Selling real estate isn’t merely about exchanging property for money. It’s about exploring the best possible routes to maximize return on investment. That could not be truer than in today’s high-interest rate environments where the banks seem to be tightening their lending by the day. And with the commercial real estate crash and the commercial loan liquidity crisis upon, we need tools for today’s marketplace.
One of the best tools is seller financing, where the seller is the bank! Seller financing provides distinct advantages that are not typically available in conventional real estate transactions. Here, we will explore six critical benefits of selling your real estate through seller financing.
- Deferred Depreciation Recapture and Capital Gains Tax
One key advantage of seller financing lies in the realm of tax implications. With traditional property sales, sellers must immediately pay capital gains tax and depreciation recapture on their profits. In contrast, seller financing allows for an installment sale, where tax on the gain is spread over the period of the loan. This deferral strategy can lead to substantial tax savings, especially for sellers who fall within high tax brackets. Moreover, spreading out your income can prevent you from moving into a higher tax bracket in the year of the sale, leading to further tax efficiencies. You can also permanently reduce your tax obligation if you are in a lower tax bracket in the future than the year you sell!
- Make Interest on Your Equity and Keep Cash Flow
In a seller-financed deal, you don’t just earn from the sale of the property; you also earn interest on the loan offered to the buyer. This essentially makes you the bank, allowing you to benefit from interest payments over the course of the loan. As the equity holder, you maintain a cash flow from the property even after its sale. This steady stream of income can serve as a powerful financial cushion, particularly in uncertain economic climates. And, if set up properly, if the buyer fails you receive your property back, keep the down and the monthly payments and owe the buyer nothing.
- Sell at a Higher Price by Offering the Financing
Seller financing can help you fetch a higher price for your property. Why? Because you’re offering an added value: finance. As the seller, you’re in a unique position to negotiate favorable terms because you’re addressing a critical buyer need—access to funds. Buyers willing to pay a premium for the convenience of seamless financing can thus contribute to an enhanced return on your investment. Think about it…. If your market is selling at a 6% capitalization rate (Net Operating Income/Purchase Price) and the banks are offering 8% loans with fees, how much more would a buyer pay for say, a 6% interest rate from the seller? The answer is a significant amount!
- Advantage of No Bank Appraisal
In traditional real estate sales, bank appraisals serve as a requisite, often leading to a lengthy and complex sale process. The appraisal can impact the final sale price, often leading to lower-than-expected returns for sellers. Seller financing, however, removes the need for a bank appraisal, allowing the buyer and seller to agree on the property’s value directly. This gives you more control over the pricing and can hasten the sale process significantly.
- Very Quick Closing Time Frame
Seller financing can expedite the entire transaction process. With a traditional mortgage, the approval and underwriting processes can take several weeks or even months. However, seller financing eliminates this wait time. Since the seller assumes the role of the lender, the closing process can be finalized in a matter of days, making it advantageous for both parties who wish for a quick, seamless transaction.
- No Broker Commissions Due
Another significant cost saved with seller financing is the broker’s commission. In a conventional real estate sale, a significant portion of the sale price (usually 5-6%) is allotted to the broker as a commission. By acting as the lender, you can bypass the broker’s role, saving a substantial amount of money. This makes seller financing an attractive option for individuals who prefer to manage the process themselves.
I love when the real estate markets become dicey because it creates opportunities for buyers and sellers alike. Seller financing opens a vista of opportunities and benefits not commonly found in traditional real estate transactions. With the potential for tax savings, consistent cash flow, higher sale prices, rapid closing, and the absence of broker commissions and bank appraisals, seller financing proves to be a viable and advantageous alternative.
If you are interested in learning more about how seller financing works or would like a seller-financed offer on your property, call us at 509-414-5123 or visit www.ExtantInvestment.com
As with any financial decision, however, careful analysis and understanding of the associated risks and legalities are crucial. Consult with a tax advisor or legal expert before deciding the best path for your situation.