Author Topic: Seller financing a multi-family property  (Read 2834 times)

LadyMaWhiskers

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Seller financing a multi-family property
« on: April 26, 2016, 01:37:02 AM »
I need some reading recommendations and information about the pros/cons for me as a seller contemplating seller-financing of a multi-family property.

Some details

Location: California, USA

Loan terms: IDK, this is partly why I ask for reading materials, I don't know what the pros and cons of the options are. I gather that the customary rate is 2% over bank rates and balloons are typical. I have a buyer, and I don't think he'll pay a premium - he'll qualify for bank financing. Wouldn't a balloon payment be a problem for me, tax wise.

Current financial situation: $125k salary, passive income ~$50k (mostly unrealized), filing Head of Household (these figures don't include the current rental income or any future income from the note)

Future financial situation: similar, no plan to quit working imminently

Motivation: looking at options that lower my responsibility to maintain a large property and keep hefty cash reserves for it; would like to take some cash out of the multi-family to pay off my mortgage on my primary residence (but not by shifting the debt to the rental)

I'll be meeting with an accountant next week. My other option on the table is a 1031, but I have some apprehension of getting caught without a suitable replacement property, and I am getting excited by the prospect of truly passive income.

Some things I know I need to consider: inflation eroding the value of the payments, resale of the note

What else should I be considering?

Drifterrider

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Re: Seller financing a multi-family property
« Reply #1 on: April 26, 2016, 05:40:08 AM »
I need some reading recommendations and information about the pros/cons for me as a seller contemplating seller-financing of a multi-family property.

Some details

Location: California, USA

Loan terms: IDK, this is partly why I ask for reading materials, I don't know what the pros and cons of the options are. I gather that the customary rate is 2% over bank rates and balloons are typical. I have a buyer, and I don't think he'll pay a premium - he'll qualify for bank financing. Wouldn't a balloon payment be a problem for me, tax wise.No more so than getting it all when you sell.  You are taxed on the interest earned and any capital gains not otherwise excluded
What else should I be considering?

If the buyer qualifies for a bank loan, take the money and run unless you want to become a lender.

rothwem

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Re: Seller financing a multi-family property
« Reply #2 on: April 26, 2016, 06:05:22 AM »
I need some reading recommendations and information about the pros/cons for me as a seller contemplating seller-financing of a multi-family property.

Some details

Location: California, USA

Loan terms: IDK, this is partly why I ask for reading materials, I don't know what the pros and cons of the options are. I gather that the customary rate is 2% over bank rates and balloons are typical. I have a buyer, and I don't think he'll pay a premium - he'll qualify for bank financing. Wouldn't a balloon payment be a problem for me, tax wise.No more so than getting it all when you sell.  You are taxed on the interest earned and any capital gains not otherwise excluded
What else should I be considering?

If the buyer qualifies for a bank loan, take the money and run unless you want to become a lender.

I'm thinking that a lender would be a lot easier than being a landlord, but that's just my opinion.

The advantages of seller financing are:
-more money
The disadvantages of seller financing are:
-more work than a lump sum

Generally, the buyer comes up with the proposal, and its not set in stone.  However, the people I've talked to that have bought with seller financing generally have the amortization set at 20 years or so, with a balloon after 5.  Rates that are ~2-3% higher than a regular mortgage are to be expected. 

However, with all that said, loans are pretty easy to get these days.  Why is the buyer trying to buy with seller financing?  How much are they putting in from their end, do they have any money?  Do they just have too many mortgages? 

Also, there were some lending changes that happened a couple years ago that I'm not current on.  Read up on Dodd-Frank, and see if any of that stuff impacts your lending ability. 

LadyMaWhiskers

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Re: Seller financing a multi-family property
« Reply #3 on: April 26, 2016, 07:48:05 AM »
Actually, it was my idea, not the buyer's. The price can't go up from here (we've agreed to a price) and he plans to get bank financing, so I think I'd need to match the bank's terms, more or less. I'd like about 25% down, which is less than I believe he had planned.

Why do this??

My original thought was to sell the property and do a 1031 exchange. I have a ton of gain/depreciation recapture and it wouldn't make sense to sell and pay the tax. I want to sell, but not desperately. My goal in selling is to pay off my home mortgage and reinvest the remainder (about 75%) in something smaller and closer to home that has a more favorable ratio of rents to maintenance costs.

As I lie awake thinking about that, I wonder if I might rather just get out of the land lording game altogether. The passive income stream from the note would be roughly as much as I'd cash flow either way, (either keeping the current property or exchanging). The differences are the taxation issues and the fact that once the loan pays off, I'd have no equity vs, if I had a property, rents should go up indefinitely and I have equity.

I appreciate anyone else's musings. I've been thinking like rothwem...being a lender is so easy, banks are doing it!.

rothwem

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Re: Seller financing a multi-family property
« Reply #4 on: April 26, 2016, 09:58:01 AM »
Actually, it was my idea, not the buyer's. The price can't go up from here (we've agreed to a price) and he plans to get bank financing, so I think I'd need to match the bank's terms, more or less. I'd like about 25% down, which is less than I believe he had planned.

Why do this??

My original thought was to sell the property and do a 1031 exchange. I have a ton of gain/depreciation recapture and it wouldn't make sense to sell and pay the tax. I want to sell, but not desperately. My goal in selling is to pay off my home mortgage and reinvest the remainder (about 75%) in something smaller and closer to home that has a more favorable ratio of rents to maintenance costs.

As I lie awake thinking about that, I wonder if I might rather just get out of the land lording game altogether. The passive income stream from the note would be roughly as much as I'd cash flow either way, (either keeping the current property or exchanging). The differences are the taxation issues and the fact that once the loan pays off, I'd have no equity vs, if I had a property, rents should go up indefinitely and I have equity.

I appreciate anyone else's musings. I've been thinking like rothwem...being a lender is so easy, banks are doing it!.

The seller financing sounds like a good deal to YOU, but I'm not sure its a great deal for the buyer.  Generally people only buy using seller financing if they can't do bank financing. 

How would you pitch something like that to him/her?  "Hey, how about you buy the house from me with a higher interest rate and then have to pay closing costs again in 5 years when you have to refinance?  Sounds like a great deal, right?"  I doubt the buyer will bite unless you drop the price a bunch or sweeten the deal some other way.