All Forum Posts by: Eric Andrekopoulos

There’s numbers on a piece of paper that put seller financing in a great light.

And then there’s the reality of seller financing being a bet on the buyer managing and maintaining a property well for years or decades while you still have skin in the game.

And a bet that the value doesn’t decline by more than the balance of the debt.

And a bet that the higher “price” received because of seller financing doesn’t come with opportunity cost in the form of being able to spend or invest the liquidity day 1.

And the fact that buyers with seller financing always want better terms than a bank would give them, which is real economics that sellers are far less equipped than banks to estimate risk/reward on.

Seller financing is relatively rare. And I completely empathize with this seller. 

This is the norm, not the exception.

Biggest risk of seller finance is if the buyer finds bad tenants who don't pay rent and destroy the property, now the buyer can't afford the payments and gives back a distressed building, now the seller has to spend money to fix it up, which could cost more than the down payment he got from the buyer.

@Eric Andrekopoulos

Let me be more “clearly constructive.”  Creative financing is about “solving” a seller’s “problem” with nontraditional methods

Nothing in this thread addresses what is this seller’s problem (maybe if I reread I’ll see something).  You have a solution looking for a problem

Maybe this guy is savy enough, or had his accountant run the numbers, and taxation isn’t a problem like my personal example.  You guys put that stuff to me looking to buy my properties, I’d try to politely laugh you away…

What’s supposed to be rule#1 in trying to do “creative deals” is finding a person with a problem that can’t be solved with the traditional sale, and solving it.  All I see here is everything from your perspective.  Your perspective is really immaterial in my opinion.

You need to find out from the seller’s perspective.  If there isn’t a “problem,” then as an “investor looking to do creative deals” you basically move on.  If you want to make a “deal,” that’s a different story, but doesn’t seem to be the one here

Good luck

Quote from @Eric Andrekopoulos:

Quote from @Chris Seveney:

@Eric Andrekopoulos

He could also sell them and not have to worry about if the borrower is paying or not - put the funds in a deferred sales trust and invest it in something less risky (not levered at 90% which is probably what it would be seller financed) and not pay ordinary income but have it taxed at qualified dividend.

There is a reason why 99% of loans are originated by banks and not by sellers. If banks didn’t have fractional lending they would not give mortgages either as with inflation you lose money over time

For example:

Take $1M as an example of a portfolio and put it at 7% seller financed vs putting it into an investment that gets 6% but doesn’t pay your principal back and is taxed at a much lower rate and see how big a difference that is

Roughly $1.4M interest vs $1.8M and taxed at 15% less rate it makes a huge difference.

 Hey Chris, You're saying it would make more sense for him to sell the portfolio and invest it. I'm Curious what it is that he should invest into specifically?

I tend not to provide financial advice but would say as I get older my risk profile will continue to decrease. The issue I am not a fan of seller financing is the following:1

1. Holding the note that you originate is a depreciating asset. Its like buying a new car, it will not go up in value in the majority of cases.

2. The lender has no exit. Most seller financed deals are to borrowers who lack sufficient credit to get a conventional loan, so their risk of default is much higher. While some may say "I am ok taking it back", that is like saying "I am ok with flying" but they have never experienced what it is like to take a property back, its like flying an F-16. Are you ok spending $5-$10k to foreclose, realize the borrowers trashed the place and it needs $50k in repairs, and oh maybe they file BK 3x and it takes 5 years for this to go through. Are they truly ready for that. Typically as someone gets older their tolerance for BS is far less.

If I could sell an asset even for less $ and invest it passively at a lower risk than seller finance it to an overleveraged borrower with poor credit there is really no choice to be made in my mind. 

Everyone forgets that four letter word called RISK.

Quote from @Eric Andrekopoulos:

Hey BP Fam,

  I currently have a local investor looking to exit his rental business within the next 5 years because he's older in age. So he wants to sell all of his properties. A vast majority of them have 100% equity which is a beautiful gate to seller finance which I feel will be the most profitable. He mentioned he just "doesn't want to do it" and would rather just get the cash from selling them. Now he does have children he wants to pass wealth to (cash) and not his business. Other than explaining how his children will continue to receive the payments after his passing what can I do to get him on the positive side of creative finance? I also explained to him the tax benefits of it which was another one of his worries.

 WHY? Just buy them or sell them to a cash buyer, or have them use traditional financing, why are you complicating things? Hey so you buy them then you flip them with seller financing. 

@Eric Andrekopoulos I'm offloading my portfolio and I don't want seller financing.. You why?  I am NOT a lender in that regard.  I'm not going to extend hundreds of thousands of dollars in credit, really to anybody.  I can't pay my bills with a Note, or Title for that matter either.

Also, I think people seriously don't understand the possibilities in the sale.  Even in NJ, I'm paying VERY LITTLE tax on my sales.  I think my eff tax is 5%-10% approx.  Will people tell you how and why (I didn't do anything fancy, its just how the tax code works)?  Of course not.   they want to SELL you on various other deals and techniques.

"Creative deals" only "fits" when the seller "needs" it.  Honestly, I find it annoying how investors seem to think that doing a creative deal is some sort of right that sellers should accept.

Anyway, sorry as iI find this annoying.  nothing personal.  Good luck.

Quote from @Eric Andrekopoulos:

Quote from @Jeff S.:

@Eric Andrekopoulos seller finance is not without risk. If he wants his cash get it to him. So he pays tax, seller finance does not eliminate taxes it just defers them. If he spreads out his sales over 5 years he is spreading out his tax bill.

 Hey Jeff, Are you opposed to creative finance? Running numbers you actually see he makes much more sense with this method. I also am able to offer more to purchase because we have full control of terms. I find most sellers lack confidence in it because they lack knowledge about it and all it takes its deep explanation.

Seller financing is investing in the buyer. A seller needs a buyer he can trust. That is deal (buyer) specific. No sane seller is going to announce specific terms of seller financing without knowing who the buyer is, the buyer’s character and his experience and financial wherewithal.

Then there’s the seller’s “children.” Note the plural. Each of them have their own needs and desires. It also means daddy has to get the kids to agree to the terms of his deal in order to keep peace in the family.

Sorry, Joe, but a side-by-side may give the seller an idea of what he’s leaving on the table, but that may not be enough. 

He likely just wants out and to move on to other things and having to deal with whether or not someone does their monthly payments is more than he wants.  It is a risk and while when it works, the return can be good, it may not be for him.

@Eric Andrekopoulos seller finance is not without risk. If he wants his cash get it to him. So he pays tax, seller finance does not eliminate taxes it just defers them. If he spreads out his sales over 5 years he is spreading out his tax bill.