If You’re Thinking of Selling Any Time in the Next 10 Years, Don’t Wait Another Minute
August 31st, 2010 categories: Land Trusts, Real Estate News, Seller Financing
Recent email from someone looking for a refinance (from a commercial hedge fund… Chase won’t refinance for them… they just want their $1,157,000 balloon payment):
“Dawn,
You have us thinking. We would like to sell anytime between now and 5 years. What we would like out of a transaction is $100,000 a year for 20 years. Is that doable? Otherwise, it will pay to keep the building.
Meanwhile we are all proceeding to have a loan in place by 10/15. Loan is uppermost in our mind, but thought I’d give you something to think about–for us.”
Yes, great to be thinking… Just off the top of my head…
Installment Sale
- Purchase price: $3,500,000
- Buyer comes in with $1,500,000 down payment (kinda stiff - pays off existing financing and closing costs)
- You carry a first note and deed of trust for: $2,000,000
- At 5% amortized over 240 (20 years)
- Monthly P&I payment from buyer: $13,199.12 (x12 = $158,389.37/year to you)
- This also defers capital gains, but you have to deal with depreciation recapture.
- Buyer pays all taxes and insurance and maintenance
Installment Sale
- Purchase price: $3,500,000
- Buyer comes in with $875,000 down payment (25% is reasonable, more buyers can do this)
- Buyer gets a bank loan for $1,000,000
- Between DP and bank loan you pay off underlying financing and put $375,000 in the bank (for capital gains, or money to make real estate loans with at 9-12% safe returns)
- You carry a second note and deed of trust for as much as the bank will let you: $1,625,000 (alternatively… have the buyer get a private money loan for just enough to get rid of the underlying bank financing… another $600,000 or so, instead of a $1,000,000 bank loan, then you don’t have to worry about the bank not letting you record a 2nd)
- At 5% amortized over 240 (20 years)
- Monthly P&I payment from buyer: $10,724.28 (x12 = $128,691.37/year to you)
- This also defers some capital gains, but you have to deal with depreciation recapture.
- Buyer pays all taxes and insurance and maintenance
Use a Title Holding Trust instead
- You place the property in a title holding (land) trust
- Mutually Agreed Value: $3,500,000
- Buyer comes in with $1,500,000 initial contribution (kinda stiff - pays off existing financing and closing costs)
- You become co-beneficiaries in the trust
- Buyer leases property from trustee
- Monthly lease payment from buyer: $13,199.12 (x12 = $158,389.37/year to you)
- This also defers 100% capital gains and depreciation recapture until trust is terminated (1-20 years) at which point you can potentially do a 1031 exchange if you want to
- Buyer pays all taxes and insurance and maintenance
Sell to conventional buyer, cash or cash-to-new-loan and use Deferred Sales Trust
- Purchase price: $3,500,000
- You pay off underlying financing and put $2,000,000 in a DST (low risk portfolio you help determine)
- Create payout equivalent to 4% amortized over 240 (20 years)
- Monthly payout from trust: $12,119.61 (x12 = $145,435.28/year to you)
- This defers capital gains like an installment sale, but you have to deal with depreciation recapture.
Of course, these numbers are based upon your opinion of value at $3,500,000.
Selling now will get you…
- A simpler life… no management to deal with
- You are buffered against downturns in the market in the next 10 years (very likely)
- You are buffered against major improvements that need to be done, like new roof, etc., new plumbing or electrical… catastrophic events
If you’re thinking of selling any time in the next 10 years,
THE SOONER THE BETTER!!!
Don’t waste another minute. Things are stacking up to get more ‘interesting’, not less. What you need to think about is quality of life, which of course is influenced by monthly cash flow, but also stress level, and how hard you have to work to manage the property, and what you could do with your time if you weren’t managing. Wanting to travel more? Visit family? Take up basket weaving?
If you decide to sell, I would recommend that I co-list the property with an expert in apartment buildings (I know some), and I have the expertise in owner financing strategies and private money solutions that most agents lack. If I am not co-listing the property I will need to charge you an up front deposit for consulting that will be refunded to you at close of escrow when we have the buyer bring in my fees as part of their closing costs.
Anyhow, we’ll talk soon!
Dawn
P.S. Ask questions, make comments and connect on my Facebook Page!
P.P.S. My real live book is available at last: “Seller Financing on Steroids: Pumping Paper for Power, Peace and Profits“ Book purchase includes a complimentary 30 minute consultation, so save the receipt!
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Owner Financing Scam That Wipes Out Your Seller Carry Note
July 29th, 2010 categories: Seller Financing, Selling Your Note
The perfect set up:
- Seller owns $500,000 property free and clear (or only has a small loan)
- Buyer offers seller full asking price if they’ll accept $300,000 now and
- Carry a $200,000 note
I know… you’re thinking,
“So what’s the problem??? That’s a 60% down payment for cryin’ out loud!!! I’d take that in a heart beat! There’s $300,000 of protective equity on this deal! I HOPE they default so I can take the property back and sell it again for full value!”
Not so fast…
The $300,000 that the Seller received at close of escrow was a loan from the Buyer’s Private Money Buddy, and the seller carry back loan was in 2nd position.
THERE WAS NO DOWN PAYMENT!!!
Zip, zero, nada. No “skin in the game”. And there’s no problem if the buyer is 100% ethical and lives by the Golden Rule or the Golden Fleece or Fibonacci’s Golden Mean… but if the Buyer only lives for GOLD, here’s what they do…
They tell their Private Money Buddy,
“Hey Dude, I’m not going to pay you according to the terms of the note, so… you might as well foreclose on me, right?” (wink wink, nudge nudge)
The sellers/note holders (holding that 2nd lien note), if they’re not sophisticated and don’t take precise and definitive action, they’ll get wiped out at the Trustee Sale, and the Buyer and his Buddy get the property for a total investment of $300,000 plus foreclosure costs.
Sweet, huh? I thought you’d like it.
So how to avoid it:
- Use a professional note consultant to engineer your transaction (or an attorney or accountant or someone you trust who understands how real estate and notes work)
- Use a highly professional and diversified note servicing company… they’ll help you keep on top of things and advise you on how to proceed if anything goes wonky
- If you’re thinking of taking a 0% down deal from a buyer… have your head checked
Owner financing is an effective and powerful tool when used
- Legally
- Ethically and
- Intelligently
Wishing you the best!
Dawn
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Should I Get Into the Note Business With All the New Laws Going Into Effect?
July 23rd, 2010 categories: Note Business
A lot of people want to know if the note business is right for them, as indicated by this recent email:
“As a new note broker that wants to get started with all these laws going into effect, is this a career path that will you recommend?” - Josephina
Hi Josephina,
Like with anything, only go into the note business if you really love it. Knowing the note business helps you understand so many things . . . like how owner financing works. It gives you a much better sense of how the real estate market functions and gives you a lot more flexibility:
- You can buy property with owner financing
- Sell property with owner financing
- Buy notes for yourself
- Broker notes to others
- Become a consultant to sellers thinking about carrying paper
- Learn how private financing and basic underwriting works
It can take concerted effort and a couple of years before trying to broker notes pays off in a significant way, unless you’re already in a closely related business or you have favorable connections from the start.
I don’t believe the new laws are going to kill the note business… at least it doesn’t appear to be that way yet. Because loans are probably going to be harder and harder to get, there will be even more notes being created than ever before.
If you have a passion for the information, learn the note business! Just don’t spend a fortune doing it.
Best wishes,
Dawn
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