I have a 5 unit property. A good long term tenant has approached us about selling. They are successful business people, young enough to know the value of long term property hold, (especially here in Seattle market).
We are thinking about Holding the Paper. We are retired, comfortable, make good rental income on the property, Building almost paid off, but getting tired of doing the minor maintenance & management (used to work for Property Mnge. firm, don't want that). Also want to travel with no daily worries. Don't THINK I want the hassle of 1031 exchange with more properties Just want the monthly income for now, (which I figure would be close to what we make now minus upkeep) . Sale would be in low 7 figures.
Are there any thoughts on this?
1) what should the rate be?
2) the DP?
3) term length & any balloons
4) do we need anything special written up other than whats thru Escrow company
5) Was thinking that Taxes & Insurance would be put into set Escrow company account to assure they are paid.
6) Is it hard to get building back if things don't work out?
anything else I should consider?
I am thinking with NO bank we can pretty much write up anything that works for both parties
Thanks much, love this site with all the info from such smart people.
I'm sure others will chime in here, but my first thought would be that you'll pay a higher tax taking on monthly interest payments rather than paying a long-term capital gain tax one time. I could be wrong though as I'm certainly no expert on this matter.
Mark Gallagher, Real Estate Agent in New Jersey (#1221341) and Pennsylvania (#RS314542)
Well done @Joseph Quarto ! Someday, I hope to be selling off my portfolio in a similar way! To start, here in WA, folks use either a Real Estate Contract (better for the seller) or Note and Deed of Trust (like a bank).
Depending on the experience of the buyer, my min DP would be 10%. There is excise tax here, so that's 1.7% or so paid to state/local gov't. Keep that in mind.
My most recent seller-carries were at 6%, long-term. A balloon and rate is up to you. When I do these, I have a contract servicer handle the payments and year-end reporting. A local bank there in Seattle may offer that service. A title co will have a referral source for a good RE attorney to ask about RE Contract vs Note and DofT.
Congrats again and good luck!
Thanks for the reply. Figures you quote seem reasonable in todays market; I might feel safer if I could get a little more upfront. So a "Contract Service handler" takes all the rent $$ and distributes it to everyone (like me, Utilities, Electric, Taxes, etc?
what do you consider "long term", 5-7 years? Then a cashout?
Yea I have my CPA running some numbers on that to see if there is a big difference in which way we go. It just seems the 1031 would be a hassle, but I have to research more I guess.
I suppose there are Realtors that "specialize" in doing/fiding 1031's?? Guess that might make a good question another post.
@Joseph Quarto Congrats! I think you might be able to get a higher interest rate the. 6%. You need to figure out how long an amortization period and if it is a balloon payment. Good luck!
The contract servicer handles documenting the buyer's payment to you and the end of year interest, etc. Other services, too. I have all of mine auto-drafted. The also hold my original docs & the amort schedule. Rent collection and op expense payments are the responsibility of the owner, of course.
I think @Mark Gallagher was just referring to being cashed out at long-term cap gain rates vs receiving interest which is taxed, generally, at ordinary income rates. A 1031 is a different discussion.
Why is a RE contract better for me than a Note Deed of Trust?
What do you consider long term? 5-7 years?
"Rent collection and op expense payments are the responsibility of the owner, of course." Meaning the new buyer owner, right?
Yep, meaning the new buyer owner is responsible for those tasks.
As a seller, I like RE contracts because if they default, I only have to give them 90 days to cure through a Notice of Intent to Forfeit. If they don't cure, I record another paper and get the property back. Note and D of T is full foreclosure. Speak with that attorney I mentioned earlier. I am not one.
My last two purchases on contract were for 15 years. To me, that's long-term. It's a personal decision in the end. The rate, the length, etc are all what you're comfortable with. The big things in this state are the excise tax and the method of which you carry the paper. Over and out!
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