Benefits of seller financing

Benefits of seller financing

Jorge VazquezBusiness Member
Real Estate Broker · Tampa, FL · Member since 2017 · 1k+ posts · 700 votes

Owner financing is like a secret weapon for folks looking to sell their properties after hanging onto them for ages. Instead of selling your place outright and getting hit with a massive tax bill all at once, you play the bank and provide a loan to the buyer. This way, you get to spread out those capital gains taxes over time, making your tax bill way more manageable. Plus, you get a steady flow of cash from the buyer's payments, which can be super handy, especially if you're retired and looking for a consistent income stream. It's a smart move for both keeping more money in your pocket and making your property more appealing to a wider pool of buyers. What is your strategy when doing owner financing? Do you have the buyers assign the rent to you etc... Tell me about your experiences! 

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Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
2y
Quote from @Jorge Vazquez:

What is your strategy when doing owner financing? Do you have the buyers assign the rent to you etc... Tell me about your experiences! 

When I tapped out in March, April and June of '22 I sold all my larger mf on i/o contracts. 

I conveyed with a hybrid contract for deed which put title in the buyer's names, but I remain the legal owner.   Like a car loan. After a default of 90 days, I take the property back with a piece of paper. 

They are serviced with a note/contract servicer which holds the original docs, receives and dispurses pmts, does the tax reporting and enforces the terms like late fees, early payoff penalties,  interest-only end dates, etc.  It costs $18/mo per contract and $145 annually but is worth it at this level.   I have other smalls I handle myself.   

I agree with all your reasons to offer SF as a seller, just research what methods of conveyance your state has available which offers more seller protections.

If I just had a regular note and DofT I don't know if I'd do it.  My buyers were sophisticated entities that would lawyer up to stall a foreclosure, but not sophisticated enough to challenge the conveyance method ironically.   Conveyance methods of seller financing are not discussed nearly enough. 

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  • Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    2y
    Quote from @Jorge Vazquez:

    What is your strategy when doing owner financing? Do you have the buyers assign the rent to you etc... Tell me about your experiences! 

    When I tapped out in March, April and June of '22 I sold all my larger mf on i/o contracts. 

    I conveyed with a hybrid contract for deed which put title in the buyer's names, but I remain the legal owner.   Like a car loan. After a default of 90 days, I take the property back with a piece of paper. 

    They are serviced with a note/contract servicer which holds the original docs, receives and dispurses pmts, does the tax reporting and enforces the terms like late fees, early payoff penalties,  interest-only end dates, etc.  It costs $18/mo per contract and $145 annually but is worth it at this level.   I have other smalls I handle myself.   

    I agree with all your reasons to offer SF as a seller, just research what methods of conveyance your state has available which offers more seller protections.

    If I just had a regular note and DofT I don't know if I'd do it.  My buyers were sophisticated entities that would lawyer up to stall a foreclosure, but not sophisticated enough to challenge the conveyance method ironically.   Conveyance methods of seller financing are not discussed nearly enough. 

  • Real Estate Agent · Puyallup, WA · Member since 2022 · 551 posts · 379 votes
    2y
    Quote from @Steve Vaughan:
    Quote from @Jorge Vazquez:

    What is your strategy when doing owner financing? Do you have the buyers assign the rent to you etc... Tell me about your experiences! 

    When I tapped out in March, April and June of '22 I sold all my larger mf on i/o contracts. 

    I conveyed with a hybrid contract for deed which put title in the buyer's names, but I remain the legal owner.   Like a car loan. After a default of 90 days, I take the property back with a piece of paper. 

    They are serviced with a note/contract servicer which holds the original docs, receives and dispurses pmts, does the tax reporting and enforces the terms like late fees, early payoff penalties,  interest-only end dates, etc.  It costs $18/mo per contract and $145 annually but is worth it at this level.   I have other smalls I handle myself.   

    I agree with all your reasons to offer SF as a seller, just research what methods of conveyance your state has available which offers more seller protections.

    If I just had a regular note and DofT I don't know if I'd do it.  My buyers were sophisticated entities that would lawyer up to stall a foreclosure, but not sophisticated enough to challenge the conveyance method ironically.   Conveyance methods of seller financing are not discussed nearly enough. 


     Interesting! I'm all ears. Please educate me on Conveyance methods.

  • Real Estate Agent · Puyallup, WA · Member since 2022 · 551 posts · 379 votes
    2y

    I have switched up my buying strategy entirely to only going after landlords with 100% equity. Seller financing is soooo much more valuable than a bank for so many reasons.

    I was just talking to my wife about this, I have no intention of buying another investment property with traditional lending. So many advantages for all parties, just as you mentioned.

  • Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    2y
    Quote from @Nathan Harden:

    Already answered.  As agents, you guys are professionals I thought.   

    I was trying to answer the OP's question but he ignored all I said anyway.  

    Do some digging. I'm out. 

  • Accountant · NH · Member since 2019 · 269 posts · 288 votes
    2y

    The piece to be aware of with seller financing that can readily bite someone - depreciation recapture.  The regular straight line depreciation is fine, that receives the normal treatment.  But if you have done cost segregation studies and have 1245 / ordinary recapture to deal with, all of that income is taxed in the year of the sale, regardless of what you received for proceeds.

    Not previously as big of an issue, but in this world that we have had the last few years of 100% bonus depreciation, it is rearing its head more and more often.

  • Jorge VazquezBusiness Member
    OP
    Real Estate Broker · Tampa, FL · Member since 2017 · 1k+ posts · 700 votes
    2y
    Quote from @Kory Reynolds:

    The piece to be aware of with seller financing that can readily bite someone - depreciation recapture.  The regular straight line depreciation is fine, that receives the normal treatment.  But if you have done cost segregation studies and have 1245 / ordinary recapture to deal with, all of that income is taxed in the year of the sale, regardless of what you received for proceeds.

    Not previously as big of an issue, but in this world that we have had the last few years of 100% bonus depreciation, it is rearing its head more and more often.


     Can you elaborate more on "1245"?

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  • Accountant · NH · Member since 2019 · 269 posts · 288 votes
    2y
    Quote from @Jorge Vazquez:
    Quote from @Kory Reynolds:

    The piece to be aware of with seller financing that can readily bite someone - depreciation recapture.  The regular straight line depreciation is fine, that receives the normal treatment.  But if you have done cost segregation studies and have 1245 / ordinary recapture to deal with, all of that income is taxed in the year of the sale, regardless of what you received for proceeds.

    Not previously as big of an issue, but in this world that we have had the last few years of 100% bonus depreciation, it is rearing its head more and more often.


     Can you elaborate more on "1245"?

    Sure thing - IRC 1245 refers to Personal Property type assets - think of all that 5-7 year property you pull out in a cost segregation study.  When you recognize depreciation recapture on these types of assets, that depreciation is taxed as "Ordinary" income, therefore is not eligible to be included in an installment sale.    Depending on what one can defensibly argue for the allocation of the sale price, it may or may not be an issue.  But if you are doing seller financing on assets you acquired in the last few years and did a cost segregation study, it is something to be cognizant of.

    There is also "1250 recapture" which is taxed as Ordinary income as well, and is not subject to installment reporting - this is when you took accelerated depreciation (bonus) on any real property assets.  Primarily this applies to when one took bonus depreciation on land improvements, or in the case of nonresidential property, qualified improvement property.

    The one type of depreciation recapture you can defer with an installment sale is "1250 unrecapture" - this is that typical 25% depreciation recapture rate that you think of, which is the depreciation recapture on the straight line building and/or straight line depreciation on something like the previously mentioned land improvements or qualified improvement property.

    Allocation of the sales price is incredibly important here.  You can't arbitrarily decide that you don't want to allocate any of the proceeds to the portion of the property that will create Ordinary income recapture (thus can't be included in the installment sale treatment) - it should technically be allocated amongst all the assets in accordance with their fair market value at the time of the sale.  Whether that is determined in a reasonable approach by you and your accountant, or you come to an agreement with the buyer of the property - you just need to do something.
  • Member since 2023 · 1 post · 0 votes
    2y
    Quote from @Nathan Harden:

    I have switched up my buying strategy entirely to only going after landlords with 100% equity. Seller financing is soooo much more valuable than a bank for so many reasons.

    I was just talking to my wife about this, I have no intention of buying another investment property with traditional lending. So many advantages for all parties, just as you mentioned.


     Have you been successful in acquiring properties with seller financing?  Where are these properties located?

  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y

    @Jenny Tsa

    I think what is not talked about often is the risk with seller financing.

    I have seen in many instances people sell properties to borrowers who would not traditionally qualify for the loan. They also do not get a substantial down payment. These two factors lead to historical higher default rates. While it’s great being a bank, there is a downside when a borrower defaults, and you have to go through a lengthy and arduous legal process to foreclose, which most likely the lender has never done.

    In many instances on defaulted loans, the interior of the properties get trashed, and have significant amount of work which lowers the value of the property significantly.

    Lastly, if a Bank would not lend to a qualified purchaser at 8% with only 5 to 10% down payment, why would someone want to do this to an unqualified purchaser?

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