Tom Moore, co-founder of Equity Advantage, is diving into the ins and outs of seller financing, especially when it comes to the sale side of real estate transactions. If you’re thinking about selling a property and considering carrying financing, this video and article are for you.
What is Seller Financing?
Seller financing is essentially when the seller of the property gives a loan to the buyer for the purchase of the property. This can be especially useful in the case of the property being difficult to arrange funding through normal channels or if the seller is willing to draw more customers. However, it’s important to understand that doing this can complicate the Exchange process.
How it Works
Suppose you are involved in the sale of a property pegged at $500,000. You opt to take care of $400,000 of this amount through the provision of a loan to the buyer. In this specific context, let us deliberate on several essential aspects you should observe:
- Trust Deed vs. Land Sale Contract: Using a trust deed is generally preferred over a land sale contract for Exchanges. This is because a trust deed tends to simplify the process.
- Tax Implications: If a trust deed is drafted and you are the beneficiary as the seller, you will be taxed on the payments you receive. In our example, when you receive those $400,000 payments, they will be taxable as you receive the principal payment.
- Tax Deferral: You can carry forward the remaining $100,000 in the Exchange, allowing you to defer taxes initially on that portion.
Why Consider Seller Financing?
You may decide to go into seller financing for several reasons.
- Attract More Buyers: Offering financing can make your property more appealing to potential buyers who may have difficulty securing traditional financing.
- Control Over the Sale: You have more control over the terms and conditions of the financing.
- Potential for Higher Sale Price: Properties with seller financing options may command a higher sale price due to the added flexibility offered to buyers.
Things to Watch Out For
While there are benefits to seller financing, there are also risks and complications to be aware of:
- Tax Liabilities: As mentioned, receiving payments can lead to tax liabilities that you need to prepare for.
- Risk of Default: If the buyer fails to make payments, you may face challenges in recovering your investment.
- Complexity in Documentation: Ensuring that all agreements are properly documented is crucial to avoid future disputes.
Conclusion
Seller financing can be a great tool for sellers looking to get the most out of their property sale while providing buyers with the financing they need. However, it’s essential to navigate the complexities carefully to avoid pitfalls. Always consult with a real estate professional to ensure you’re making the best decisions for your situation
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The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
