Selling Rehabs.....Retail Or Owner Financed
Good afternoon everyone.
When selling a rehab, is one method better than the other. Either cashing out selling retail or pulling cash out refinancing and owner financing the house.
I understand that both exits will have advantages and dissadvantages, but I'm just looing for some words from the wise on this subject.
Thanks all
Bobby
[addsig]
I generally simply rehab and hold as a rental, although I have sold rehabs. I don't like the idea of cash out refinacing and then owner financing. The problems I see are 1)The higher interest rate you pay on a cash out, 2) The closing costs involved in refinancing, and 3) The person who is buying the property is not a first rate credit risk since they can't get conventional financing.
Of course the advantage is you have more potential buyers, and you can always repo the house if they don't pay.
My own personal preference if I sell is to sell at a price that is guaranteed to move the house. This doesn't even have to be below market value. I think far to many rehabbers look for properties that need fixing up but they settle for something that is in a less than desirable neighborhood. If you want to sell quickly, you really need a safe, clean, upcoming neighborhood where people with good credit like to live. In this case you don't need to offer owner financing. You don't find these properties everyday though because there is a lot of competition for them.
This is a very, very complex question and I would certainly contact an accountant. It would take a good 1/2 hour to explain all the potential things that go on here. I'll briefly state a few points you should research and consider:
1. Rehabbing is considered an active trade or business and holding the property longer by using a CFD (contract for deed) may reclassify it thus requiring you to depreciate and add material improvements to basis.
2. "Real estate professionals" cannot use the installment method of reporting capital gains tax. If it is determined that you should depreciate your asset and such as described above, you likely will owe all tax when you sell the property.
3. If you do a number of rehabs and/or a number of CFD's/mortgages you may have additional fees and requirements imposed to you by the state. In Iowa if you sell on CFD for more than 4 properties you must record the actual contract (no memorandum) and after 15 you may have to pay to be a licensed mortgage broker.
This really is too much of a complex question to get into further but I hope this gives you something that you didn't know before.[ Edited by myfrogger on Date 12/26/2003 ]
There certainly are accounting and tax implications with the quick sell. I normally do both, depending on the property but most often I rehab and turn them into rentals.
I normally pay cash for the property and the rehab, then refi the property and pocket the difference, (Usually around 20k). If you use this method you do NOT pay capital gains or taxes until you actually sell the property (the 20k is financed).
This method gives you several things which I find very benificial.
1. No immediate tax issues.
2. Positive Cash flow on the rented property.
3. Cash in my pocket.
4. Tax benefits as you can write off your depreciation and expenses.
Just my personal way, there are others.
Goodluck!