Why Would Anyone Give Seller Financing Terms?Posted on March 26, 2013 by
I thought this might be a good time to explain why a seller will be better off selling their property they have never personally lived in if they were to give the investor/buyer seller financing terms instead of the seller getting all cash for their property. When you are negotiating with a seller who thinks they want all of their money at closing you know isn’t thinking very clearly and it is your obligation to inform them why your seller financing offer will always be better for them than if they were to get all cash at closing.
Let’s think about why I said the seller will always be better off taking your terms deal rather than getting all cash for their property, especially if they are planning to use the money as part of, or most of their retirement plan. Most people want their retirement income to last as long as possible. The key words in this example are a property they have never lived in they are selling. Let me do a simple example of the difference of a seller getting all cash at closing, and giving seller financing terms to their buyer. For this example I want to use simple math to show you how to negotiate with a seller who is stuck on getting all cash when your seller financing offer will be better for them.
Example: The seller can sell their property they have never lived in for:
$100,000.00 (cash after closing costs).
They will pay Long Term Capital Gains Tax (15%): – $15,000.00
Seller will net: $85,000.00 after tax.
$100,000 Sale Price
Less $15,000 Long Term Capital Gains
Equals $85,000 Net Proceeds from Sale of Property
Let’s say our Seller Needs $750.00/mo to supplement Their Retirement Income!
And, their bank will pay: 1.5% interest (Use the (I) key on your financial calculator).
They need income each month: $750.00/month (Use the (PMT) key on your financial calculator).
Their deposit will be: $85,000.00 (Use the (PV) key on your financial calculator).
Some day their balance will be: $0.00 (Use the (FV) key on your financial calculator).
How many months will their money last? Next, solve for the number of months the money will last for the sellers retirement plan by pressing the (N) key on your financial calculator. This will show you and the seller, that their payments will run out after 122 Months! This is 10 years and two months when all of their money including interest earned will be gone and their retirement income stops.
If The Seller Were to Give Seller Financing Terms:
And the Buyer/investor agrees to pay: 4.5% interest (I)
Seller needs income each month: $750.00/month (PMT)
The Note Balance will be: $100,000.00 (PV) from the buyer
Someday the Note balance will be: $0.00 (FV)
How many months will the income last? Solve for (N)?
When calculating the numbers in the second example, you can see the seller’s payments will run out after 184 Months, which is 62 months longer than the first example and why would any seller not want 62 more months of income? (184 months – 122 months = 62 more months) from the same deal?
The extra money the seller will receive by giving you seller financing terms will total ($750 X 62 Months =$46,500 more dollars over 5 more years of income), simply because the Seller was willing to give Seller Financing. This is why I say your offer with seller financing terms will always be better in the long run for any seller who has never lived in the property they are selling! The seller will only be required to pay the taxes due from a seller financing deal on the 12 monthly payments they receive in any calendar year, not all in the year of the sale if they get all cash for their property.
I feel this is one of the best negotiating strategies all investors can use to convince any sellers who have never lived in the property they are selling and want the income from the sale to use as their retirement plan. Remember any seller who is getting all of the sale price for their property at closing who has never lived in the investment property MUST recapture all of the depreciation they have taken over the time they have owned that property in the year of the sale. They must also pay long term capital gains on that property in the year of the sale. The long term capital gains are calculated on the difference between what the seller paid for the property and how much they sell the property for times 15%. Then you must remind them that their Bank probably isn’t paying more than 1/2% to 1% or less if they deposit it in their local bank for their retirement plan.
When dealing with a seller who is selling a property they have never personally lived in this is a great way to help convince the seller your seller financing offer will be much better than if they were to get all of their money at the closing. This is a valuable lesson you never want to forget.