Owner Finance paid for rentals

7 Replies

Hello BP. I am approaching retirement and am looking at selling my rental properties owner financed. My thoughts are that this would continue my great cash flow without the rental maintenance issues. Plus maybe delay a huge lump sum payment of capital gains taxes.

I have heard that owner finance rules are possibly different in each state? I am in the TN area. Any tips or information would be appreciated.  I had a attorney tell me recently that there was a law passed that prevents any owner finance without a mortgage license but from my internet research I believe the fella may not have been knowledgeable or at least had not kept up with current laws and exemptions. (hard to get good help nowadays)

Most all the new laws regarding financing especially owner financing are regarding homeowner properties. They generally do not apply to rental/investment properties. 

If you are going to sell to investors not much of an issue. If you intend to sell to homeowners, you may not need a license but you will have to have someone that has one help you. 

This is a specialized area with several new laws so you  need an attorney that specializes in this area. A general Real estate attorney is probably not going to know enough. There have been a number of threads here on BP with some very knowledgeable people that may help. Search for Dodd Frank or @Dion DePaoli

Congrats on having paid for rentals to sell and for thinking outside the normal 'cash me out' box @Darryl S. !  That's awesome.  How long ago did you begin buying?

When I buy or sell on contract, I go through my local title co.  They have a RE attorney they work with that drafts the docs for a nominal fee ($250-$400).  They will also be able to explain (but not advise) the pluses and minuses of the different methods of financing used most in your area.

I also use a local community bank to hold the original docs and do the contract servicing. They auto draft the payment, track the amort schedule and do the annual 1098 interest reporting for us.   Here it costs $150 to establish and $7-$10/mo to service.  

Correct on the above if you finance to another investor.  DF is not in play.  You can agree to any terms you agree with the buyer as long as they will not occupy the home.

You can take installment sale tretment on financing an "investment property", which means it was a rental.  Google:  publication 537.

You will not save on capital gains in total, yes it will be paid over the term, but you get MUCH more cash in return because you are earning interest over time on the unpaid balance.  So charge 6%, 20 years, you will earn alot on your unpaid balance vs taking a cash sale.  Or more appropriately you work backwards from the rent, pick mortgage payments to be 1/2 of rent, then 6%, then what is the term that pays down the selling price to zero.  A financial calculator problem.

Thanks Steve. we started out approx 15 years ago. Only have a hand full of properties. I just wanted to supplement my retirement, not get rich LOL. I will check with my regular closing company to see what they can do for me on the paperwork that sounds like a great idea. Great tip on the local bank service too I will for sure be following up on that.  Someone else had mentioned that if I deal with investors that I do not have to worry about the new laws. If you have done many deals with investors you know that is probably not going to be a a very logical choice LOL. Homeowner is the way to go I think but I am not sure if that is going to restrict how many I do a year or what. Lots of conflicting information (as always) on the internet. 

I would join www.Legalshield.com and would get advise from them.  Also if you use a title company, especially the national ones, to transfer title, they can make sure things are done correctly.  In fact you can talk to the title officer and maybe their attorney to make sure things are being done correctly and legally.

I will check that legalshield thing out "thanks Joe'. Great summary on the Dodd Frank law "thanks Brian". Looks like the law is not quite as onerous as I had first thought. I did not plan on selling property on a owner finance without getting the qualification paperwork so this should work out just fine. It looks like it may take a while to do all this though as you can only do three deals per year. Now I just have to find out if my current closing company can help me out and see if my local bank  is willing to service the loan. I have a starting plan thanks to all the help here at BP. 

Curt I am a bit confused by your post Quote "Or more appropriately you work backwards from the rent, pick mortgage payments to be 1/2 of rent, then 6%, then what is the term that pays down the selling price to zero. A financial calculator problem."  Hoping you can detail that out a bit more for me I am pretty slow sometimes on figuring things out........     

I do have a couple of questions on a owner finance deal if anyone cares to chime in.

1. How do you handle the Property insurance on your deals. Does the buyer pay that? 

2. How do you handle the Property taxes. 

3. What clauses do you like to put in your contracts to protect your interest? For instance this property has some timber, my thought on that is if it is cut off ALL proceeds must go to pay down the loan. Looking for ideas here, talk to me BP