After owning their investment property for many years, the Garcia family began thinking seriously about the future of the asset. The property had been a strong long-term investment, and over time, they had paid the loan down until it was owned free and clear.
However, two realities were becoming increasingly clear. First, the building itself was aging. The property still had its original roof, plumbing, and electrical systems, improvements that would require significant capital soon.
Second, the Garcia family was simply ready to move on from being landlords. After years of hands-on ownership, they were tired of coordinating repairs, dealing with tenant issues, making constant runs to Home Depot, and relying on vendors who were not always dependable. While hiring a property manager was an option, they did not want to take on the added layer of oversight that still came with it.
Rather than reinvesting additional time and capital into an aging asset, the Garcia family decided it was the right time to explore their options.
Several potential paths were explored:
- Continue operating the property and fund the upcoming improvements.
- Sell the property and pay applicable taxes
- Complete a 1031 exchange into another investment
- Structure a seller carryback financing arrangement
After reviewing these options, the Garcia family was particularly interested in seller financing as a way to transition out of ownership while maintaining cash flow.
Seller Financing
Seller financing, in simple terms, allows the seller to act as the lender. Instead of the buyer securing a traditional bank loan for the full purchase price, the seller carries a portion of the loan and receives payments over time.
By structuring the financing to align with the Garcia family’s desired exit, the property was positioned to attract qualified buyers, which generated strong interest, and ultimately secured a buyer who met the terms and successfully closed.
As part of the process, a key focus was the buyer’s creditworthiness and ability to service the debt. Proper vetting included financial strength and experience, which was critical to ensuring the reliability of the future income stream.
The buyer provided a down payment at closing, which covered closing costs and put meaningful cash in the Garcia family’s pocket. The family then carried the remaining balance as the lender, secured by the property in a first trust deed position, meaning the real estate serves as collateral for the loan. The buyer now makes monthly payments directly to the family.
The Garcia family received immediate liquidity from the down payment while maintaining a consistent monthly income stream.
They were also able to defer a portion of their capital gains taxes over time by structuring the sale as an installment transaction, rather than recognizing the full gain in the year of sale.
Just as importantly, they fully stepped away from ownership. The responsibility for tenants, property taxes, repairs, tenant turnover, and evolving government regulations all transferred to the new owner.
Instead of managing the property, the Garcia family now receives consistent monthly payments.
Their story highlights an option many long-term owners overlook. For investors who own property free and clear, or with minimal debt, seller financing can provide a practical path to transition out of active management while deferring capital gains taxes.Seth Watje & Adam Cairo are Principals at Starker West Inc. – an independent, full-service commercial real estate brokerage firm that specializes in the representation of clients in the acquisition and disposition of multifamily assets throughout San Diego County. While they coordinate with buyers, lenders, and other professionals to facilitate these outcomes, they are not acting as lenders, legal counsel, or tax advisors. Starker West helps clients evaluate and structure opportunities as part of the sales process.
For more information, contact them at: [email protected] / [email protected];
619-358-3748 | 619-300-0173. Visit their website at www.starkerwest.com.