Seller financing options?

Question

Hi!

We may have found a great multi family unit. The owner owns the property free and clear but says that if she was going to do seller financing, she would do it with a friend of hers. ￼ Any tips on what to say in order to have her work with us? Is there anyway that she could just seller finance half of the deal and still use the 1031 tax exchange?￼￼￼￼￼￼

Brenna Crowe · Answer

@Dave Foster this is so helpful, thank you! So they would have to use money from somewhere else for the note? Then we pay them into that account so it’s tax free? Sorry this is the part of real estate that trips me up haha

Brenna Crowe · Answer

@Joseph Cacciapaglia thank you! I want to make sure I know what I’m talking about before I go back to her

Joseph Cacciapaglia · Answer

Whenever someone says they'd rather sell to their friend than me, I like to ask why they haven't done so already. This is often pretty telling. I also like to ask them what it would do to their friendship if that person didn't perform on the deal. People often don't think about that ahead of time. Is it worth the risk to their friendship?

It's great that you're also figuring out the exchange information up front. If you come across as the knowledgeable professional, that can often make people feel much safer than going with their friend.

Dave Foster · Answer

@Brenna Crowe, right.  They bring in cash equal to the amount of the note from anywhere.  Let's just say that they have a savings account getting 1% a year.  They could take $200K from that and put the cash into their exchange account.  The note is now outside the exchange and you simply make payments to them.  for the life of the note.  If your note was say for 5% then they are making 4% more on their money plus they still got to defer all tax and depreciation recapture.

It's a pretty powerful tool if you've got access to cash.

Dave Foster · Answer

@Brenna Crowe, She can't just do a 1031 on half without paying tax on the other half.  So unless her basis is very very low that would not create any savings for her.

However, it is possible to combine an owner carry with a 1031.  They would need to put all of the cash proceeds and the note into their exchange account.  And then during the exchange period they exchange cash from somewhere else for the note in the exchange account.  Once they do this the exchange account has enough cash to complete the 1031 exchange.  And outside the exchange they have the not which you are now making tax free payments to them from (other than the interest portion).