It’s widely known that investing in real estate requires significant capital, whether it’s for a down payment on a home or securing a loan for a commercial property. However, there are financing strategies that can make the process more manageable.
One such strategy is the sale price balance, which can help buyers ease the acquisition of a property and, at the same time, assist sellers in facilitating the sale of their property.
Curious to learn more? Let’s break down the key points to understand about this.
What is the sale price balance in real estate?
The sale price balance, also referred to as the balance of sale, is a strategy where the seller finances part of the sale price to the buyer when the buyer doesn’t have the borrowing capacity to secure the full financing from their bank or financial institution. In essence, it's a loan that the seller provides to the buyer during the property sale. By offering credit for the purchase, the seller effectively becomes a private lender to the buyer.
This financing comes in the form of a loan that is repaid over a set period, with the agreement formalized in a contract. At the end of the repayment term, the seller receives the full-sale price along with the interest accrued on the loan.
Typically, the balance of sale serves as the down payment for the buyer’s purchase and usually doesn’t exceed 20% of the sale price. The remaining amount is generally financed through a bank loan.
It’s important to note that this financing method only works if the seller has sufficient equity in the property.
A strategy used in business
The balance of sale price can be a valuable tool to secure the necessary financing for your project. It's especially popular among experienced real estate investors, such as those looking to expand their property portfolios.
This strategy is also commonly applied in the sale of businesses. Many business owners choose to sell their companies without receiving the full-sale price upfront, instead opting for a balance of sale arrangement.
Variable terms
A contract formalizing the sale price balance be signed by both parties involved. This ensures that the terms of the agreement are clearly defined and protects the seller if the buyer fails to make payments.
The terms in the contract can vary significantly depending on the situation. Buyers and sellers have the flexibility to negotiate terms that work for both parties, especially regarding:
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The amount loaned
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The interest rate applied
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The loan duration
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Other repayment terms (monthly payments, full payment at the end, etc.)
In many cases, both the principal and interest of the balance of sale are repaid at the end of the term. However, the parties can agree to other conditions, such as annual interest payments or monthly instalments similar to those of a standard mortgage loan.
Examples of using it as a down payment
Here are a few examples to help illustrate what a transaction with a balance of sale might look like. Please note that the figures provided are for illustrative purposes only.
Example 1
Laurie sells her house for $500,000. The buyer informs her that the bank will only grant him a mortgage of $415,000. After some negotiation, Laurie agrees to offer a balance of sale. She finances the remaining $85,000 at an interest rate of 4%. The buyer will need to repay the balance in 5 years, with interest paid annually.
Example 2
Maxime buys a triplex for $750,000. His financial institution lends him $630,000, and he covers the remainder with a balance of sale of $120,000 at an interest rate of 6% over 4 years. He will repay the seller with monthly payments that include both the principal and the interest, similar to a standard mortgage.
Example 3
Annie sells her multiplex for $800,000. The buyer finances the purchase with a mortgage of $640,000, and Annie offers a balance of sale for the remaining $160,000, to be repaid over 3 years at 5%. The repayment will take the form of a balloon loan, with the full amount due at maturity.
What are the benefits for the seller?
There are several reasons a seller might consider offering a balance of sale. This strategy can provide them with the opportunity to:
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Facilitate the sale of their property.
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Obtain additional returns, usually higher than those from other types of investments.
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Defer part of the capital gain and, if applicable, the taxation on that gain.
Additionally, by signing a contract that outlines the loan terms, the seller is protected in case the buyer fails to fulfill their obligations.
And for the buyer?
The buyer can also gain several advantages from using a balance of sale to facilitate their purchase. This strategy allows the buyer to:
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Pay less money as a down payment.
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Have flexible repayment terms for the balance loan.
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Benefit from a lower interest rate compared to those offered by a private lender.
What are the disadvantages?
Despite its advantages, the balance of sale comes with some challenges that should be considered to determine if it’s truly a viable option for you.
First, it’s important to note that a balance of sale can be difficult to secure. Most sellers are hesitant to offer this type of financing, and banks are often reluctant to approve loans under these conditions.
Additionally, even with the protections outlined in the contract, the seller assumes financial risk by offering such financing. If the buyer fails to meet their obligations, the seller will have to take steps to recover the money.
How to repay the sale price balance?
As mentioned earlier, the buyer and seller can agree on different repayment terms based on what works best for both parties. However, here are the three most common repayment methods:
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Monthly payments (principal and interest)
In this case, the buyer makes periodic payments to the seller that include both the principal and interest. This works similarly to a standard loan.
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Interest-only payments
With this method, the buyer only repays the interest during the term of the balance of sale. While payments are smaller, the principal must be fully repaid at the end of the contract.
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Balloon loan
This option involves no payments of principal or interest during the term. The full amount owed is repaid at the end of the agreed period, which means more interest will accumulate over time.
It’s important to carefully consider all options before choosing a balance of sale and agreeing on the terms.
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