Seller Financing Your Florida Apartment Building: How It Works and When It Pays
With seller financing, you act as the bank: the buyer puts money down, you carry a note secured by a mortgage on the building, and they pay you monthly until the note is paid off or comes due. It can get you a higher price and spread your tax bill, but you take on the risk that the buyer stops paying.
Seller financing comes up in almost every conversation I have with an owner who has held a building for a long time and owns it free and clear. The idea sounds great: sell the building, keep collecting a monthly check, skip the tenants. Sometimes it is exactly right. Sometimes it is a way to sell your building twice. Here is how it actually works in Florida. I am a broker, not a CPA or attorney, so run the tax and legal pieces past yours.
How does seller financing work?
Instead of the buyer getting a bank loan, you lend them part of the price. They pay a down payment at closing, sign a promissory note to you, and give you a mortgage on the building as security. They make monthly payments to you, on whatever schedule you negotiate: interest only, amortized over a long schedule with a balloon due when they refinance or sell, or fully paid off over the life of the note. If they stop paying, you foreclose and get the building back.
What the terms usually look like
Seller financing terms are all over the place, and that is the point: every term is negotiable, and every win on one term is paid for on another. Down payment, price, interest rate, amortization and the length of the note all trade against each other.
- A low down payment, say 20 percent, usually means a higher price, a higher rate, or a shorter term.
- A low interest rate usually means a higher price and a shorter balloon.
- A low price and a long term usually means a higher interest rate.
The structures vary just as much. Some notes are interest only. Some are fully amortized with no balloon at all. Some use a 40 year amortization to keep the monthly payment low, and pay for it with a higher rate or a shorter term. Across all of it, my standard is 25 to 35 percent down.
Whatever you trade, insist on the protections: a personal guarantee from every signer, even if they buy through an LLC, insurance with you named as mortgagee, tax escrow or proof that taxes are paid, and a default rate in the note.
Price and terms are one trade
Every seller-financed deal is a compromise between price and terms, and you get to choose which one matters more to you. If you want a higher price, be more negotiable on terms: a smaller down payment, a lower rate, a longer amortization. Just make sure the deal still cash flows for the buyer at those terms. A note that only works if everything goes right is a note you are likely to get back, and chances are you do not want the building back after someone else has owned it for a few years.
If you are reasonable on price, you have earned the right to ask more on terms: a higher interest rate, or interest-only payments with a longer balloon that pays you well while you wait. Neither side gets everything. The deals that close and stay closed are the ones where each side got the thing it cared about most.
One rule I do not bend on: every person who signs for the buyer personally guarantees the note, even when they buy through an LLC. An LLC that owns one building and nothing else is not much of a promise. A personal guarantee keeps the people behind it on the hook, which is exactly where you want them if the payments stop. Your attorney drafts it; I make sure it is in the deal from the first offer.
Why owners do it
Three reasons. Price: buyers pay more when you are solving their financing problem, and with bank money tight, that problem is real. Buyer pool: a building a bank will not lend on, because of its age, condition, or size, suddenly has buyers. And income: a performing note pays you like the building did, without the toilets.
The tax angle
An installment sale can spread your capital gain over the years you receive principal, instead of taking it all in the year you sell. One catch surprises owners: depreciation recapture is generally taxed in the year of sale, even if you have not received the cash yet. If you have owned the building a long time and depreciated most of it, that bill can be large. This is exactly where a CPA earns their fee. My post on capital gains when you sell a Florida apartment building covers the rest, and a 1031 exchange is the other option to compare.
Florida costs to know about
Florida charges documentary stamp tax on promissory notes, 35 cents per $100 of the note, and a one-time intangible tax of 0.2 percent when the mortgage is recorded. Who pays is negotiable, but someone does, so put it in the contract.
Where it goes wrong
The risk is simple: the buyer stops paying, and you get the building back in worse shape than you sold it, after a foreclosure that takes time and legal fees. The other trap is an existing mortgage. If you still owe on the building, your loan almost certainly has a due-on-sale clause, and seller financing on top of it without your lender's consent can blow up badly. Vet a seller-financing buyer harder than a cash buyer: their track record running buildings matters more than their credit score.
When it beats a cash sale
Seller financing tends to make sense when you own the building free and clear, you do not need all the cash now, the building is hard to finance with a bank, and you have a buyer with real experience and a real down payment. If you need the money, or if the best buyer is a cash buyer at a fair price, take the cash. Either way, start with an honest value, because a note built on an inflated price is just a bigger loss if it goes bad. My valuation model will give you that starting point, and here is how the rest of a sale works.
Questions owners ask
What are typical seller financing terms on an apartment building?
There is no standard, because every term trades against another. A low down payment usually costs the buyer a higher price, a higher rate or a shorter term, and a low rate usually means a higher price and a shorter balloon. Notes can be interest only, fully amortized or stretched over 40 years. My standard is 25 to 35 percent down.
What happens if the buyer stops paying on a seller-financed note?
You foreclose and get the building back, because the buyer gave you a mortgage on the property as security. The risk is that foreclosure takes time and legal fees, and the building may come back in worse shape than you sold it. That is why I vet a seller-financing buyer harder than a cash buyer and weigh their record running buildings more than their credit score.
Can I offer seller financing if I still have a mortgage on the building?
Usually not without your lender's consent. If you still owe on the building, your loan almost certainly has a due-on-sale clause, and layering seller financing on top of it without the lender agreeing can blow up badly. Seller financing works most cleanly when you own the building free and clear. Talk to your lender and your attorney before you offer terms.
Does seller financing lower my capital gains tax?
It can spread the tax rather than erase it. An installment sale can let you report your capital gain over the years you receive principal instead of all in the year of sale. Depreciation recapture, though, is generally taxed in the year of sale even if you have not received the cash yet. On a long-held building that bill can be large, so run it past your CPA.
What protections should a seller ask for in a seller-financed deal?
At a minimum, ask for a personal guarantee from every signer, even if they buy through an LLC, insurance with you named as mortgagee, tax escrow or proof that taxes are paid, and a default rate in the note. A meaningful down payment is a protection too, because more of the buyer's own money in the deal means less risk for you. Vetting the buyer's experience matters as much as any clause.
Who pays the Florida taxes on a seller-financed note?
It is negotiable, but someone pays, so spell it out in the contract. Florida charges documentary stamp tax on promissory notes at 35 cents per $100 of the note, plus a one-time intangible tax of 0.2 percent when the mortgage is recorded. On a large note these add up, so they belong in your net proceeds math from the start.
I structure seller-financed sales as a Florida apartment broker, including the trade-offs between down payment, price, rate and term, and I tell you plainly when a cash sale is the better path.
