For real estate agents, business brokers, and mobile home dealers and brokers, seller-carryback financing can make the difference between a “sold” or an “expired” listing. This is particularly so in certain economic cycles.
True open-market financing and the rise of the subprime lending industry made it unnecessary to use seller-financing as much as had been done over the previous 80 years–at least in the SFR marketplace. Those sellers and their agents, who understand seller-carryback financing will make more sales!
The solution: Seller-financing closes the deal
Seller-carryback financing has continued to be used for all types of real estate, including mobile homes on lots or land; small or large apartment buildings, office buildings, commercial, industrial, motels, warehouse properties; special purpose properties such as theaters, hospitals, senior care facilities; and raw land, farms, or ranches.
It is heavily used to accomplish a number of other significant property transactions, including the sale of businesses (approximately 90% of small businesses sold are seller-financed) and the sale of mobile homes located in mobile home parks.
For real estate investors, in particular, seller-financing has continued to be a primary tool in achieving their investment objectives. This is true whether they are buying or selling their investment properties. There are very compelling reasons for that.
My favorite uncle–Uncle Sam
Many sellers mistakenly think they need to pull all of the equity out of the sale of their property. Uncle Sam doesn’t seem to think that’s such a good idea, especially for real estate investors. Otherwise, he wouldn’t pound us so hard with those tax hits when we sell for cash out or reward us for structuring our real estate sales in certain other ways.
The U.S. Tax Code provides several strong incentives that make it exceptionally profitable for real estate investors to “both a lender and a borrower be!” The most recognized maybe the Section 1031 tax-deferred exchange, which is the bailiwick of perhaps the most educated and creative people in real estate–professional Exchangers.
Section 453 (Installment Sales) allows investors to avoid the bulk of capital gains taxes ordinarily due on the sale of their investment property. Using the seller-carryback installment payment technique, sellers can avoid what we call “tax friction” and defer these taxes, paying them in very small increments over a long period of time. As a result, sellers are able to reinvest their profits for even more profits.
Another meaty bone Uncle Sam throws investors is by way of Tax Code Section 163, which allows investors to write off interest on debt used to finance investment assets! Financing a high percentage of the purchase price generates a large interest deduction in the early years of ownership.
This deduction provides a tax shelter that can shield positive cash flow, as well as the equity buildup occurring through principal reduction on the loan, from taxation. At times, it may even shelter some of our other income from taxation as well.
The icing on the cake
Seller financing, if structured properly, creates an opportunity to maximize the sale value of the property. And the carryback note gives investors a well-secured, high-yielding, near-cash asset that offers greater flexibility in building up their investment portfolios.
These notes allow us to add strength to our financial statements while earning much better returns than cash accounts, making them valuable tools for further acquisitions and pyramiding the growth of a tax-sheltered wealth accumulation base.
Depending on their objectives, sellers have multiple options other than cash to achieve maximum advantage for profit structuring while cinching the sale of their property and building a healthy investment portfolio.
This article was modified from an article originally written by David Butler and posted to this site on 2006/10/18.
