Just inherited 485k house, considering offering seller financing

[Mike Schoonover]

Hello, I recently inherited a home in Solano county, the home is paid off and was owner occupied since built and was well taken care of with multiple upgrades over the years. 

I initially intended to rent the property but i would only net $1,800 a month in doing so. This feels like a light return on a 485k asset, and my thinking migrated towards selling the property and moving the money out of state and purchasing other rental properties.

During my deep dive into self taught real estate investing i came across the idea of creative financing, and started running numbers on my monthly cashflow if I carried the note, with current interest rates, with favorable interest terms to me in exchange for a low down and relaxed qualifying factors, and the hypothetical cashflow doubled.

My question is, is this doable for a first time home seller? I would want to bypass realtors so i would need to learn that side, along with the need to learn how to draft a note with terms and navigate all the other legal pitfalls that could sink my idea. Im not against paying professionals to take care of the needed steps im not qualified for but i dont know where to look, nor do i know everything i need to look for. 

Watching Pace do deals makes it look effortless on the seller financing side, but hes done enough deals that its all muscle memory. Am I insane for trying to be the bank on my first home sale? Ive been looking for resources but it feels like i get 2 new questions with each answer i find.

[Mason Hickman]

@Mike Schoonover

What’s the main reason for wanting to offer seller financing? Since you just inherited the property, it should have a stepped up basis so capital gains should be very low, if any. 
Also, don’t draft a note on your own. Pay an attorney to get it done right. 

[Bill B.]

I’d want at least 10% down, especially in California. I can’t imagine your cost if the buyer decided to stop paying after a couple months. $10,000? $20,000? 3-6 months of expenses with no income before damage? I assume it’s going to be harder and cost more than evicting a tenant. 

They could have the best of intentions until the furnace, the ac, the roof, the water heater, something they can afford to fix breaks. They lose their job and can’t afford to move out. Whatever. 

List it with a realtor and put possible seller financing. Then offer it for a 5% higher price with 10% down. Your buyer might not even need or want it. 

[Greg Scott]

Yes, $1,800 per month on a $485K asset is a terrible 4.4% return. and you haven't factored in vacancy or repairs.  Double the cashflow, in this situation, is still a horrifically bad return.

I"m not a fan of being a lender.  You get a fixed upside and lots of potential downside.  I prefer being a borrower and having a fixed downside and sky-is-the limit upside.

If you inherited the house recently, you should be able to sell it with no capital gains taxes.  (Confirm with your CPA)  Assuming you sell, you have unlimited options with that money.  That is the route I would take.

[Steve Vaughan]

I've sold plenty with seller financing- to spread out the tax hit.

No tax hit inheriting with stepped-up basis.

Lots of ways to screw yourself up. No tax benefit.  Sell it regular. 

A lot of publicly traded REITS  are paying dividends of over 10%. Maybe get cf there. 

[Mike Schoonover]

Quote from @Mason Hickman:

@Mike Schoonover

What’s the main reason for wanting to offer seller financing? Since you just inherited the property, it should have a stepped up basis so capital gains should be very low, if any. 
Also, don’t draft a note on your own. Pay an attorney to get it done right. 

My intention with this property is to fund additional investment property purchases, if i sell it and carry the loan at 7-8% my monthly net would nearly double since i wouldnt need to cover the rental expenses, allowing me to aquire additional properties twice as fast.

I understand i would be taking on serious risk with a default, and the costs of foreclosure may sway my thinking but the property costs me very little when it does not produce income, so the risk feels manageable. but if i just list and forget im only going to have 420ish to play with, as opposed to 40k every year for hopefully 30 years to play with. I would probably make bigger mistakes playing with a big chunk while learning what im doing. 

I dont hate the idea of partnering with a realtor, buy coughing up the commission out of pocket tastes bad, so that would need to be covered by the down payment.

[Mike Schoonover]

Quote from @Steve Vaughan:

I've sold plenty with seller financing- to spread out the tax hit.

No tax hit inheriting with stepped-up basis.

Lots of ways to screw yourself up. No tax benefit.  Sell it regular. 

