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I am tired of my rental property, but don’t want to lose the investment. Are there any options?
Now, we’re definitely proponents of rental properties. We love rentals. We have some of our own, as well as we manage them for hundreds of clients.
Now, at some point in time, there may be situations where the investor grows weary or tired of a rental property for various reasons. Some people experience tenant turnover, increased maintenance costs, you may have a roof that needs to be replaced, which can eat into your returns. There’s a lot of different things that can happen, and for some, even some bad experiences that they weren’t planning on happening, and one of the first things that they look to do is to sell that property. They usually sell it the traditional way. Well, if you wanna look and see what other options you have as far as keeping it as an investment and not putting those funds into other possibly more volatile investments, we want to talk to you about some options.
So, there are options. The first one, of course, is if you’re managing the property on your own, you can turn it over to a property manager. The property manager will handle the day-to-day and help keep that investment in place for you, where you can step away and not have to deal with it as much.
The second option, which is a little bit more hands-off and it allows for a few different benefits the rental property doesn’t provide, is it provides increased cash flow, upfront appreciation capture, which means instead of waiting 10, 20, 30 years to capture the appreciation, you get it right on day one, no maintenance, no tenants, no turnover. So what we’re talking about here today is converting from being the landlord into being the bank, being the lender through seller financing.
So, what is seller financing? So, in a nutshell, seller financing is that the seller agrees to take payments over time with interest and with a sizeable down payment. Essentially, converting from a landlord to being the bank. Or, you can even buy properties and resell them offering seller financing, where you convert it into a note, into a loan that the buyer’s making installments payments. I’m gonna go into a little bit more detail on that.
So, who could seller finance their property? There’s a lot of different people in different situations that can do this. Anyone wanting to invest in real estate and earn high rates of return, passive monthly cash-flow, large up-front cash payments; those struggling to get consistent returns from the stock market, rental property, or other investment strategies; those trying to sell in the traditional sense, but are unable to due to a lack of demand, lending restrictions or other reasons; and real estate investors not wanting to be responsible for maintenance and repairs. There’s also current or previous landlords who are tired of tenant turnover, city violations, neighbor complaints, or tenants in general. And then, investors who never plan to move into the investment property. So they plan on keeping this long-term as an investment property, and they don’t have any plans of returning back to it. They don’t want to move back to it. So, if you do plan on moving back into your investment property, don’t consider what I’m sharing with you today.
‘Kay. So, who should not sell their property using seller finance? Well, anyone wanting to be a landlord and manage tenants. That can actually be a lot of people who enjoy that process. They like to have the tenant relationship there. Anyone who, at some point, will want to move back into the investment property, like I mentioned. Now, anyone who needs flexibility with their investment property is the third reason why some investors shouldn’t consider seller financing, because seller financing is a sale, and it’s not something that you can just take back. It’s not contract that you can just terminate at the end of a lease agreement, for example, with normal rental properties. So, there’s less flexibility, what’s done is done, and the control of that term is more with the buyer. I’m gonna talk about that.
So, what is the preferred method of seller financing? Because, there are a few different ways that you can seller finance. One’s an All Inclusive Trust Deed, but the one that we like is Contract for Deed. Now, this has been around for a long, long time. It’s been referred to as a land contract, as it originated with plots of land, or an Installment Sale Agreement. What it is in a nutshell, it’s very similar to a car loan. Banks, when they provide money and they lend on a car, they are taking title, and they retain title of that car until the buyer fully pays off the loan. At which time, the title is transferred to the buyer.
Now, in real estate, in the traditional sense and even with All Inclusive Trust Deed, which is a type of seller financing, the title transfers to the buyer even though the bank, or the lender, isn’t paid off. So, what Contract for Deed is, is it’s setting it up more where the seller is still on title, which gives the seller a little bit more control over that relationship. And so, why Contract for Deed? I just mentioned it. It reduces the investor’s risk by having increased control, where the seller’s still on title. If the buyer were to not make a payment, there doesn’t have to be a switch of title through a foreclosure process, similar to what banks do. If the buyer of a car stops making their payments, they can repossess that car. In this situation, the seller can repossess, or they go through what’s called a forfeiture process, and if necessary, an eviction process, which the timeline is far less with Contract for Deed, than having to go through a foreclosure.
So, how does it work? So in a nutshell, this is how it works. So when you put your property up for sale offering seller finance, a buyer comes to the table. Oftentimes, these buyers may be self-employed. They don’t qualify for traditional financing. There’s a lot of them. They may not be in a complete legal status of citizenship to buy yet, and they’re working on that. And so, there’s a lot of folks that come to the table. They say, “You know what? I have 10%, 15% that I can put down on the property.” They put that cash down as collateral, as a down payment, similar to how it is in a conventional or a traditional sale. And then, a note is prepared, or a loan is prepared. It’s a 30-year amortized loan that sets the payment schedule of that. If you know amortized loan, most of the interest is on the front end of that loan. And so, that’s how lenders have a high rate of return on their interest that they’re collecting.
It’s typically in this situation, a higher purchase price. So here’s an example of one that we did where the home was worth about $220,000, and it was sold for $250,000 with seller financing Contract for Deed. They buyer puts down 10%, so about $25,000, that goes to the seller. There may be some commissions there that they pay, but the difference is retained by the seller, which is great. Now, the buyer makes a payment, and it’s structured. The closing and the contract and everything’s taken care of through the title company that we work with, as well as the attorney who has years of experience in Contract for Deeds.
It’s structured in a way where the payment from the buyer goes to an escrow company; an escrow company that then escrows taxes, insurance, different things, pays in any underlying mortgage. So, if you have a mortgage, you can still have that paid by the escrow company using the funds from the buyer. And then the difference is paid to you, the seller. And so, that will go on for a few years, five, 10, 20 years, depending on how long the buyer takes to either refinance it … Sometimes they never want to. Other times, you can set a balloon schedule of three to five, maybe even 10 years, to where they need to pay it off. Once they pay it off, you’re paid in full, and then you can go out and buy a different property.
Now, there’s a little bit more to it than that, and happy to discuss more. You can also learn more, if you are interested, on our video series that talks about some of the details of Contract for Deeds and the strategy of seller financing. If you have questions, of course, feel free to reach out to me, to people on our team. We’re happy to have a conversation with you to see if it could be a good fit for you. It’s not a good fit for everybody in every situation, but it is one option that you can look at for your investment goals.