Real Estate Journal — Creative Financing — Financial Digest — June 10 - 23, 2016 — 9A
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C reative F inancing By Barry Furman, Kaplin|Stewart Seller financing
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there are risks, both sellers and buyers can benefit. Prime seller candidates are typically
eal estate is a fairly safe investment that can help diversify an
title to the property for the term of the note. How long the loan is to be repaid, the inter-
to designate a time limit for when the note must be paid in full. This is generally be- tween one and five years. A typical offer to a seller is to pay interest only monthly at the prime rate. If the seller needs cash flow, he may negotiate a higher interest rate. The qualified seller will re- port his income from the sale of qualified property on the in- stallment sale basis unless he timely elects otherwise. This means he will recognize gain from the sale proportionately over time. The buyer gets a full stepped-up basis even though he may have given only an
installment note to the seller. Barry A. Furman, Esq. is a principal of Kaplin Stew- art in Blue Bell, Pennsyl- vania in the Corporate & Business Planning, Trust & Estates and Taxation groups. Mr. Furman has counseled a wide range of business clients regarding healthcare, tax, corporate, employment and real es- tate law in matters such as entity formation, busi- ness structuring, acquisi- tions, financing, licensing, regulatory issues, contract negotiations and estate planning. n
investment portfolio and l e v e r a g e one’s capital. To succeed in real estate i n v e s t i n g , however, in- vestors have t o b e c r e -
“There are various ways seller financed loans are structured. However, a seller financed loan can be as flexible as the parties negotiate.”
those who do not need the cash proceeds from the sale im- mediately and instead prefer having a stream of income. If the buyer defaults, the seller may foreclose just like a bank or mortgage company. If the seller finances the entire purchase price, he will generally continue to hold
est rate, late charge and due date, among other things, are negotiated between buyer and seller or their representatives. There are various ways seller financed loans are struc- tured. However, a seller fi- nanced loan can be as flexible as the parties negotiate. Most of the time the seller will want
Barry Furman
ative. There are many financ- ing options and each has its own risks and benefits. Why use creative financing at all? One reason is that the buyer may not have money. Seller financing is one com- mon option. A seller financed transaction involves the seller conveying real estate to a buyer by warranty deed with the seller taking back a mort- gage note secured by a deed, deed of trust or mortgage. The mortgage or other instrument generally becomes a first lien. Therefore, seller financing al- lows the buyer to use as little of his own money as possible. Seller financing is often used when the seller owns the prop- erty free and clear of all liens and encumbrances. The seller doesn’t want the property and likes the idea of receiving a monthly payment. Seller financing allows the buyer to purchase the property for very little or no money down and lower closing costs. Eliminating the bank or mortgage lender with seller financing certainly has an appeal. Instead of a bank or mortgage company, the seller acts as the bank. Although a section of the MARE Journal P.O. Box 26, Accord, MA 02018 781-871-5298 • 800-584-1062 fax 781-871-5299 www.marejournal.com Section Publisher Barbara Holyoke bholyoke@marejournal.com Section Editor Julie King jking@marejournal.com Financial Digest
Firmly Rooted in the Law and in the Community We are well grounded in every facet of real estate law, from acquisition to construction. We are committed to serving the needs of our clients and our communities.
Contact: Barry A. Furman • bfurman@kaplaw.com 910 Harvest Drive, Blue Bell, PA 19422-0765 • 610-941-2529 • www.kaplaw.com Visit our Real Estate Blog: www.philadelphiarealestatelaw.com Visit our Construction Blog: www.pennsylvaniaconstructionlawyer.com Other Offices: Cherry Hill, NJ 856-675-1550 • Philadelphia, PA 215-567-3120 Kaplin Stewart A t t o r ne y s a t L aw
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