Why would a seller opt for seller financing and 20% dn for fixer?

5 Replies

I'm looking at conventional financing to purchase a property, around 250,000 where I can pay 10% downpayment and get approved for the total amount. While the house needs small cosmetic upgrades, it sounds like it would pass an inspection through the bank (speculation at this point), given the buy price is below the market price and it's livable. 

I spoke with the FSBO home seller and he said he wants 20% down, and the rest paid off within 10 years. I don't plan to keep the house for 10 years (will likely sell), but sounded like he was interested in a seller financing contract, and spoke of balloon payments within 8 years as well...

But why would a home seller want a 20% down payment, and seller financing if I can get conventional financing for the house and pay his asking price at escrow? It would help me in making 1/2 the size of a downpayment, own the house outright (in case I sell before market drops), and he would receive all the funds all at closing.

When asked why he preferred a seller finance contract, seller mentioned he prefers residual income than at once.

Is there something I'm missing?

If structured correctly, he may be able to reduce and/or spread out his tax burden.

Could be a few reasons.  Tax planning is a common one as @J Scott mentions.   I have a guy who will only do seller financing for estate planning purposes.  He has over $5mil in assets and is 91.  A third common reason is higher returns for the proceeds.  Where else can he get a secured 6% (or whatever) return.  He may understand compound interest and wants to be the bank.  

Maybe give it a try if the deal makes sense.  I love not having to deal with the hassles and fees of lenders, appraisals, etc. It also won't go on your credit report, limiting the number of future loans.  Please keep us posted @Tony K. !

@J Scott Thanks for the quick response. He purchased the property in the Spring of this year.. I asked it had to do with 1031 exchange (sounds like it wouldn't apply) and he said it was because he liked residual income. It did not sound like he purchases a lot of properties every year.

As for tax burden reduction, wouldn't he have to pay for the capital gain taxes anyways when all funds are transferred over; which could be even more (if the house continued to increase in value over the years?)

Is there any benefit of me buying under a seller contract... Would it being under contract that restrict me from selling the house in  say 1 year, if I could payoff the rest of the house then?

Tony,

He would pay capital gains taxes on the portion of principal he receives.  He would pay on the 20% in year sold and the principal reduction in years received.  An future sale would not be affected as long as there is no prepayment penalty.

Mark

@Mark Creason is close, but few points are given for 'leaners' in the tax world.  Seller has to pay all of his depreciation recapture taken over the years in the year of sale @25% - installment or all cash.  Some of each payment will be just recouping his cost basis, some will be at long-term cap gain rate and some will be interest, taxed as ordinary income.  Chances are the seller knows this and it is to his advantage for some reason to carry the paper.  

I like them and have 6 right now.  I use a contract servicing agent at a local bank.  They hold all original docs, draft the payments electronically, maintain the am schedule and do the 1098 annual interest reporting.  It costs $10/mo, but removes confusion on a ton of tricky areas.