Real-estate investors - seller financing ?

I know there are people smarter than me about this so here I am;
I'm selling a multi-family property and lining up the attorneys now. Seller asked if I'd be willing to finance the purchase as opposed to them using a bank.
Correct me if I'm wrong here:
Upsides,
-this property will produce some income for me even without being burdened with actual landlord duties.
Downsides,
-won't be getting all sale proceeds at once, rather smaller trickles over longer period of time. (Not a huge downside)
-buyer could default on our agreement

Anybody play this game before? Is there any protection for the seller(me) should the buyer not keep up?

The 16yr old in me says take the lump sum and buy shiny Italian things with wheels.
The nearing-50yr old in me says finance the sale and buy all the slicks I could need for the next 15 years.

 

I would question the motivation of the buyer to ask for this. Money is cheap from banks, so what is their issue w/ avoiding them? Bad credit, low down payment? I would consider owner financing is 1: 25% min down payment, preferably more. 2: 5% or more interest on a 20 yr am. 3-5 year arm. 3: Rock solid loan docs prepared by your attorney with you as the 1st lien holder, and all wording for you to repossess the property if loan defaults/missed payment over 60 days late. You cannot let this go on too long if they stop paying you before foreclosing. That process is expensive, so you need their money to do it hence the larger down payment.
Huge upside with taxes, as the cap gains gets pushed out. You obviously see the upside w/ steady oncome w/o management, but do not take your eye off of the property for too long, to see that they are not running it into the ground. The loan is still secured by the property, so it needs to be worth what you are selling it for for the term of your arm.

 

Great points, kevincg. Almost like I'll be swapping my old concerns about tenants keeping up for new concerns about buyers keeping up.
The buyers initial gameplan is to finance w/ a bank. He half-heartedly asked about seller financing and I wasn't in favor at first not knowing anything about it.
Your input was exactly what I am looking for.

 

Make the down payment large enough to offset any possible losses should he default immediately. Also have a clause for inspections to maintain the values of said property. If you have the money it's a win.

Edit: someone beat me to it.

 

Yeah, we're trying to sell off mom's houses since she passed and we got a couple of offers to self finance, mainly from tenants already in the houses. We gave them a big "no thanks". I'm sorry, there's just something sketchy about this even though I know that it occasionally works out. The market is too hot to deal with this, although we're seeing a cooling off now. We sold two pretty quick but we also have two that aren't going all that fast. I'm sure I'm asking too much but you can always go lower.

 

I would say an existing tenant that has a record of keeping up with rent payments would be a fine person to do seller financing for if you can agree to the down payment and terms. It saves the buyer moving costs and the seller has a known quantity as a buyer. But it still would require a decent down payment to consider it.

 

If you want the hassle coupled with the potential tax savings by delaying all your income go for it.

But in my mind i dont think the "economy" is going to be very good in a year or 2. Will this buyer be able to cover his payment if he is at 80% or 60% occupancy? I am in the same boat with my rental about re-fi and take cash out or sell. I am probably going to sell it. Soon.

 

To summarize - give the buyer directions to the nearest bank.

Shit is just not worth the hassle/risk to deal with.

 

Shiny Italian things.

 

Once I suggest 25% down, 5% interest and me as 1st lean holder he'd probably go w/ the bank anyway.

1st the Beeb tells me when the next Cromags show is and now I get legit financial advice.
Sean should charge an entrance fee to this place.
Thank you, gentlemen.

 

That's exactly what I did with the one guy that really wanted to stay. He couldn't get a loan.

 

5% is awful nice.. 6-7% interest at least, can get 5% in any nearly risk free mutual fund/investment. As some said, BIG down payment, have good real estate lawyer draw up contract so you can foreclose easy if they default.. but i'd rather get the money and run vs have it hanging over your head.

 

Upside if you have enough liquid to float the losses from non payment until foreclosure you’ll make even more on the resale combined with whatever payments he’s put in. And it’s a write off. Downside potentially long term losses and legal hassles if he stuffs you.


But I literally have no idea what the fuck im talking about most of the time so take my advice like a sexy girl trying to take your ugly ass home at the bar…

 

We owner financed our many rental properties. We get 10% interest. If the buyer wants to quibble, we tell them to go to the bank. There has to be a financial reward for the risk. Check foreclosure laws in your state and get a large enough down payment to cover your ass. It's a simple process to foreclose here. About 25% of buyers end up defaulting badly enough to lose their property. Overall, it's a better business model than rental property.

 

Will you marry me?

 

No less than 50% down and Your lawyer drafts the docs Not theirs

 

Oh fuck, are you female? Haha my bad, I meant “your ugly ass” in a very general sense not you specifically

 

in my experience the buyers asking for owner financing are usually leveraged to the gills that an underwriter would stamp DENIED after a 2 min financial review. Though there are a few exceptions where a buyer may have sufficient income or assets to cover.

A friend of mine sold a 4plex of 2br 900 sq ft units to a young couple that took ~3 months to close because even with their parents putting up a strong downpayment no lender would loan them more than 50% of the sale. My buddy was getting almost $5k / month positive income for something he bought for 215k from a distressed seller & got $665k after 10yrs of headaches.
In the end the couple had to live in the complex, sell their condo, and their 20 year note on $465k was at 7.5%. We did the numbers and it was razor thin. They had asked him to hold the note for 5-10yrs but my friend wanted out. The couple was in their early 30s.

 

RUN.

 

Trend here seems to be sell and wash hands of it. Appreciate the input and unless there's a massive percent down, I'll keep it a simple sale.
I'll need to find somewhere to stick the gains and generate some passive income that way because that's the part of the game I'll miss.