Seeking Help Structuring a Seller Finance Deal in Cali

Buying & Selling Real Estate
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Seeking Help Structuring a Seller Finance Deal in Cali

Orion Walker
Investor · Ukiah, CA · Member since 2014 · 196 posts · 83 votes

Hi Folks,

I'm in conversation with a lady who has a property that I would really like to buy. She owns the property outright and is open to holding the loan. I made her an offer of 100k down and the rest over 15 years based on using a portion of the cash flow to pay her, but she responded that it wasn't enticing enough. 

I'm looking for ideas on how to sweeten the deal. Currently I don't have a lot of flexibility on a larger down payment. I can come up some on the monthly payment, but I'm wondering if there are other ways to structure/adjust things that might work best for her. 

One of her issues is dealing with the tax impact of selling. If she lives there for another year she said that will significantly reduce her tax hit. I was thinking I could offer to do a lease/option type arrangement so that we don't actually transfer title for a year or two. 

I've also thought that I could adjust interest rate and length of pay back to either reduce her tax burden and/or increase her interest income. If I pay a higher interest rate but lower the purchase price does that help her on taxes, or does she just take the hit paying taxes on the income from interest?

So, to summarize, I could suggest a lease/option type arrangement, I could increase the purchase price and monthly payments a bit, I could see if she wants to extend the loan timeframe and pay more over a longer timeframe... Any other bright ideas that might help to make this more appealing to her?

Thanks for any/all ideas and input. 

-Orion

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Ellis San Jose
Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
9y

What about offering her more total money by paying her longer than 15 years? To reduce her taxable income you would want to pay less interest & more principal.

Is this her primary residence? if so she has a $250k exclusion if she is single.  Why not buy the house & lease the land for a few years. Then she can sell the land via 1031 deferred exchange.

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  • Ellis San Jose
    Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
    9y

    What about offering her more total money by paying her longer than 15 years? To reduce her taxable income you would want to pay less interest & more principal.

    Is this her primary residence? if so she has a $250k exclusion if she is single.  Why not buy the house & lease the land for a few years. Then she can sell the land via 1031 deferred exchange.

    1Reply
  • Orion Walker
    OP
    Investor · Ukiah, CA · Member since 2014 · 196 posts · 83 votes
    9y

    Thanks for your reply @Ellis San Jose. Yes, I will definitely see if she is interested in extending over 20 years. 

    Yes, she was saying it needed to be her primary residence for 2 out of 5 years, and she would need another year to have that be the case. So with the $250k exclusion, that reduces her tax burden by that amount off of the sale price correct?

    Another piece of the puzzle is that the property is actually 3 lots, with houses on two of them. That increases options, but I would need rental income from both the properties with houses in order to make the numbers work. 

    I'm unclear on how the buying the house and leasing the land would work in relation to the 1031. If you have a minute to flesh that out a bit more that would be great. My understanding from her was that she wouldn't be able to do a 1031 because I wasn't paying enough upfront for her to turn around and buy something else. Maybe she could do a 1031 on the property that isn't her main residence and use the residence exclusion on the other one. 

    Any additional thoughts/explanation/ideas from folks out there?

    Thanks!

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y

    An option or long-term PSA in escrow with a ROFR on the primary would keep your protected while the year passes.  Make sure there is reasonable consideration.

    So is this more than one parcel, the 3 lots?  I've done one of these where I bought the tax implicated property (primary) conventionally, but they carried the other parcels with the rentals on them.  An installment sale on the primary could get sticky for her.

    Is conventional financing an option for you?  With $100k dp I would think so.  Seller financing is nice and I've done quite a few, but sometimes the answer is a conventional on this one, carry the others.  Good luck @Orion Walker!

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  • Orion Walker
    OP
    Investor · Ukiah, CA · Member since 2014 · 196 posts · 83 votes
    9y

    Thanks for the reply @Steve Vaughan, I haven't really considered a conventional financing approach because the over all purchase price of the property is well beyond what I would qualify for. Purchase price will probably be around $800k. I suppose it might be an option to do a conventional loan on one of the properties. That would certainly help on getting her more money quicker. 

    Thanks! I hadn't really thought about this option. 

    Other ideas/suggestions out there?

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  • Ellis San Jose
    Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
    9y
    Originally posted by @Orion Walker:

    Thanks for your reply @Ellis San Jose. Yes, I will definitely see if she is interested in extending over 20 years. 

    Yes, she was saying it needed to be her primary residence for 2 out of 5 years, and she would need another year to have that be the case. So with the $250k exclusion, that reduces her tax burden by that amount off of the sale price correct?

    Another piece of the puzzle is that the property is actually 3 lots, with houses on two of them. That increases options, but I would need rental income from both the properties with houses in order to make the numbers work. 

    I'm unclear on how the buying the house and leasing the land would work in relation to the 1031. If you have a minute to flesh that out a bit more that would be great. My understanding from her was that she wouldn't be able to do a 1031 because I wasn't paying enough upfront for her to turn around and buy something else. Maybe she could do a 1031 on the property that isn't her main residence and use the residence exclusion on the other one. 

    Any additional thoughts/explanation/ideas from folks out there?

    Thanks!

    Look up IRC 121 exclusion from gain. 

    You have many avenues to structure this deal because of the multiple parcels, which is a good thing.  Typing out all the possibilities & explaining the combination lease back & 1031 would be arduous .

    In a nutshell, for an effective solution you need to calculate her gain & then brainstorm solutions to solve the sellers situation.

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