As we prepare for the holiday season, people are looking for ways to keep expenses low. With real estate and interest rates continuing to climb, it is becoming increasingly difficult to sell properties and get a loan to purchase a property. With the growing challenges in the real estate market, buyers and sellers are turning to alternative financing options to facilitate transactions.

Seller Financing

One of the most popular methods is to utilize seller financing (Owner-carry notes). Including an owner-carry note as part of your tax-deferred exchange is actually very easy. In order for it to be included in the exchange, the installment note and corresponding documents need to be drafted with the Qualified Intermediary listed as the beneficiary or owner (example language: “ERG as QI for John Doe”). The note and corresponding documents will then be sent to the Qualified Intermediary and held until the buyout. Prior to the purchase of the replacement property, the exchanger will need buy the note out of the exchange account. The exchanger will send funds in the amount of the note plus any payments that have been made, and then the note will be assigned back to the exchanger. This will leave cash in the exchange account to be reinvested and the exchanger being able to directly receive the payments on the note.

Seller financing is also an option when purchasing through an exchange. It is much simpler as it is treated as a loan for the acquisition of the replacement property and can be a great option for covering the debt replacement that is a part of the reinvestment goal.

Loan Assumptions/Wrapping a Loan

Another method of financing a transaction that can be used for a sale or the purchase is assuming a loan that is already in place. This is often referred to as wrapping the mortgage as part of a closing. Some loans are written with clauses that allow them to be assumed by a third party in the event of a sale, leaving the current mortgage (and interest rate) in place for the buyer. With loans that don’t have this clause, there can be challenges with utilizing this method. Many lenders have due on sale clauses in the mortgage so when the property is sold, they must receive the payoff of the loan. This method will be dependent on the mortgage and the requirements of the lender, but if successful, can save the buyer a lot of money.

Caleb grew up on a farm in the Central Valley of California where he learned the value of hard work along concepts of small business and real estate from his family’s multi-generational farm. He worked on the farm as a chemical applicator, heavy equipment operator, mechanic, and welder. His first exposure to a 1031 exchange was when his family did a reverse 1031 exchange to purchase and develop land for one of their walnut orchards.

Caleb is a graduate of Colorado Christian University with a B.S. in Business Administration and Accounting, with a minor in Finance. He has been a part of the ERG team since 2021 working as an Exchange Consultant and our Business Development Director.

Caleb moved to Denver to pursue his education and decided to stay and enjoy all that Colorado has to offer. When he is not working, you can find him enjoying the outdoors either hiking, fishing, or skiing.