A lot of publicly traded REITS  are paying dividends of over 10%. Maybe get cf there. 

This feels like an easier strategy to attain. Appreciate your insight.

[Sean Bramble]

Hey @Mike Schoonover, seems like your goal is to maximize your return .. here are a few out of the box ideas:

- short term rental (if it’s legal in your area) … and if you don’t want to operate it yourself you could master lease it at a higher rate to a str operator

- medium term rental (same as above- can diy or master lease)

- sober living home or assisted living home (you would want to find companies in your area who do this and master lease to them .. likely at a way higher rate than LTR)

- lease option to a prospective buyer. You could lock in the same payments as a seller finance arrangement with at least some probability the buyer wouldn’t actually end up buying, and you could collect an option fee from them. Plus you can structure it in a way that all repair/ maintenance is covered by your tenant 

- cash out refi or heloc when interest rates normalize a bit and invest in other RE w/ the proceeds) works with all 4 above strategies)

***also, you should 100% consult with a RE CPA before the end of this year and conduct a cost segregation study so that you can deduct accelerated depreciation on your taxes. This is the last year for a 100% accelerated deduction 

[James Hamling]

@Mike Schoonover you are way WAY over thinking this, and forgetting; pigs get fat while hogs get slaughtered. 

You inherited this property, not purchased it, your $1,800mnth rents is 100% ROI because your outlay into this performing asset is what, legal fee's? So less then $10K. Is $10k outlay for $1,800mnth a good investment? Your getting way off in the weeds focusing on that $485k.

This is simple, keep it simple. 

Your knowledge base is obviously extremely limited, so you MUST keep strategy equally as limited and simplistic or your gonna incur education via pain. 

Keeping it simple you do a standard rental. And being of no experience in the real world you use a professional to defend against risk exposure (PM) and learn from them. You then get a HELOC, to open up use of that equity position.

And then, with all that done, now your ready to start putting together team and fielding deal potentials that work, and have that HELOC to facilitate the acquisition.

Then, lastly, with some experience under the belt, some other properties acquired and operating, NOW it's a choice on this originating property of do you keep it and let it keep chugging along OR is it time to sell, and 1031 the remainder of equity into other deals. 

Pace has done how many hundreds of deals before any you have seen? Yeah, Pace kept it simple at start, very simple. Do yourself a favor and also keep it simple, you have a great opportunity to get in and gain experience in a very safe simple setting, don't screw it up by getting greedy and over-complicating things. 

[Matt K.]

That's pretty low rent, especially by CA standards.  Is the property a good fit for a rental, as in would people want to live there or have to live there ?

I'm a big fan of OOS, CA has it benefits, but to me they're better served when dealing with a primary home.

Weather going to crap in the Midwest, sales going to slow down, find the right deal and you'll make double the rent for the same price or better. Might not see the same appreciation, but in a more landlord friendly state it could be easier.

Happy to run through numbers and share my experience in Kansas City. I'm not to far from you, I'm in the East Bay.

[Alex Olson]

@Mike Schoonover Of course I am partial to KC since I live here but like @Matt K. says I think there is an opportunity here in the midwest to make some great cash flow with some good appreciation AND fewer legal constraints/renter issues. I can show you a few real examples of investors who have sold their property in CA and bought in KC with the amount of money they cash flowed. The transaction is tax deferred through a 1031 exchange which is the best wealth building tool that too few people use. 

[Antonio Gonzalezcruz]

@Mike Schoonover Hey mike , I live in Sonoma CO. If your thinking about selling your property on seller finance i would be interested .IF you just need some guidance with creative structuring  i could help as well . Ive been with Pace for some time now (Its the best decision  Ive made ). Happy Holidays  

[Eliott Elias]

I like this strategy, get cash down and cash flow way more with mortgage payments rather than rent. I would go for at least 20% down and a 8% interest rate. This will be appealing to someone who can't qualify for financing 

[Nathan Fuller]

With california laws protecting tenants over the landlord, which is essentially what you'd be in this case, your best bet would be to just offer the house without sellr financing.  Too easy to get burned and that might sour you against real estate investing altogether being this is your first time.  Make this first transaction easy.  Get a realtor and learn from what they do while learning on your own.  sell the house and you've got a nice egg to start investing in real estate.

