Investor Off loading portfolio but doesn't want to seller finance.

[Eric Andrekopoulos]

Hey BP Fam,

  I currently have a local investor looking to exit his rental business within the next 5 years because he's older in age. So he wants to sell all of his properties. A vast majority of them have 100% equity which is a beautiful gate to seller finance which I feel will be the most profitable. He mentioned he just "doesn't want to do it" and would rather just get the cash from selling them. Now he does have children he wants to pass wealth to (cash) and not his business. Other than explaining how his children will continue to receive the payments after his passing what can I do to get him on the positive side of creative finance? I also explained to him the tax benefits of it which was another one of his worries.

[Chris Seveney]

Quote from @Eric Andrekopoulos:

Quote from @Chris Seveney:

@Eric Andrekopoulos

He could also sell them and not have to worry about if the borrower is paying or not - put the funds in a deferred sales trust and invest it in something less risky (not levered at 90% which is probably what it would be seller financed) and not pay ordinary income but have it taxed at qualified dividend.

There is a reason why 99% of loans are originated by banks and not by sellers. If banks didn’t have fractional lending they would not give mortgages either as with inflation you lose money over time

For example:

Take $1M as an example of a portfolio and put it at 7% seller financed vs putting it into an investment that gets 6% but doesn’t pay your principal back and is taxed at a much lower rate and see how big a difference that is

Roughly $1.4M interest vs $1.8M and taxed at 15% less rate it makes a huge difference.

 Hey Chris, You're saying it would make more sense for him to sell the portfolio and invest it. I'm Curious what it is that he should invest into specifically?

I tend not to provide financial advice but would say as I get older my risk profile will continue to decrease. The issue I am not a fan of seller financing is the following:1

1. Holding the note that you originate is a depreciating asset. Its like buying a new car, it will not go up in value in the majority of cases.

2. The lender has no exit. Most seller financed deals are to borrowers who lack sufficient credit to get a conventional loan, so their risk of default is much higher. While some may say "I am ok taking it back", that is like saying "I am ok with flying" but they have never experienced what it is like to take a property back, its like flying an F-16. Are you ok spending $5-$10k to foreclose, realize the borrowers trashed the place and it needs $50k in repairs, and oh maybe they file BK 3x and it takes 5 years for this to go through. Are they truly ready for that. Typically as someone gets older their tolerance for BS is far less.

If I could sell an asset even for less $ and invest it passively at a lower risk than seller finance it to an overleveraged borrower with poor credit there is really no choice to be made in my mind. 

Everyone forgets that four letter word called RISK.