REALTOR® Magazine Online: Pros and Cons of Deferred Payment

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Pros and Cons of Deferred Payment

Pros

Deferred payments mitigate the impact of taxes.

Deferred payments provide an annuity-like stream of future income.

Cons

Future payments are made with depreciated dollars, which can drastically reduce the true selling price.

There’s always a risk that the company might fail under the new ownership and there won’t be enough assets to complete the payments. In such a case, you’ll probably receive the company back. —Joe Klock, Real Estate Professional, Sept./Oct. 1997

Ways to Protect Yourself Under Seller Financing

If you take back seller financing, try to have the buyer provide some of all of the following:

Additional security for the loan. For example, require the buyer to put up a personal residence as additional collateral.

The right to audit the company’s financial statement and business plan during the years of the loan payout.

A life insurance policy on the buyer’s life with you as the beneficiary until the loan is paid off.

TIP: Instead of taking back an installment loan, per se, have the buyer purchase an annuity or some zero-coupon bonds in your name. These can often be bought at deep discounts to eventual payout, lowering the sale price, but guaranteeing you a higher future return. —Commerce Clearing House’s, Business Owner’s Toolkit

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