I didn't get up this morning with this idea, but I'm always challenging and questioning my assumptions. Anyway, I ran across a seemingly unrelated post on FB today with questions about selling a SFH to a tenant under a rent to buy scenario. After reading what others had to say and sharing my own thoughts, a what if question came into my mind that I thought I'd share with the group and see what you thought.

Gman,

Some quick thoughts...

In my moderate midwestern prices $800 MORE would be hard to get. The math don't math.

The seller would have to pay off the existing mortgage to do true seller financing, so that increases the seller's investment.

LLs often lead with their heart not math and truth, trying to do someone a favor by "helping" others buy. Don't take a risk by loaning money to someone the professionals at a bank are not willing to take.

On a straight out sale with seller financing the seller would have to cough up the capital gains tax money NOW, again increasing their investment cost.

Rent To Own laws are complicated and differ state to state. The minute the LL makes OWN part of the contract the LL gives away many of their rights to the overly optimistic buyer.

At Convention I will be teaching how stopped doing RTO and bring in a large chunk of CASH on each lease AND add "fries with that" to increase the rental income.

BRAD

It has been getting more and more difficult to sell to owner occupants using RTO strategies and techniques. Using a land trust does help to a limited degree on limiting liabilities when these go sideways.

Can you do it - absolutely. They tend to be the exceptions though and not the rule. Only every third of my folks actually moved ahead and most of them well beyond the typical 15 months that I gave them.

When it works, it works well. I have been sued before though after trying to get rid of a want to be buyer who though collecting trash in the garage was a good way to save the money garbage companies were charging. $800 a month does go that far when something like that happens.

The other issue that I find happens, when you do get them on the deed after they do come up with that 20%, they question why this category called escrow goes up. In their eyes, the PI is the payment and that is it.

Gkarl,

Do I understand correctly that the buyer has been RTO up until now & they are ready to finalize the sale?

And the same landlord that has been collecting their rent may want to finance the sale?

If that is the case, then I think the chances of the payments being made are pretty good. Assuming they were always made on time as tenants.

HOWEVER, if the "sale" payments are that much more than the "rent" payments....that could affect their ability to pay.

I would expect(if it were me) to screen them like a bank would, including savings, other assets, DTI ratio, etc And I would want to know why they don't want to go to a bank. Or did they try & got rejected?

I am selling one right now where I play the bank. Small loan on a property I already owned outright.

I have been charging 10% interest from the start. I think it is a 15 year note. I did it more as a favor for my cousin. She covers insurance and I pay the taxes which I escrow in her mortgage.

In my case if she defaults and I get the place back so be it. It wasn't a million dollar home to begin with.

Also, for what it's worth, I did not record anything with the county. I am still the owner. We both signed a contract and had it notarized.

Every time someone brings up selling with owner financing on this site, it seems like naysayers are all you hear.

Owner financing can be a great exit strategy for rentals. In my situation, selling for the additional $800/mo alone wouldn't sway me, but when I sell properties as an ender, I will offer them on owner financing either with a note/mortgage, Contract for Deed, or Lease with Purchase Option, depending upon the buyer, how much they have to put down, and my situation at the time. So if this is a property I would likely sell anyway, I would prefer to sell it on owner financing and continue to get cashflow.

Big benefits of owner financing - you can typically get market price or higher, you don't have to improve the property to the same level as a traditional retail sale, and your buyer usually won't come at you with a list of repairs from a home inspector whose primary motivation is to make sure there is a list of repairs for you to complete.

The downside is that you can wind up with someone with a tenant mindset if you don't screen properly.

Be sure you get enough down payment to cover the cost of the foreclosure in case you have to do one.

I have sold properties with me carrying financing before. Sometimes it can make sense too. But for the majority of the cases, it makes more sense for them to just to go to the bank.

I have a large NNN property in a land trust with financing in place at 4.12%. I can wrap this financing and create a six-figure gain in just the financing alone. Instead, I am electing to do nothing and get a six figure a year income.

Just Tim:

Dealer property is never subject to capital gains taxes. That's inventory held for resale and subject to ordinary income tax rates.

Section 1250 unrecaptured gain does receive installment treatment, however, that bucket of money gets taxed prior the capital gain pool of money. In other words, assume you have a 350K total gain with 100,000 being unrecaptured section 1250 and 250,000 being long-term cap gain. As you receive the installments, the section 1250 pool is taxed first using the installment method. After that pool is completely taxed, lower capital gains rates would apply to capital gain pool. Bottom line is you benefit from the installment method but the money is taxed the same as if you sold it without installments; the difference being you stretch out the impact.