Requesting Seller Financing

[Jacob Bolinger]

Hi BP! I am looking for some advice on making a deal happen and hoping that someone might have some suggestions.

An owner of 3 duplexes in the Minneapolis area recently contacted me, knowing I own a duplex a few doors down from two of his. He explained to me that he is in no real hurry to sell the properties, but wants to be done being a landlord. He is looking to roll his money into a franchise opportunity and wants to do this through a 1031 exchange of all the properties. He further explained that he does not want to list the properties, deal with showings, realtors, and potentially having one of the three deals fall through at the last minute. All three are in great locations, long term tenants, but need cosmetic updates.  From briefly speaking with him, it sounds like he is looking at around a $1mil price point, which would make these a solid investment.  2 of the 3 have Lake Minnetonka, MN views, and down the road, mine just appraised for $503k (similar property, but not an exact comparable).  The other duplex is near the University of Minnesota.  

I informed him that I would take all the information that he provided and go over it with him next week over coffee. Due to his patience in needing to sell, desire to be done being a landlord, wanting true passive income, and needing to sell all at once, I want to explore the option of seller financing. At the end of the determined time, I would close on all three at once, alleviating the other headache of making that deal work.  Without partnering, I would not have the capital to acquire these properties otherwise.  

I’m looking to see if anyone would give some advice on how to present this to him, things to consider, or if I should even approach this through seller financing.  Any help will be greatly appreciated. Thanks in advance! 

[Dave Foster]

@Jacob Bolinger, @Tom S. raises a good question.  And there's actually a couple hurdles in your scenario.

1. If you take control deeded or otherwise with a land contract, lease to purchase, owner carryback, or outright purchase his 1031 calendar starts with the day of the closing of the deal.  In any of those but the outright sale that means that he is entering a 1031 with only the down payment and a note in his exchange account.  He must use both the note and the cash to purchase his 1031 replacement so that is problematic unless he has cash from the outside that he can swap for the note in the exchange acct.  If so then he takes the note outside of the exchange and you continue with the terms per contract.  Since his exchange now has the total amount of cash in it he can now complete his 1031 fully and successfully.

2. The other thing I saw was that his desired replacement is a franchise.  In order for a 1031 to be valid it must be a sale of investment property followed by a purchase of investment property.  Purchasing a franchise (or any part of one that is not real estate) does not qualify for 1031 treatment.

I spose that would lead me to continue along the owner carry path but making sure he understood that a 1031 was off the table if he wanted to buy a franchise so why not just sell to me on a note pay the tax and move on.