Carrying paper on a rehab I've owned 11 months, and my CPA hasn't called back

The 5 year balloon is the piece I'd stare at. You're handing the refinance risk to a borrower in a year neither of you can forecast, on a four unit in a market with thin comps. If the appraisal problem that killed your two bank offers is still a problem in 2030, the buyer can't refi and you are back in the same position with a 491k balance owed to you. Shortening to 3 years makes that worse, not better.

Can someone explain installment sale in plain terms? I've read it three times. Is it just that you pay tax on the gain as the payments come in rather than all at once in the sale year?

Dumb question, why carry at all if you flip? You're 11 months in on 505k of cost. Doesn't waiting for a cash buyer at 600 beat 93k down and a five year wait for the rest?

@juniper yes, that's the mechanism. Installment reporting spreads recognition of gain across the years principal is received rather than all in the year of sale, and interest received is generally taxed as ordinary income separately.

@quarry the distinction you've hit is real. Property held as inventory by someone in the business of selling it is generally treated differently from property held for investment, and installment reporting is not available on dealer dispositions. Whether your 11 month rehab with four leased units is inventory or an investment hold turns on facts about your intent and pattern of activity, and that is a determination for your CPA and possibly a tax attorney, not something to settle from the terms sheet. Do not price the deal on an assumption you can't confirm in writing.

What you can price without waiting: if the whole gain is recognized this year, you owe cash tax on roughly 100k of gain in a year you receive 93k. Run that number. If the tax bill exceeds the down payment net of closing costs, you are funding the government out of pocket to hold a note. That single comparison decides whether 20% down is a preference or a requirement.

On the three levers, they are not equivalent. Down payment reduces loss severity if the buyer defaults. Rate raises yield if they perform. A shorter balloon raises the odds you get the property back, because the buyer's exit is the appraisal problem that already killed two bank deals. Pulling all three at once on a borrower with a real track record is how you lose the buyer and end up back at 60 day contingencies.

Also confirm with your attorney how foreclosure would run in the state the property sits in, since timeline and cost differ significantly by state.

Nobody has said this yet so I will. You just rehabbed it. When the water heater you installed fails in month seven, the buyer is going to call you, and if they're already paying you 4,422 a month they're going to feel entitled to an answer. Get the as-is language and the warranty disclaimer in front of an attorney and make sure the closing statement and the note both reflect it. I've watched a carry go sour over a 1,900 dollar repair argument that turned into a withheld payment.

If your capital is the constraint, price the note as an asset you might sell rather than hold. A 9% note, 15% down, unseasoned, four unit, thin comps, that trades at a discount if you try to move it in year one. Twelve months of clean payment history changes that discount a lot. Which argues for structuring it so it's sellable, meaning clean documents, a servicer of record, escrowed taxes and insurance.

Who collects the money in this structure? Does the buyer send you a check every month and you keep the ledger yourself, or is there somebody in the middle? That part has never been clear to me and it seems like the part that decides whether this is annoying or not.

@meridian selling the note is where I'd slow down. My understanding is that disposing of an installment note can accelerate the gain you were deferring, which would undo the reason to structure it that way. @quarry that may be moot for you if dealer treatment applies anyway, but worth your CPA hearing the plan and not just the sale.

@anchor use a third party loan servicer. They collect, they escrow taxes and insurance, they send the annual statements, and they create a payment record that isn't your word against the buyer's. We pay a small monthly fee per loan on the ones we manage and it has never once been the wrong call. It also means the awkward call about a late payment comes from someone who isn't you.

9% secured by four leased units is a better yield than anything my land does, so I understand the appeal. But you're a flipper trying to become a lender for five years. Those are different temperaments. If you get restless in month 14 and want the cash for the next rehab, you're stuck, or you're selling the note into a discount.

If the buyer defaults in year two, what actually happens to the 93k? Does the seller keep the down payment plus whatever principal came in and then take the building back, or does some of that get clawed into the accounting? I've never seen that walked through with numbers.

Reading this thread as someone who wanted income without a second job, and it looks like carrying a note is a second job for the first year at least.

The permit question matters here. You put 90k into a four unit. If any of that work was done without pulled permits or the certificate of occupancy doesn't match four legal units, the buyer's refinance lender in year five will find it, and then your balloon doesn't get paid. Get the file closed out before closing while you still control the leverage. Recording and permit closeout practice both vary by jurisdiction so check with the local building department rather than assuming.

I'm still learning this. Is the seller automatically in first position on a carry like this, or does that have to be arranged? And does the buyer get a title policy the way they would with a bank loan?

20% down and leave the rate at 9. The extra half point is about 2,600 a year. The extra 5% down is 31k in front of you. I'd take the boring one every time.

Question I'd have been embarrassed to ask out loud: what stops the buyer from turning around and selling the building to someone else and keeping the money? I assume the answer is that the deed of trust shows up on title and has to be paid off at their closing, but I want someone to confirm that's actually how it works and not just how it should work.