A buyer may occasionally request that a seller take back a promissory note (“Note Payable”) on a real estate purchase. “Seller financing” or a “seller carry-back” refers to this strategy where the seller effectively acts as the lender. When negotiating a real estate transaction, a seller carry-back note can be a powerful sales tool, and if done correctly, it is an effective tax planning strategy. There are various methods for handling the Note in a situation whereby the holder of the carry-back loan wants to carry it:
1. Sell the Note on Open Market
This allows a third party to buy the Note with cash on an open market. Usually, the most difficult part of this financing option is getting a buyer and an agreed-upon price. This is because Note buyers typically expect a discount on seller carry-back notes. This option is beneficial to explore when the seller needs cash immediately, and there’s a third party willing to buy.
2. Buy the Note
On second thought, the seller can buy out the Note by exchanging it for cash which equals the whole amount he owes. For tax purposes, this method is preferred even though not all sellers might be able to implement it because a significant cash reserve is required on the seller.
3. Apply the Note to a Future Purchase
This strategy enables the holder of the Note to use the Note as payment for purchasing another piece of real estate. This option is preferable when the replacement property seller is willing to take the Note as remuneration for the purchase.
There are other options of financing seller carry-backs that are lucrative for lenders in the real estate industry. To read more on other available alternatives, click here.
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