Owner Financing – Making Investments Last Longer

You’ve decided to sell your property and are wondering if owner financing is right for you. Maybe it is and maybe it isn’t. I can tell you that there are several investors in the Metro East REIA who have used this method to keep their investments working longer for them. We’ll talk through on example of how you can keep your investment property working longer for you even after you sell it.

Our Example Property for Owner Financing

Let’s say you have an eight unit complex (two fourplexes) for sale in Alton, IL (or Wood River, Godfrey, Granite City, Pontoon Beach, Belleville, Collinsville – you get the drift). Each unit is a 900 sq/ft, 2 bed, 1.5 bath, and rents for $625/mo. W/S/T included in rent. Built in 1975. You have owned these for 15 years and purchased them for $150,000 (the land was worth $15,000). You can sell this via the “traditional” route for $215,000. Are you really satisfied with $215,000? What really works for you?

You Can Get More Money

No hard data in his section. I’ll just tell you that most investors, including me, are willing to pay more for a property that is being sold with owner financing. How much more is all based on the terms you agree to. Let’s talk through why this is.

With seller financing I can work with you creatively, and I am willing to pay a premium for that flexibility. When I use traditional bank financing (I like working with Scott Jones over at Carrollton Bank), I am more limited in what kind of terms I can use. Down payment amounts, payment terms, etc., are less flexible therefore giving me fewer options. I love using bank financing, but owner financing gives me a lot of options to better fit my current business situation. And it gives me a better way of working with you on a program that better matches your needs as well. We can both benefit from this arrangement in most cases.

  • With our example property, you’re going to pay a lot in capital gains and depreciation recapture. When you sell using owner financing, you can defer the payment of some of those taxes. Ask your CPA about what you can and cannot defer when using seller financing.
  • With our example property, once you are out, you are out. That mailbox money you’ve been receiving all of these years comes no more. With seller financing, you’ll continue to receive a check consistently for years to come.
  • When I buy using bank financing, I’m required to put a down payment on a significant portion of the sales price. With owner financing, I might be able to put less down and therefore pay a little more for the property.
Back to Our Example – Income From an Annuity

Let’s look back at our example using rough numbers. Sorry if this gets a bit complicated. (Remember, I’m not a CPA. Check with your attorney and CPA about your situation.)

Traditional Financing nets $653/mo

Traditional Financing Example

The bottom number is the one I’d like to focus on. If you put these proceeds into an annuity that pays you 2.5% for 30 years, you can reasonably expect to receive $653/mo for those thirty years. If you find an annuity that guarantees a 5% return (which you will not find), that income would amount to $885/mo.

Back to Our Example – Income From Seller Financing
Owner Financing nets $1,042 a month

Seller Financing Example

First, you’ll notice I agreed to pay about $10,000 more for this property. Why? Because you agreed to finance that $10,000 and because I didn’t have to pay for an appraisal. Second, you can see that your first year’s taxes are significantly less under this scenario. That’s because you defer payment of capital gain taxes until you receive your mortgage payments from me. Third, because we dealt directly with each other you don’t have to pay a real estate agent any commission. Fourth, because a ban is not involved you won’t end up repairing things just to make the financing work so your “other closing costs” will be less.

Bottom line? At the end of thirty years, I’ve paid you $375,000 for your property. Under the traditional way, you’ll only get $235,000.

Wrapping It All Up

There are a ton of questions still unanswered about owner financing. Some of those include what happens if the new owner refinances, what are the dangers I face when I carry the note, and can I pass on the note to my heirs. We’ll answer some of those in a future post.

But looking at this from a high-level perspective, you can see where you’ll receive a significantly higher amount of money through the use of judicious seller financing. In this case, about $140,000 more.

Do you have any questions about “being the bank”? Have you ever used this method to buy or sell a property? Please use the comments section below!

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