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Think it’s a Bad Time to Sell? Grabbing Cash From Investment Property When you Can’t Refinance

“Our loan broker suggested we talk to you,” she introduced herself, “he said you would have some interesting ideas about how we could pull cash from our rental house.”

She and her husband initially intended to refinance; however they were dismayed to discover that the interest rates and programs available for investment property were not as favorable as they had hoped.

And we can’t sell, you know,” she said, “the market is just terrible and we don’t want to pay capital gains.”

We talked briefly and set up an appointment to discuss her options, and the potential immediate cash (down payment) and monthly cash flow that could be generated if they were willing to consider a seller carry back scenario instead of a refinance.

It’s very likely that using a land trust transfer system will make a lot of sense:

  1. No due-on-sale clause that could trigger acceleration on the good underlying financing that they’d be willing to leave in place and ‘wrap’ for a qualified buyer,
  2. No reassessment of property taxes, and
  3. No capital gains until the trust is terminated years down the road (and even at that point, they may very well be successful using a 1031 exchange, exchanging their beneficial interest in the trust for another income property, for 100% deferral of capital gains).

And remind me why they’d bother?

Well, the market really isn’t terrible, the opportunities are just different.  Is it really a bad time to sell?  There are many hungry buyers who want and can afford a house, but they just can’t get the financing right now.

Don’t you think that one of them just might be willing to pay top dollar for a home to call their own if they can get terms?  Advertising ‘Owner Will Carry’ will generate a lot of interest and give the seller the best possible chances of maximizing the price they’ll ultimately get.

And even if prices are down from bubble highs, selling is a good way to hedge against further depreciation, tenant hassles, and the other liabilities that go with owning property.

If you can afford to hang on for at least 10 years, you might get some appreciation, at least in theory . . . but when a cheeseburger costs $27.95, even without the pickle, what does that really mean?  The inevitable inflation that we will experience at some point will waste away a whole lot of net worth, so

The risks of NOT selling are just as great

as the risks of selling

And how do we mitigate the risks inherent in a seller carry?  Land trust transfer system again:

1) If the buyer defaults, no foreclosure is necessary to regain control of the property, they can be evicted according to tenant law.  This is especially important if the buyer is putting down any less than 10%.

2) As with a simple land trust, the property is protected against any potential liens, judgments, litigations and probate proceedings.

And if it were me, I would probably use a land trust for seller financing even if I owned the property free and clear, and even if I got a substantial down payment.  Unless, of course, I am planning on selling the real estate note that would be created if I just used the traditional installment sale. I can’t sell a beneficial interest in a trust the same way I can sell a well-crafted real estate note.

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