mortgage brokers usually sell their loans on Wall Street, so the loans are standardized and don’t necessarily fit everyone. In addition, commercial lenders charge “loan origination fees,” also known as “points.” Most sellers do not charge fees for lending, and in some states they cannot (e.g., California). The absence of this fee saves the buyer quite a bit of money. BENEFITS TO THE SELLER The seller can benefit from seller financing in three ways. The first is that carrying some financing facilitates the sale. Second, seller financing can defer federal capital gains taxes by employing an “installment sale.” Consult a tax professional or search the internet to learn more. Third, the note that is carried back has a regular (usually monthly) income stream for the seller. This is secured by the property with which they are familiar, making it a very good long-term investment. Between 1980 and 2021, mortgage interest rates declined from 18% to 3%-4%. This long-term trend is now reversing. Seller financing, which allows the buyer to negotiate a “customized” loan with the seller is a powerful way to continue making advantageous purchases. • Bruce Kellogg has been a real estate agent and investor in California for 44 years. He purchased about 350 investment properties for himself, mostly with high leverage and tax-deferred exchanges. In the process, he made three fortunes and experienced three real estate downturns since 1980. He has transacted approximately 550 properties for clients, creating fortunes for several. His book “Real Estate Investing Wisdom” is in publication. Kellogg can be reached at Brucekellogg10@gmail.com or (408) 489-0131.
situation is resolved, modify the note to include the missed payments and proceed as before. The third alternative is to sell the note at a discount and let someone else deal with the default. You can do this via the internet. Discounts on defaulted notes are heavy, typically 40%-80%. Frankly, it is a terrible option, so try to avoid doing it.
But maybe you don’t need to sell the entire note. You can sell just part of the note, or just a certain number of the payments. There are markets across the country and via the internet. Notes can be very “liquid” nowadays. Finally, you could borrow against the note. The legal term for this is “hypothecation.” Private parties, local banks, credit unions, and “factoring companies” all do note hypothecations. Check the internet first. BENEFITS TO THE BUYER Seller financing offers the buyer two primary benefits. The first is the buyer can negotiate a “customized” loan with the seller to accommodate the buyer’s needs and circumstances. Banks and
IF THE SELLER NEEDS MONEY LATER
There are several alternatives avail- able if you need money later. The first is to sell the entire note at a discount. Because the note will be performing (i.e., not in default), the discount could be in the 20%-30% range, which isn’t so bad if you need the cash.
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