An installment sale lets you take advantage of your hard-earned equity by doing what the banks do: loan money, earn interest, and gain a consistent, passive income. 

Flexible empowers property owners to unlock better outcomes than they thought were possible. One way we do that is by letting owners choose their Offer Type. This article covers Installment Sales, a great option for sellers who want to defer capital gains taxes and generate a passive income.

If you’re not sure if an Installment Sale is right for you or your client, use our Offer Type Finder to see other options.

What Is an Installment Sale?

An installment sale is when a seller—not a bank—finances a real estate sale. So, instead of a buyer getting a mortgage to purchase your property, you essentially become the "bank." The buyer usually gives you a down payment upfront and then pays back the loan over an agreed-upon period, whether that's 30 months or 30 years. 

How It Works

With an installment sale, you (as the seller) take on the role of a lender. But instead of giving a cash loan to the buyer, you extend to them enough credit to cover the purchase price of the property, less any down payment. Even though you sell the property, it serves as collateral for the loan and offers protection if the buyer defaults.

You and the buyer sign a legally binding contract called a promissory note (sometimes called a promissory letter). This serves as the buyer's promise to pay you back and specifies the terms and conditions of the loan, including details about:

• The loan amount

• The down payment

• The interest rate

• The repayment schedule (and how the buyer will pay you)

• Your options if the buyer defaults

• Your right to sell the loan (which you may decide to do if you later want a lump-sum payment)

• Penalties for late payments or early payoff

Benefits

An Installment Sale is a great option for sellers who want to take advantage of any of these benefits:

• You defer capital gains. Instead of paying capital gains tax upfront, you can spread out the tax hit over many years as you receive payments from the buyer.

• You get a passive income stream. You receive a cash down payment and then a steady source of monthly income over the loan term.

• It's negotiable. Installment Sale deals are fully customizable. You can negotiate to get the terms you want.

• It's faster than traditional sales. You can sell and close faster because your buyer avoids the lengthy mortgage process.

• You can sell "as is." You can sell without making the repairs that traditional lenders would require—saving both time and money.

• It can be a good investment. You may get higher offers for your property. Also, you could earn better rates on the proceeds than you would by taking the cash and investing that money somewhere else. 

• Income with no property management. You get real estate income without managing the property or paying for upkeep. 

• You can sell the note. If you decide you want a lump-sum payment at some point, you can sell the promissory note to an investor.

• You have recourse. If the buyer defaults, you get to keep the down payment, the monthly payments you've already received, and the property.

When Is an Installment Sale a Good Idea?

An Installment Sale makes sense when you want a steady monthly income and tax benefits instead of upfront cash when you sell a property. And because an installment sale tends to be faster than a traditional sale—and more negotiable—it’s ideal if you want to sell quickly or if you have unique circumstances. 

The strategy is also a good option if you're behind on your taxes or having trouble selling. That could be because you're in a cool real estate market, the property needs considerable repairs, or it would otherwise be hard to mortgage—for whatever reason. 

Flexible works with property owners to find the perfect "exit strategy" when it's time to sell. An Installment Sale is a popular strategy because it's fast, it minimizes taxes, and it creates cash flow.

Terms to Discuss with Flexible 

An Installment Sale with Flexible is designed to give you options. When you’re ready, contact one of Flexible’s Offer Guides to discuss:

1. The monthly payment you want

2. How long you want the loan to be in place

3. If you want any funds at closing (and if so, how much?)

4. Your preferred payment structure, such as an interest-only structure (lower payments, deferred taxes), amortizing structure (higher payments, pay taxes as you earn income), or a hybrid structure (interest-only period followed by amortization)

Tip: If your property has appreciated in value, you may be facing a significant tax bill (capital gains and possibly depreciation recapture). A lower down payment (cash at closing) can help defer these taxes and earn interest on a higher loan balance. FAQs 

What are the risks of being the lender in an Installment Sale? 

As the lender, you receive a promissory note—a legally-binding promise that Flexible will repay the loan. The loan is secured by a lien that is recorded at the local deeds office. The loan is secured by the property—which means you can foreclose if Flexible defaults. 

To limit your risks, you can:

• Ask for a down payment. That money is yours to keep, even if Flexible defaults. You would also get to take back the property, including any improvements made to the property while the borrower owned it. Flexible has never defaulted on a loan.

• Ask about the “contract for deed” option where ownership doesn’t get transferred to Flexible until the loan is paid in full. 

How is my monthly payment determined?

The monthly payment depends entirely on your agreement with Flexible. Tell us your monthly income goal and we’ll work together to get as close to that as possible by adjusting the down payment, interest rate, purchase price, and other variables.

What happens if Flexible resells the property before the Installment Sale loan is paid off?

If Flexible sells the property, the loan could be assumed by a new borrower or it could be paid off in full to you. If you chose an Installment Sale as part of a strategic tax planning strategy, you can include a prepayment penalty in your agreement with Flexible. This would offset some of the tax consequences if the property is sold before the loan is paid off. 

What if Flexible makes a late payment or stops making payments?

You can add a late fee clause to your agreement with Flexible. If Flexible misses payments and defaults on the loan, you keep the down payment, the monthly payments you’ve already received, and the property. 

What if I have a loan on the property?

Your loan can be paid off with Flexible’s down payment at closing, or Flexible can assume the loan.

This article is intended for informational purposes only and should not be construed as financial, legal, tax, insurance, or investment advice. Flexible encourages you to contact an Offer Guide to discuss your unique situation and consult qualified third-party financial, legal, tax, insurance, or investment professionals prior to making any related decisions.