Learning new ways of conducting business – and providing your clients with the most up-to-date marketing concepts and problem-solving techniques – will play a huge role for the Real Estate Professional in the 21st century. That role includes re-educating themselves based on current market conditions.
Paradoxically, two of the most powerful tools an elite Real Estate Professional can have at his disposal in today’s economic environment – basic working knowledge of Exchanging; and using Seller financing – are actually somewhat advanced deal-making techniques that have been practiced by more enlightened real estate professionals and real estate investors, for many decades.
There are several powerful reasons for this change in the real estate marketplace, which are creating a boom in the use of the Exchange concept as a method of concluding real estate transactions. One is that several changes in federal tax regulations have increased the tax advantages offered by exchanges – while most other tax-related benefits of RE investing have been significantly stripped away!
Tax-deferred 26(IRC) USC Sec. 1031 Exchanges are not used just for larger commercial real estate transactions or special use properties anymore.
Today, most RE Exchanges are actually being completed on bread & butter properties that are typically listed by retail residential real estate agents, including building lots and vacant land parcels, small multi-family duplexes, tri-plexes, and quadruplexes; single-family rentals, rental condos/ townhouses, etc.
Just one example… Investors now often take Single Family Residences to convert and hold as producing rental property for at least 12 months, to meet the Sec. 1031 requirements for deferring taxable gain. They can then take advantage of the recent change in 26(IRC) USC Sec. 121 (Exclusion of gain from the sale of principal residence) by converting these homes to their own personal residences for at least two years, and holding the property for a minimum of five years. In this manner, they can essentially shelter up to $500,000 of capital gains permanently, and avoid the taxes on them!
Pipeline to Prosperity
Another growing factor playing out in the marketplace is the substantial demographic change in RE ownership, as thousands of Americans at the grassroots level have joined the ranks of RE investing. Many of these nouveau land barons entered the marketplace after obtaining some form of training -or at least relative exposure – through the flood of real estate and investing seminars, courses, and self-help books that have proliferated.
Many of these folks were schooled in the use of “creative financing” techniques to take maximum advantage of the primary advantages offered by real estate investment as a vehicle for accumulating wealth, including leverage, income, tax shelter, appreciation, hedging, and estate building. The most prominent of these techniques is also the most obvious – utilizing Seller-carryback financing.
Seller-carryback financing provides a powerful tool for buyers, sellers, investors, and brokers of a broad mix of real and/or personal property. And contrary to popular misconception, seller-financing is not simply a last resort solution for desperate sellers or unqualified buyers. Quite the opposite!
Sophisticated property sellers and investors have been utilizing creative financing techniques for decades, particularly when transacting larger commercial and/or special use property transactions. Oftentimes, seller-financing is used to achieve specific and well-thought-out investment objectives of the parties. These objectives can include:
- smoother and faster closings
- lower transactional costs
- obtaining valuable tax benefits
- cash flow imperatives and/or
- better rates of return – for either or both sides of a transaction
- all of the above!
Seller-financing has been applied to all types of real estate transactions, including Homes, townhomes, condos, manufactured homes on lots or land parcels; both small multi-family dwellings and 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.
Seller-financing is also heavily used to accomplish a number of other significant property transactions, including the sale of businesses; and the sale of manufactured homes located in mobile home parks. In fact, in these transactions, seller-financing is often the only means of completing a given property transaction.
Turning Paper Into Gold!
In addition to a softening market, the current macro-economic cycle, particularly in the residential sector, is facing the specter of rising foreclosure rates is producing a double-whammy effect on property sales. As a result, an increasing number of residential listings are expiring… UNSOLD. For buyers, sellers, investors- and the real estate agents, business brokers, manufactured home dealers, and brokers who assist them – Seller-carryback financing can make the difference between a SOLD or an EXPIRED listing.
By offering seller financing at a favorable rate and terms, sellers can achieve the sale of their property in a shorter time frame, and in most instances… get a much better price for it as well. This is especially the case where geographic location and/or non-availability of attractive financing – or nonconforming property(ies) – are factors in the transaction.
Those who recognize the trends and needs of the broader marketplace, as well as the variety of needs that seller-financing can satisfy at the individual buyer and seller level, will have a distinct advantage in making more deals happen over the coming years, and beyond – if they know how to do it!
This article was modified from an article originally written by David Butler and posted to this site on 2006/10/02.