There are many benefits for both the buyer and seller when doing an owner-carry installment sale as opposed to the buyer obtaining conventional mortgage financing on an apartment building. Sometimes the advantages inure to the benefit of one or the other, but in most cases, the transaction can be a “Win/Win” for both parties.
Let’s examine the benefits for the seller and buyer on owner-carry installment sales.
BENEFITS FOR THE SELLER
Most sellers of real property insist on the highest price and all cash at closing. Sellers want a fast closing with little hassle. Sellers also want to pay as little taxes as possible on the gains incurred. In many cases, the seller can have most of his needs satisfied by an installment sale rather than a traditional cash sale. Let’s look at these needs one by one.
What is an “installment sale”? It’s defined as a transaction in which the seller receives any part of the sales price in the tax year after the closing. Typically, this means a down payment at closing and a promissory note from buyer to seller with payments over many years with interest.
- Highest Price. There is no doubt that a seller can insist on and receive the highest price when offering flexible owner-finance terms. In many cases, the seller can receive more than the fair market value of the property by offering these “soft” terms. People are always willing to pay a premium for “non-qualifying” (that is, non-mortgage bank qualifying) financing.
- Cash. Nearly every seller says he wants all cash, but few need it. What the typical seller wants is the most net cash from the deal. Often, the seller has to pay closing costs, title insurance, broker fees, and the balance of the existing loan on the property. In addition, there may be capital gains tax due to Uncle Sam (as well as the state of California). In many cases, the sale of a property by an installment sale will net the seller more future yield than any source from which the cash proceeds were reinvested.
- Fast Closing. Nothing holds up a sale more than new lender financing. It can take months for a buyer to qualify and close a new loan to purchase your property. Since most standard real estate contracts contain a financing contingency, you may end up back at square one if your buyer does not qualify. Furthermore, if your house is not particularly nice or unique, it may take you some time to even find an interested buyer. Since you are competing with all of the other houses for sale, you may need to spend thousands of dollars on paint, new carpet, and landscaping to get the house ready for the market.
There are very few “assumable” loans, and few sellers are offering “soft terms.” Thus, an owner-carry sale makes your house unique. Furthermore, an owner-carry transaction can be consummated in a matter of days, since there is no appraisal, underwriting, survey or other lender nonsense involved. In many cases, you will be able to sell the property yourself, saving potentially tens of thousands of dollars in real estate broker’s fees.
- Tax Savings.On an installment sale, so you only pay gains to the extent you receive payments each year. I.R.C. Section 453(b) This can be particularly advantageous if you have owned the property for several years. Furthermore, you can combine the installment sale with an I.R.C. Section 1031 Tax-Deferred Exchange for further savings.
As you can see, the installment sale provides many advantages to the seller of real property. Let us now turn to the advantages for the buyer.
BENEFITS FOR THE BUYER
- Easy Qualification. The buyer, in many cases, prefers an installment sale to conventional financing because it does not require traditional lender income and credit approval. The buyer may have poor credit because of a divorce or recent bankruptcy. He may be self-employed and cannot prove income. He may be new to his job and cannot meet strict lending guidelines. Even if he could qualify for a loan, the rate will be astronomical if he has poor credit (in this market it’s pretty high, even with GOOD credit!) Furthermore, few conventional lenders offer fixed interest rate loans to people with a less than stellar credit rating.
As you can see, there are dozens of reasons why a buyer cannot (or will not) qualify for a conventional mortgage or even a D.S.C.R. (Debt Service Coverage Ratio) mortgage loan. The installment sale becomes the perfect solution for him or her.
- Credit Rating. An installment sale may give the buyer a chance to improve his credit rating by owning a property and making payments timely. This can set up the opportunity for a refinance loan down the road.
- No Loan Costs. One of the biggest benefits for the buyer is not having to pay the costs associated with conventional loans. Points, origination fees, underwriting charges, appraisal, credit reports, title insurance and the plethora of other “junk” fees charged by conventional lenders can amount to thousands of dollars at closing. The buyer is free from these with an owner-carry installment sale.
- Fast Closing. A buyer can close and move into a property within days since there is no third-party lender holding up the transaction.
Despite the elevated purchase price and interest rate, there are many benefits to a buyer who engages in an installment sale transaction.
As you can see, there are benefits for both buyer and seller with an owner-carry installment sale. Many times, these benefits can be combined for a “Win/Win” transaction, but often a seller or buyer (or their real estate agent) can educate the other party on the benefits to both parties. In short, the more you know, the more creative” options you can offer a seller or buyer to induce them into doing a deal “outside the box.”
