Vendor Financing

[HOMESOLUTIONS]

I recently became REIN member. We have special situation here where a close friend of ours just recently lost her husband in an accident and they had several rental units. She would like to get rid of them and we want to help her out and it looks like she is open to vendor financing. What is the best way to structure this? What (if there is any) would be the going interest rate to pay someone when they carry the down payment? She does not want to sell them all at once - can we do a long closing perhaps 6-24 months down the road. What are the financial repercutions for her to sell them all at once as opposed to over the next year or so?

Henry

 

[mikecunning]

HI Henry

There are some discussions on the Vendor Take Back already in the Ask an Expert discussion area that will answer most of your questions.

The bottom line is that everything is negotiable! When we offer VTBs we typically charge 7%, however, I know other investors that charge second mortgage market rates (anywhere from 12%-15%)

Depending on the market, a long closing of 24 months may not be to your advantage i.e. in a declining market such as part of the US right now, this would not be a good thing because you are fixing your price today and paying for it in two years when the values may be lower.

Assuming the properties are owned personally, if she were to sell them all in the same tax year she may have a higher taxable income and therefore pay more tax than if she spread it out over 2 or 3 years. As we are nearing the end of the year, there may be an advantage to close some in December and some in January....however please encourage her to consult with her accountant as some of the properties may be classed differently and subject to different tax treatments ie. income vs capital gains.

Good luck!

Mike

 

[DonCampbell]

Hi Henry,

This is definitely a time for your friend to get an astute real estate accountant on their side before they do anything. Having a well thought out exit plan will be very important.

Options to consider:

* Selling through an option
* Carrying back money thus providing income AND a the ability to `elect` spreading out her capital gains tax due over up to 5 years
* Keeping a portion of each unit and doing a JV with someone like you (you win they win)
* Keeping them and finding a great property manager so that it provides income

There is a lot to consider on their end, which all stems from what they want the properties to provide. (i.e cash flow, or a pile of after tax cash.) Then if it is the cash option, where will they put it to generate the same or better returns than they could get in the properties.

You have an opportunity here to assist someone to look at their vision and help them with their options. Congrats, go make a difference!

 

[HOMESOLUTIONS]

QUOTE (mikecunning @ Nov 10 2007, 02:52 PM) HI Henry

There are some discussions on the Vendor Take Back already in the Ask an Expert discussion area that will answer most of your questions.

The bottom line is that everything is negotiable! When we offer VTBs we typically charge 7%, however, I know other investors that charge second mortgage market rates (anywhere from 12%-15%)

Depending on the market, a long closing of 24 months may not be to your advantage i.e. in a declining market such as part of the US right now, this would not be a good thing because you are fixing your price today and paying for it in two years when the values may be lower.

Assuming the properties are owned personally, if she were to sell them all in the same tax year she may have a higher taxable income and therefore pay more tax than if she spread it out over 2 or 3 years. As we are nearing the end of the year, there may be an advantage to close some in December and some in January....however please encourage her to consult with her accountant as some of the properties may be classed differently and subject to different tax treatments ie. income vs capital gains.

Good luck!

Mike

Mike

Thanks so much for your reply. I will do some research in the VTB section. It definitely gave me something to think about.

Henry

 

[HOMESOLUTIONS]

QUOTE (DonCampbell @ Nov 10 2007, 06:56 PM) Hi Henry,

This is definitely a time for your friend to get an astute real estate accountant on their side before they do anything. Having a well thought out exit plan will be very important.

Options to consider:

* Selling through an option
* Carrying back money thus providing income AND a the ability to `elect` spreading out her capital gains tax due over up to 5 years
* Keeping a portion of each unit and doing a JV with someone like you (you win they win)
* Keeping them and finding a great property manager so that it provides income

There is a lot to consider on their end, which all stems from what they want the properties to provide. (i.e cash flow, or a pile of after tax cash.) Then if it is the cash option, where will they put it to generate the same or better returns than they could get in the properties.

You have an opportunity here to assist someone to look at their vision and help them with their options. Congrats, go make a difference!

Don

Thanks for the help - I really appreciate it. I will be in touch with her after she gets home from Toronto visiting her son.

Henry