Using Sales Agreements - March 2006
by Bill Gladstone, CCIM, SIOR

I used to think a Sales Agreement was for younger people in the sense that if a mistake was made by not cashing out and the buyer defaulted on the loan balance due, a younger person would still have time to rebound and over time be able to substitute other investment dollars for the loss of funds that occurred on buying real estate on a Sales Agreement.

However, I was introduced to a situation in a settlement that just happened in which an elderly woman had to dispose of land and buildings that were in the estate of her husband. We were approached by a buyer who wanted to pay fair market value for the property but did not want to use bank financing. The buyer was prepared to pay 50 percent of the purchase price upfront in cash at settlement and wanted the balance of the loan (less than $150,000) to be amortized over 15 years at a five percent interest rate. The 50 percent down was certainly attractive in that it helped to minimize the risk. The buyer had good references, which we had checked with people whom he had done similar transactions. 

Since the property was fully depreciated, there was going to be a capital gains event, mostly through appreciation. Although you may think by taking the balance of the payment over time that the tax event would be lessened, but that may not be true. The interest would be taxed at the individual’s regular income rate and the principal taxed at the capital gains rate. I don’t know if there was much of a savings there or not. That was a question for her accountant. However, she wasn’t losing money and she had the property sold; and with a Sales Agreement, she still controlled the deed, which the buyer was not able to get until the mortgage was totally paid. If there was a default, she didn’t have to spend time trying to get her legal counsel to obtain the deed.  

It was a good lesson. I learned that Sales Agreements and perhaps other real estate tools are not age restricted when considering risk. The transaction has worked out very well for both parties and it was a great way for an elderly seller to dispose of real estate for which she had no further need.

**Featured in the February 2006 edition of the "New Properties" email.

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