Seller financing is an often overlooked but highly beneficial option when negotiating the sale of a self-storage facility. Understanding how this works can significantly impact your discussions with sellers. Let's break down why seller-financed deals make sense and how to explain it in a way that resonates, particularly with older sellers.
The Priority for Older Sellers: Steady Income
Sellers nearing retirement are less focused on making big purchases or taking risks. Their goal is to ensure a steady, reliable income stream that supports a comfortable lifestyle. Instead of looking for lump sums of cash to reinvest, many are seeking the security of consistent monthly payments. This difference in perspective between younger and older sellers opens the door for presenting seller financing as a practical solution.
Current Interest Rate Realities
Older sellers are facing historically low returns on traditional investments like CDs or government bonds, which are often capped at 3% to 4%. In contrast, seller financing offers an opportunity for significantly better returns, often around 6% to 8%. To put this into perspective, financing a $1 million deal could generate between $5,000 and $6,666 a month—far outpacing what traditional low-risk investments offer.
The Importance of Security
While some sellers might compare these rates to riskier investments, such as junk bonds, the security provided by seller financing stands out. Unlike bonds or stocks, seller financing is backed by a first lien on real estate—the same property the seller knows well. This tangible, familiar asset offers much greater peace of mind and reduces the risk of losing principal, making it a far safer choice.
Tax Benefits to Consider
Another advantage of seller financing lies in how taxes are paid. If a seller opts for a traditional cash sale, they're immediately hit with a tax bill on the full amount. But by choosing to carry the financing, taxes are paid gradually as payments are received, allowing sellers to hold onto a larger portion of their earnings and invest it before taxes are due. This deferral can lead to significant savings over time.
Downside Protection
What if the buyer defaults? In the case of a seller note, the worst scenario often ends with the seller keeping the down payment and repossessing the property. This situation offers far more protection than losing out entirely, as can happen with riskier investments like junk bonds. Sellers effectively get paid twice—once with the down payment and again if they sell the property a second time.
Conclusion
Seller financing is a win/win for both parties. Educate sellers on the benefits of carrying paper and they will more than likely agree with you. We've seen many a cash deal converted to seller financing but I've never seen a seller that opts to convert from a note to cash – so it must be a good idea for them.