One of the least understood means of purchasing property has to be seller financing. Even though many sellers don’t understand it, if it is done correctly, it is a win-win for both buyer and seller.
Communication: Key To Successful Negotiation
Just like any financing, seller financing is a negotiation. When the buyer and seller are close to making a deal, that’s when the fine points of the financing come into play. In order to do this correctly, buyer and seller need one vital key ingredient: communication. What are the seller’s motivation and expectations in offering financing and what are the buyer’s? Once that has been determined, the rest of the negotiation should fall into place.
Let’s take an example. An 80-year-old man who has owned his multi-family property for 25 years is selling. He has other properties and makes a habit of selling them as they reach the end of their depreciable years which is 27. Like anyone else, he wants top dollar for his property, but he has plenty of equity and has no plans to purchase anything else.
Is he a prime candidate for seller financing? You betcha’. First, he doesn’t seem to need a big chunk of cash to buy something else. He already has other rentals, so he’s not in any rush to buy more. And, since he will get a big chunk of cash if the buyer of his property gets a loan, he will have to pay capital gains tax on that money. Currently, the tax would be 15% of the proceeds. But, if he takes a down payment from the buyer, he can get the rest of his money in smaller increments and, although the rate will be the same, because it’s a smaller amount of money, he will have a steady stream of income for many years.
Here’s another example. A good buyer is between jobs, though he has advanced degrees in accounting and every expectation of getting a good job as soon as he completes the requirements for his CPA. To get along during this period of low income, he sells a rental property for a good price and then looks to purchase another closer to where he lives. Although as a professional, he is a good risk and he has good credit, he may have trouble getting a loan from a conventional bank. So, what does he do? He looks for a property offering seller financing.
This buyer and this seller may be able to make a deal which is congenial to both of them.
This would be a win-win for both buyer and seller and represents the most common scenario for seller financing. Not every seller is interested in financing the sale, but you never know until you ask…