Cash Flow Friday Tip #12: Understanding the benefits of Seller Financing for both the seller and buyer of an income property
In this week's Cash Flow Friday tip I'd like to share with you the primary benefits of owner financing for both the buyer and seller of an income property. The benefits I'm about to discuss should be used in your negotiations when trying to pitch the idea to the seller or to the broker representing the seller.
Here is what I feel are the top 6 benefits of owner financing for you the buyer:
Non-recourse debt and does not appear on your credit
No credit checks required (most of the time)
Ease and quickness of financing
No need to prove existing track record
Flexibility to structure creative terms including interest rates, amortization term, down payment amount, etc.
The ability to purchase un-financeable deals. For instance, an apartment building or mobile home park that has significant vacancy will be terribly difficult or nearly impossible to finance through conventional terms, but with owner financing anything is possible.
There's many more benefits than that, but I think those 6 are the primary ones. Now I will say this, most of the time an owner won't just come out and say that they'll do seller financing and I don't suggest you even bring it up during your first meeting with them. In fact, most of the time you'll need to establish a rapport with the sellers before they'll ever consider it, so be sure to be delicate with how you approach the subject and be sure to presentl it as a win-win proposition.
Now let's discuss the big benefits from the owners standpoint, and just remember, most owners don't realize that owner financing is even a viable option nor do they know how beneficial it is for them. Use the benefits as part of your negotiations and rapport building strategy to increase your chances of a seller saying yes.
Ongoing Monthly Income: For an owner who is selling an income property it might be beneficial for them to continue to receive monthly payments from the sale rather than take the lump sum of money, especially if they don't have another investment lined up which will get them either the same or a better return than that of the asset they're selling.
Keep the money in a performing investment: When asked what they plan on doing with the proceeds from the sale, most sellers have no clue what they'll do with the money and most of the time it ends up in their bank account or in a money market where it will make practically nothing. Seller financing is an opportunity for them to keep their equity at work, but eliminate the day to day headaches of operating the asset. Plus, their money is secured by a property which they are very intimately familiar with. Sounds like a win-win to me, right?
Maintain Control of their investments: Seller financing always allows the sellers to maintain control of their investment dollars whereas if they take their sale proceeds and hand it off to a wealth advisor they're basically placing their destiny in his/her hands which I'm sure we can all agree isn't the best option.
Limit Tax Exposure from Sale: With owner financing (installment sale) the seller is the ability to spread out their capital gains exposure as the IRS has special tax rules for installment sales in which the seller is only required to pay a small portion of that tax bill each year while the loan is being paid off. Assuming they aren't planning on a 1031 exchange, if the sellers take a cash sale they will be required to pay all capital gains plus a recapture of depreciation which will add even more to the tax bill.
Some of the reasons of why a seller wouldn't want to hold financing or why it might not make sense for them to do so:
1. They're planning a 1031 exchange of the proceeds into another income property
2. They have an immediate need for the cash and can't wait. This could be a emergency medical condition, maybe legal fees for a court battle they're involved in, or one of many other things why people need cash
3. They don't trust or feel comfortable with you or just can't wrap their mind around the idea
4. Their friends, family, realtor, CPA, Attorney, or someone else who is influential in their life told them it was a bad idea.
Now that you have the benefits, it's up to you to sell them to the seller. Good luck!
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