property taxes or insurance
* If the buyer stops paying, you keep everything and get the property back
* If you or your heirs ever need money, you can sell all or part of the note for cash

Related articles

• Lend to family the right way (money.cnn.com)
• The Basics of Making an Offer in #Realestate (visionaryrealtynews.com)
• Six Late-Season Tips for LGBT Home Sellers (queercents.com)

Filed under: 1031 Starker Exchange, Listing Presentation, Money-Saving, Mortgage, Real Estate Market, Selling, Tax Issues, VRN