Is Seller Financing Your Land A Good Idea?
Is seller financing your land a good idea? The answer is both yes and no.
- Due Diligence
- Down Payment
- Seller Financing Benefits
- Tax Advantage
- Disadvantages Of Seller Financing Land
- Why Seller Financing?
- Let’s Connect
I’m Brad with NorthGALandBuyers.com and Arbor View Properties. I’m a real estate investor, developer, and seller financing expert. I’ve completed numerous seller financing deals, both buying and selling properties under this arrangement. My experience spans land, development, and single-family homes.
Today, let’s discuss whether seller financing your land is a good decision. The answer can vary depending on the buyer.
For instance, if I purchase a property and sell it using seller financing, I make sure to thoroughly vet the buyer.
Just recently, I sold a property to a buyer who is moving in today in La Grange, Georgia, which is located south of Atlanta. Before finalizing the sale, I took steps to verify her financial situation. This included confirming her employment status, reviewing her bank statements, and requesting copies of her tax returns. I needed to examine several years of bank statements to assess her cash flow. Additionally, she provided documentation showing her social security income, which I also verified to ensure the deposits matched. This vetting process is similar to what a mortgage lender would do when you apply for a home loan. They evaluate your financial status to determine your risk level as a borrower. I follow the same procedure because I want to avoid having to take the property back in the event of default—this is the last thing I want to do.
There are legitimate individuals whose strategy is to operate like shark lenders: they lend items, take them back, and repeat the process. I find this business model to be quite sleazy.
Due Diligence
My approach is different; I run my business more like a “buy here, pay here” used car lot. While this model can be lucrative—since you may end up repossessing the car 30 to 40% of the time and then reselling it—I don’t agree with that method. I think it’s unethical, so I avoid it even though others may choose this route. It’s important to consider your end buyer. We require all our buyers to make a down payment of a certain percentage when purchasing properties. This down payment acts as their “skin in the game,” demonstrating their commitment.
Generally, the more money they are willing to invest upfront, the more likely they are to follow through. In addition, I conduct thorough checks on their financial situation: I review their bank statements, verify their income, and confirm their employment. This ensures that they have the necessary funds and a stable job. Of course, there is always a risk that they could lose their job and default on the loan. In such cases, I secure my investment through the property itself. I file security deeds and promissory notes, and according to Georgia law, if a buyer defaults, I have the right to foreclose on the property.
This legal protection does come at a cost. It amounts to thousands of dollars because I need to hire an attorney for these processes. Since I conduct my business through an LLC, which cannot represent itself, I must employ an attorney to represent the LLC and another attorney to handle the foreclosure proceedings.
Do I want to do that? Absolutely not. I don’t want to do it.
So, how do I stop myself? I vet my buyers ahead of time to ensure that I’m selecting the right one.
Does it work every time? No, sometimes it doesn’t, and that’s okay. However, most of the time it does.
You might be thinking, “Well, Brad, you’re an experienced investor; of course you vet your buyers. But I’m just an average Joe trying to sell my property. How do I know?”
Down Payment
First of all, focus on the down payment. If you’re listing your property for sale and you want to sell it with financing, state clearly, “I want X amount as a down payment and no less.” If a buyer can’t come up with that down payment, then say no. If they don’t have sufficient cash upfront, it’s not worth your time.
Avoid wasting your time on tire kickers. We post properties for seller financing regularly, and some people will say, “I don’t have what you’re asking for, but I can offer this amount today, and then pay the rest later.” The answer is no, absolutely not. There have been a couple of instances where I made minor exceptions, but even then, I required them to pay me back in a very short period.
For example, today a lady moved in without having the full down payment upfront due to her financial situation. I told her, “That’s fine, but please put the remaining money in escrow. Once you gather the rest of the down payment, we can finalize the deal.” I carefully analyzed her finances and determined that her situation was legitimate, even though it was an exception to my usual process. So, I made an exception. However, I did not close the deal or finalize the sale until the entire down payment I requested was sitting in the escrow account. Once they confirmed that the funds were in the escrow account, I proceeded to close the deal.
Alternatively, I’ve leased the property to them for a short period until they can gather the remaining funds. Once they have the rest of the payment, I will sell the property to them through financing. However, they are required to provide a non-refundable deposit to ensure that I’m not wasting my time if something goes wrong.
Implementing such measures is important. I recommend consulting a real estate attorney for guidance. If you’re unfamiliar with the process, they can help you draft contract provisions that will protect you.
