Creative Purchase / Sale Agreement

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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

2y

You should talk to an attorney to ensure you have this set up correctly. I would hate to see the buyer default and then discover you lose everything because your contract wasn't set up correctly.

Yes, you can terminate/evict as long as your contract is set up correctly.

The tenant/buyer should not pay your mortgage. They pay you, then you pay the mortgage.

If I understand correctly, you are selling the home for the remaining mortgage balance + $20,000? Is that market rate? I wouldn't even consider this option unless you are getting what the home is worth.

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Kevin Sobilo

Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes

2y

@Susan McBride,

With your question about rental income, yes it would be rental income because you aren't titling the property over to them until they are able to get their own loan.

To, me that sounds overly complicated. Why not just do 2 SEPARATE agreements.

1. Sell them an option to purchase at a set price (mortgage balance 1 year in the future) that they can close on anytime within 12 months.

2. Execute a 12 month lease where you can collect a security deposit and collect rent to cover the mortgage and some money towards maintenance.

Then there is no question if you can evict because they are just tenants unless they close on the sale.

Also, is there reason to believe they will qualify for a mortgage within 12 months. MANY people have wishful thinking and do not correct whatever is keeping them from getting a mortgage.

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Melanie P.Pro Member

Rental Property Investor · Member since 2023 · 1k+ posts · 922 votes

2y

What you are describing is in fact rental income. You would need to report all of the payments he makes to you as income, including the $20,000 option fee.

Your desire to avoid a few pennies in taxes makes for a very convoluted description of the proposed transaction. The IRS would say, "a duck is a duck." You are in fact leasing him the premises with an option to purchase during the initial lease term at a predetermined price. Failure to complete the transaction forfeits the $20,000 option fee.

Have your attorney draw up a lease and purchase option to ensure your compliance with consumer protection laws. Setting forth the transaction as a lease will also save you from the fact that your mortgage is unlikely to be assumable, TILA disclosures, claims of fraud down the line when he's unable to get the financing in a year, etc.

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Susan McBride

OP

Fairhope, AL · Member since 2013 · 27 posts · 4 votes

2y

Thank you all for this information. In response to some of the questions, $20,000 plus the loan payoff is in fact a reasonable market price.

If I am going to have to report rental income, I may need to consider increasing the rental amount to cover my taxes. I will also seek the advice of an attorney and consider structuring it as one agreement for an option to purchase and a separate lease agreement. Any suggestions for a good real estate lawyer in Alabama would be appreciated.

This person has a very large legal judgement against him. The only way he will obtain a loan is to get financing from friends and family.

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Susan McBride

OP

Fairhope, AL · Member since 2013 · 27 posts · 4 votes

2y

Quote from @Account Closed:

Quote from @Susan McBride:

I am considering doing a creative financing agreement whereby I will sell my home to a buyer with a $20k non-refundable purchase option. He would pay my mortgage payment and assume all responsibility for home maintenance until such time as he can qualify for financing. At that time, he would pay whatever the remaining balance was on the mortgage and would waive his right to inspection. So, he will reap the benefit of the reduction in P&I on the loan over time.

If he is unable to obtain financing in one year, it would revert to a six month lease and he would be required to pay a damage deposit at that time.

I am calling this an "Agreement of Intent to Purchase Residential Property" and not a Lease / Purchase Agreement. I am attaching a lease as Exhibit A which will be the lease if he is unable to obtain financing to purchase it. The Agreement also states that he will be subject to the terms and conditions of the Lease Exhibit A while living in the home.

I have two concerns: 1) in this type of arrangement, would I be able to evict him if he defaulted on the payments? and 2) would I have to declare rental income if the agreement stated that he was paying the mortgage (instead of rent) until such time as he could get a loan to purchase it.

Advice and comments welcome! Thank you!

Just a couple of thoughts, if you live in the home 2 of the last 5 years you get a tax exemption on the sale. Otherwise you may have capital gains. Make sure you have a lease agreement and a separate option agreement. If there is a blur in the distinction, that is, if it isn't clear that it's a option, it may be construed as an executory contract. That is very different than an option agreement.

If you apply part of the payment to the purchase, it may be construed as an Executory contract under Dodd-Frank. A judge may find that a one year agreement is insufficient time to justify a $20,000 option fee. Do not call it a down payment if you are using it to do an option.

Since he is subject to the requirements of the lease, you are required to fulfill all local requirements of a landlord. You are a landlord and have to treat it as such.

Insurance and taxes typically only go up, so make provision in your lease agreement to make sure that the lease payment is sufficient to cover the probable increase. If his payment to you is exactly the same amount as your payment to the mortgage company, the judge may construe the agreement as an Executory contract.

If the "buyer" has no possibility of getting a normal mortgage because of a known legal judgement, that is likely a violation of Dodd-Frank. A judge would likely require the $20,000 non-refundable option fee be refunded and possibly all payments made under the agreement along with maybe a fine. Please note for all of you who will undoubtedly comment. We practice "safe real estate", so this is all possible but not necessarily what will occur.

This is not exhaustive and does not constitute any fiduciary responsibility, it is merely one man's opinion on a public forum.

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Susan McBride

OP

Fairhope, AL · Member since 2013 · 27 posts · 4 votes

2y

Thank you for this information. Can you explain what an Executory Contract is and why I need to be concerned about it?

I just spoke to a lawyer and he told me I should just make it a non-refundable deposit and do a lease with option to purchase (one contract). That seems to be the opposite of what everyone is telling me here.

I will have very little capital gain after deducting my points and closing costs on this home that I purchased less than one year ago. My objective is to get out from under the expensive note. Thank you!

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Sarah Maraj

Member since 2024 · 9 posts · 0 votes

2y

@Susan McBride Hi do you know anyone in Canada (Ontario) who knows more about Creative Purchase agreements?

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Susan McBride

OP

Fairhope, AL · Member since 2013 · 27 posts · 4 votes

2y

Quote from @Sarah Maraj:

@Susan McBride Hi do you know anyone in Canada (Ontario) who knows more about Creative Purchase agreements?

Creative Purchase / Sale Agreement

Creative Purchase / Sale Agreement

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