[Jay Hinrichs]

Quote from @Steve Vaughan:

I've sold plenty with seller financing- to spread out the tax hit.

No tax hit inheriting with stepped-up basis.

Lots of ways to screw yourself up. No tax benefit.  Sell it regular. 

A lot of publicly traded REITS  are paying dividends of over 10%. Maybe get cf there. 

Agreed would be crazy to take that kind of asset that can be cashed in with ZERO tax and then make  it a rental you would have no basis to write off depreciation.. sell it for cash and diversify as you noted.

[Chris Seveney]

@Mike Schoonover

Seller financing is not as easy as it sounds. My recommendation would be to sell the property outright.

[Mark Pedroza]

Quote from @Mike Schoonover:

Hello, I recently inherited a home in Solano county, the home is paid off and was owner occupied since built and was well taken care of with multiple upgrades over the years. 

I initially intended to rent the property but i would only net $1,800 a month in doing so. This feels like a light return on a 485k asset, and my thinking migrated towards selling the property and moving the money out of state and purchasing other rental properties.

During my deep dive into self taught real estate investing i came across the idea of creative financing, and started running numbers on my monthly cashflow if I carried the note, with current interest rates, with favorable interest terms to me in exchange for a low down and relaxed qualifying factors, and the hypothetical cashflow doubled.

My question is, is this doable for a first time home seller? I would want to bypass realtors so i would need to learn that side, along with the need to learn how to draft a note with terms and navigate all the other legal pitfalls that could sink my idea. Im not against paying professionals to take care of the needed steps im not qualified for but i dont know where to look, nor do i know everything i need to look for. 

Watching Pace do deals makes it look effortless on the seller financing side, but hes done enough deals that its all muscle memory. Am I insane for trying to be the bank on my first home sale? Ive been looking for resources but it feels like i get 2 new questions with each answer i find.

Seeing that your in CA, you might get hit with the Parent-Child Transfer provision. 

For additional info read this article: https://www.sccassessor.org/ta...

Good luck...

[Mike Schoonover]

Quote from @Mark Pedroza:

Quote from @Mike Schoonover:

Hello, I recently inherited a home in Solano county, the home is paid off and was owner occupied since built and was well taken care of with multiple upgrades over the years. 

I initially intended to rent the property but i would only net $1,800 a month in doing so. This feels like a light return on a 485k asset, and my thinking migrated towards selling the property and moving the money out of state and purchasing other rental properties.

During my deep dive into self taught real estate investing i came across the idea of creative financing, and started running numbers on my monthly cashflow if I carried the note, with current interest rates, with favorable interest terms to me in exchange for a low down and relaxed qualifying factors, and the hypothetical cashflow doubled.

My question is, is this doable for a first time home seller? I would want to bypass realtors so i would need to learn that side, along with the need to learn how to draft a note with terms and navigate all the other legal pitfalls that could sink my idea. Im not against paying professionals to take care of the needed steps im not qualified for but i dont know where to look, nor do i know everything i need to look for. 

Watching Pace do deals makes it look effortless on the seller financing side, but hes done enough deals that its all muscle memory. Am I insane for trying to be the bank on my first home sale? Ive been looking for resources but it feels like i get 2 new questions with each answer i find.

Seeing that your in CA, you might get hit with the Parent-Child Transfer provision. 

For additional info read this article: https://www.sccassessor.org/ta...

Good luck...

Prop 19 was the tipping point that made me lean towards selling the place.

[Mike Schoonover]

Quote from @Alex Olson:

@Mike Schoonover Of course I am partial to KC since I live here but like @Matt K. says I think there is an opportunity here in the midwest to make some great cash flow with some good appreciation AND fewer legal constraints/renter issues. I can show you a few real examples of investors who have sold their property in CA and bought in KC with the amount of money they cash flowed. The transaction is tax deferred through a 1031 exchange which is the best wealth building tool that too few people use. 

I like this idea, once i turn the property liquid id love to discuss opportunities in your area.