Seller Financing Benefits
Seller financing can be a viable strategy for selling your property, so let’s discuss its benefits.
Seller financing is generally considered an installment sale by the IRS. This means you can defer your capital gains taxes over time since you only pay taxes on the amount you receive each year.
For example, if you seller finance a property for $99,000, you could structure it as three payments over three years, with the buyer paying you $33,000 each year. You could handle it this way, and you’ll only pay capital gains taxes on the profits. To simplify, if you sell a property for more than you bought it, you only pay income taxes on the $33,000 you earned each year, not on the entire sale amount.
There are some caveats to this, though. If you’re classified as a dealer—like I am—you’ll need to approach things a bit differently. It’s best to consult with your CPA about that, as you may not qualify for this type of sale. However, most average property owners who sell one property can benefit from this installment sale arrangement in the eyes of the IRS, meaning you only pay taxes on the portion you earn over time.
As I noted, because I’m considered a dealer, the IRS requires me to pay taxes on the total amount upfront, even if I don’t receive the full payment right away. How frustrating is that? It doesn’t make sense. That’s my rant for the day.
Tax Advantage
Now, let’s discuss taxes further. You can either pass these obligations on or defer them, allowing you to pay taxes gradually over time.
Seller financing offers a great tax advantage. In the case of a rental property—specifically when discussing land—you don’t have to manage tenants if you seller finance the property because the buyer becomes the owner. As the seller, you act like the bank: you simply collect payments and receive principal and interest over time.
Disadvantages Of Seller Financing Land
However, there are downsides to seller financing land.
One significant drawback is that, eventually, the loan will be paid off, and you will no longer receive that income. While there are some advanced strategies, like substitution of collateral, that can allow you to continue earning income over time, we won’t delve into those complex topics in this video.
Why Seller Financing?
So, why should you consider seller financing? It’s an excellent opportunity to generate income over time. By charging interest, you can make more money in addition to the principal.
I personally appreciate this strategy for purchasing land. Whenever I can, I opt for seller financing because it allows me to offer sellers more for their land and gives me more flexibility, especially if I’m planning on developing the property. I know that within two, three, four, or five years, I will have sold the properties, and they’ll be fully paid off.
I have successfully used this financing strategy in the past. I’ll pay the seller a certain amount of interest per year. Yes, it does cost me extra in interest, but it allows me to avoid coming up with all the cash at once. Additionally, the seller doesn’t have to pay capital gains taxes on the entire amount this year; they can spread those capital gains over the next five years.
This arrangement benefits both of us, giving each party some financial flexibility.
Let’s Connect
If this sounds interesting to you, I would be happy to discuss it further and provide more details.
We frequently buy and sell land using seller financing, but it’s crucial to vet your buyer. In your case, since I’m the one purchasing from you, you can see that I’m an experienced buyer and aware of what I’m doing. This means my likelihood of default is much lower compared to a random buyer whose background you don’t know.
It’s also essential to protect yourself in this process. Always make sure that you are secured by the property with a promissory note.
In Georgia, you will need both a security deed and a promissory note. Make sure these documents are recorded with the county. If the borrower fails to adhere to the terms, or if you are the borrower and the lender does not comply, it can lead to issues.
I remember a problematic situation a few years back where a lender attempted to act dishonestly. They tried to backtrack on the agreement, but everything was clearly documented. The case went to court, and the judge upheld the terms of the contract, stating, “This is what it says; this is what we are doing.” Consequently, the lender lost a year of time while the case was pending. Ultimately, they claimed the person owed them extra money in interest and penalties, but the court ruled against them based on the written agreements.
The judge stated, “Nope. You should never have brought this case to court. He only owes you the balance that was due a year ago, not the amount it is today, because you didn’t fulfill your obligations. You had everything in writing. He followed the rules, and you didn’t, so you have to bear the consequences.” It was a glorious moment.
I felt immense pride in the judge for standing firm against the unreasonable claims of this woman. This is why we have laws; they ensure accountability and the importance of getting everything in writing.
In our dealings, everything is documented. Every agreement is formalized in a contract, and if someone breaches that contract, the court system is there to address it.
I realize this video is lengthy, but I am passionate about seller financing, whether I am buying or selling land.
If you want to learn more about it, please visit NorthGALandBuyers.com, fill out the form, and a member of our team will contact you as soon as possible. Thank you for watching this video.