Should You Carry All or Part of Financing with High Interest Rates?

“Risk comes from not knowing what you’re doing” Warren Buffet

With increased interest rates, many sellers are considering carrying all or part of the financing on their apartment buildings. Doing so involves additional risk, in case of a default, but could produce a greater return and garner a higher price for your property at the same time.

ARE YOU A GOOD CANDIDATE?
If you are an owner who has owned properties for many years and looking toward retirement and not planning on doing a 1031 exchange this may be a way for you to go. Since there are buyers who want to avoid high rates, loan fees, and the associated red tape, they may be drawn to a property offering seller financing. Before you move forward on such an idea, you should always speak with your CPA. Before executing the paperwork, you should always consult with your real estate attorney, who will probably draw up the actual note and deed of trust.

IS YOUR BUYER A GOOD CANDIDATE?
If you offer a seller carryback, it will get noticed by potential buyers. Most sellers need all the cash to move into their next investment. Others just want to cash out and move on with their lives, so you will set yourself apart from the majority of sellers. If your CPA is on board with your acting as the bank, you and the CPA will need to decide how the sale will be structured. You can hopefully receive cash over a period of years, as with an installment sale which spreads out your gain and hopefully some of the capital gain taxes, by spreading the tax liability to two or more years when your rate would be lower, perhaps after retirement.

ACT LIKE A BANK
You, most likely, will not need all the paperwork of a big financial institution, but you want to establish the creditworthiness of your buyer. You should know all about the buyer’s financial situation, assets held, cash on hand, and sources of income. One thing you definitely want to do is require a good down payment of 25% or more. If you are selling your building for a million dollars, a buyer is less likely to walk away from an investment of $250,000. or more. If you are concerned about being paid off too soon and want to keep the monthly interest income, you may want to include a prepayment penalty. You could have your attorney draw it up for you or use a standard clause.

WHAT IF IT GOES BAD?
This is why you want to talk with your attorney and your CPA before you make a move. If the loan becomes delinquent, you want to make sure you have all the precautions in your original note signed by the buyer, such as an assignment of rents clause, allowing you to install a receiver to collect the rent in the case of delinquency. There are many moves a desperate owner can make to try to save their investment, so watch over this investment as a bank would and you may be able to deal with any problems before they get too big. On the other hand, you may be able to take back your building and retain the buyer’s downpayment. If you are not in need of all your cash, you can earn 5-6% interest from the seller on your equity and may even get a higher price. Using our example of a million-dollar sale with a carryback of 750K, your income would be an additional $37,500. to $45,000. per year to you for the years you carry the loan. It’s not for everyone, but definitely worth looking at if your personal situation fits.

“The harder I work, the luckier I get.” Gary Player

What we at PRS PROPERTIES CAN DO. We can discuss with you the current rents in your area and supply you with comparable rental prices for similar properties. Before you hire a manager, make sure the compensation is fair to you! We can also look at your building for changes that might allow you to get a higher value in order to create value without huge expenses for your building. We can help you to get the maximum value for your property, should you decide to sell, or the maximum return if you are planning to keep your building.

We always have many investors who are looking for “as-is” properties and are willing to purchase with low rents, a moratorium, or even with a problem tenant in place. We have put together numerous transactions over the years which involve properties that are not listed for sale. Many investors are in 1031 exchanges and need to identify a replacement property before their 45-day identification period runs out.

Should you decide to put your property on the market, we will put together an aggressive, targeted, and professional campaign to get your property sold fast. We have been doing this for over 40 years, and we will use all the tools available to bring you the most dollars at closing. If you are thinking of selling or are just curious about the value of your property, don’t hesitate to give us a call.

Remember – KNOWLEDGE IS POWER!