Do lenders typically allow Contract for Deed? Or do you not tell?

Question

I am selling a house out of state. Purchase price is $260K, loan balance is $190K. Buyer is buying as investment property, but his rate is over 5%, and making it not much of an investment. Our interest rate on the loan we have is 4.3%. We just want the $70K difference so we can invest it locally, and he has that much to give us as a down. We are wanting for him to either 1) assume our loan (which I haven't been able to reach the mortgage company yet to find out the stipulations for that), or 2) do a Contract for Deed with him. In the CFD case, do you need to tell the mortgage company that you are doing that?

Second question: at what point does the "sale" take place? We need to sell this property before August to avoid Capitol Gains tax, and I want to make sure if we do a CFD, that the sale takes place at the point which we execute the CFD, not a later date, say when he pays us off.

Thanks for your help!

Second question: at what point does the "sale" take place? We need to sell this property before August to avoid Capitol Gains tax, and I want to make sure if we do a CFD, that the sale takes place at the point which we execute the CFD, not a later date, say when he pays us off.

Thanks for your help!

Jay Hinrichs · Answer

gothca few details missing in your first post..  I am all about the tax free that's the best play by far in the US and one many miss out on.

I think though if you turned it into a rental again you should talk to your tax man you may have lost some of your tax free gain and will need to 1031..  @Dave Foster  if we can get him on the line is an expert at this..

Also as stated watch out for your dti on the CFD  .. and yes landlording can suck at times ..  But Charleston is the bomb. I found it 6 years ago before it sky rocketed.. been building new construction in the inner city by the cigar factory and over in Wagner terrace and a few big multi million dollar specs south of Broad.. if I was 20 to 30 years younger I would pull up stakes and move there .. great town great business town.. at least for what I do.

Dave Foster · Answer

@Sarah Pursell, way above my paygrade.  These things are tricky.  Don't ask/don't tell really isn't such a good doctrine anymore :)

Sarah Young · Answer

@Dave Foster Wow! Thanks for all that helpful info! I already have an email out to my CPA, so I will see if what he says confirms what you say. I hope it does, because that is what I’m hoping to do! And yes, I did live in it 2/5 years, but moved out 3 years ago this coming August.

One more question...do I need to tell the mortgage company we are doing a CFD? Or do we just do it? But it will be recorded, and the mortgage company could potentially find out. And I don’t want to do anything that would jeopardize things.

Dave Foster · Answer

@Sarah Pursell,  @Jay Hinrichs gave you some really good nuggets to watch out for.  Even with the best of intentions CFDs (especially when they represent a high amount of leverage) can turn into a nightmare quickly.

I think what I'm reading here is that this is your former primary residence and you moved out 3 years ago this coming August.  So because it will have been your primary residence first and then you converted it to rental you will be able to sell before that August date and get the whole amount of the exemption tax free.  That does work Jay.  It's only if they convert a rental to their primary that they would have to prorate.  But you will have to recapture a little bit of depreciation.

So there should be no 1031 needed.  But the interesting question you've identified is "when does the sale occur?"  If doing a 1031 we would see most of our clients identify that the sale occurs when the "benefits and burdens" of ownership change hands and not so much when deed actually transfers.  Another way of phrasing that is called when "risk of loss" passes.  It basically means that you have given so much of the control and power over to the buyer that they now have the burdens and benefits of ownership (but you gotta remember that mortgage risk is still huge for you).

While the above would be true when doing a 1031 your primary residence is a just enough different animal that I'd want to steer you back to your accountant to make sure they agreed with me.  But I think you could make a case for that.  So sell on a cfd, ink the contract, and exchange money prior to that August date and you may be good.   After that nothing ever goes wrong with a cfd does it Jay???  "Fubared" - industry term and potentially very accurate :)

Sarah Young · Answer

@Jay Hinrichs Thanks for the reply. I will look into the wrap.

This house is in ND. We are selling it so we can finish the renovation on a house we have in Charleston. I’m not trying to do the wrap just because the buyer wants a lower rate, but he’s the one we bought the land from initially, and we gave him first right of refusal, he’s a friend, fair business man, and would be able to close before our August deadline to avoid the capital gains tax. That’s why we are motivated to make it work with him. He’s also willing to buy it as-is, and the tenants I evicted last week did about $7k+ In damages before they left, so that’s helpful. Otherwise I will be paying to have it repaired, then put on the market. And that will  take time, which we don’t have a lot of right now.

Jay Hinrichs · Answer

Be rare in the extreme that you will get an assumption to go through in todays mortgage world.

you would be doing a wrap.. look up all inclusive deed of trust in CA.. this is a great document to read its CA specific but it gives you the details of how U wrap your first with your CFD.

YOu need to talk to your CPA  as you don't transfer title until the deed is paid.. but maybe there is situation were the CPA can make it a sale at the time you record your contract..

Also you need to be talking to your mortgage lender.. I have seen many do this and get fubared.. your mortgage you have now is still in your name and will go against your borrowing ability until its paid off.

We have been working in Charleston the last 6 years  and every thing sells in 60 to 90 days for cash no need for owner financing.. is the house in an area that it just cant be listed and sold..

I would not do this just because the buyer cant make it work  with because 7 bps.

Do lenders typically allow Contract for Deed? Or do you not tell?

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