Selling my house. buyer wants me to carry a note. Help me out

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Selling my house. buyer wants me to carry a note. Help me out

William H.
Investor · Savannah, GA · Member since 2016 · 24 posts · 3 votes

So the house is worth $275,000 and the buyer, who happens to be a realtor wants to buy it, and get in quickly. She is having a tough time getting financing because she has been self employed for 1.5 years and not two. Her husband also is self employed. They hope to in the future refi and get a loan, but in the meantime they are trying to buy other ways. 

While I like the idea of investing in notes just fine, I have most of my cash in this house, and I need to sell. NOT in a way that I am hurting to sell, just I am not in a place to invest ALL of the money/equity that I have in the house. 

Here are the details, and we are going to assume (before taking the deal I would verify of course) good credit and everything checks out with the buyers, other than the lack of two years for the lender. Also, assuming the note is secured by the house.

House value/Sales price is $275,000. Could even a say after agents and a cushion, call it $250,000. 

She wants to put down $170,000 (So I can pay off the mortgage) and me create a note for $105,000 at 5% per year. She is asking for a 4 year note.

So my question is, since I am note currently in a place to keep this for four years (ideally) and considering that it isn't a "seasoned" note. What could I sell it for and to who, or where is the best place rather, to sell the note?

Again, I am not in the business so bare with me, but I do give some value to the loan to value, and the down payment. 

ANY help is appreciated, Thanks!

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y

interest is too low.. your not a bank.

if you had to sell the note you would take a huge discount.

better to simply sell for cash unless your in a market were selling your home Is really tough or you getting a big premium .

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  • Account Closed
    Johnson City, TN · Member since 2014 · 586 posts · 705 votes
    9y

    Lease option it to her for one year and 10k down.

    1Reply
  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    9y

    @William H.,

    4 years on a balloon is kinda short, unless you mean fully amortized after 4 years (BIG monthly payments!). You'd end up holding that note to maturity, probably. Might be kinda tough to market it if you needed to trade cash for cash flow.

    Hopefully, someone in the notes business will chime in ...

    Ultimately, the question will be: does that work for YOU ?

    0Reply
  • William H.
    OP
    Investor · Savannah, GA · Member since 2016 · 24 posts · 3 votes
    9y

    @David Dachtera

    I agree, its is short. So they are flexible, they can do monthly payments of say $1000 each month and then lump sum payments per year, for the amount due per year with interest. Or just four payments (one per year). We haven't hammered out that part just yet. As for working for me, I mean sure if someone wants to buy the house for cash today, then yeah that is better for me.  On the flip side say I sell the house to someone else, pay agents commissions, and hope that its a full price offer, and no repairs, or closing cost are asked for. My thought was if someone who had the more capital than I was able to buy it, it would be a win win. I do see where its not as appealing, but that's why I asked. I figure that the chances of walking away from such a down payment was unlikely . 

    Also worth noting, the lump payments each year, are from a Trust that they can only access so much money per year from, so that is what is covering the difference in the monthly payment example. 

    0Reply
  • William H.
    OP
    Investor · Savannah, GA · Member since 2016 · 24 posts · 3 votes
    9y

    @Account Closed

    I could. But I rather sell. Even though it's not as ideal for me at the time, it's still a sale, and a return on the equity, and my thought is that each lump sum payment is a down payment for a rental each year for the next four years.

    0Reply
  • Raquel D.
    Investor · Shakopee, MN · Member since 2017 · 102 posts · 60 votes
    9y
    Yeah, I think this really depends on what you have an appetite for -- if you want all the money now then this may not be ideal. The trust comment caught my attention as well. Most lenders won't consider income from a trust (as in an irrevocable trust that defines the periodic distributions to its beneficiaries as income) when considering qualifications. If they want to carry a four year note and use trust distributions to pay it off, I'm guessing they don't anticipate trying to get a regular mortgage in 6 months (when one spouse will have reached 2 years of being self employed). So they plan on using just trust money to pay it -- either because it's simpler for them or perhaps even because their self employment income isn't enough to qualify. I would wonder what the terms of the trust are, although I'm not sure if you'd actually be entitled to that information. Some trusts have a set number that gets distribution -- x dollars annually or in more frequently installments. There are some trusts that distribute a percentage of the balance of the trust assets. But most commonly, trusts tend to distribute all income to the beneficiaries. If that's the case, then depending on what kinds of assets are in the trust, the income could fluctuate from year to year. (This may not matter, but I'm mentioning it just as a factor to consider to make sure the trust distributions are as set-in-stone as they believe.) One last thought -- if their trust allows it, could they make a note to their trust instead of to you so you can get paid up front? Example using round numbers: they borrow $100k from the trust in exchange for a promissory note at the applicable federal interest rate. You get all your money now. They make their loan payments to the trust. The $100k note is an income generating asset of the trust -- and as they make their monthly payments, if they're entitled to income from the trust, they're basically going to get that income distributed right back out to them. If the trust permits it, seems like it could be a win-win?
    0Reply
  • William H.
    OP
    Investor · Savannah, GA · Member since 2016 · 24 posts · 3 votes
    9y

    @Raquel D.

    I do believe that the "end goal" is to get a mortgage. The reason I say that is because I believe the Father in Law is the beneficiary and is putting up the $170k. I think that the trust and the deal with

    me is completely separate from them getting a mortgage. I believe they can and will get a mortgage later, and pay him back. Basically using me and the note as a way to get in the house now.  

    I am not familiar with trust and how they work, or her part in the trust. My first thought that I mentioned to her was to see if she could borrow against it, like you mentioned. My example was like borrowing against a 401k. So I think we are thinking the same there. I just don't know how to go about that, or if she is able to. But yes Ideally that would be cool too.

    0Reply
  • Account Closed
    Real Estate Agent · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
    9y
    if you want the option to sell it you should raise the interest rate to at least 7% and have the note underwriter make sure it is Dodd Frank compliant which usually means a 5 year balloon
    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    interest is too low.. your not a bank.

    if you had to sell the note you would take a huge discount.

    better to simply sell for cash unless your in a market were selling your home Is really tough or you getting a big premium .

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    4Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    9y

    @William H.

    Do a delayed sale and purchase, closing in 7 mo, use a lease for 7 months, large down payment.

    1Reply
  • Mark Holencik
    Investor · Coplay, PA · Member since 2015 · 404 posts · 315 votes
    9y
    Originally posted by @Raquel D.:

    I would wonder what the terms of the trust are, although I'm not sure if you'd actually be entitled to that information. Some trusts have a set number that gets distribution -- x dollars annually or in more frequently installments. There are some trusts that distribute a percentage of the balance of the trust assets. But most commonly, trusts tend to distribute all income to the beneficiaries. If that's the case, then depending on what kinds of assets are in the trust, the income could fluctuate from year to year. (This may not matter, but I'm mentioning it just as a factor to consider to make sure the trust distributions are as set-in-stone as they believe.)

    If I am giving a mortgage based on that payout, my lawyer would see the terms of the trust. If I am lending anyone money, I am entitled to see whatever information I want or I do not lend them the money.

    1Reply
  • Mark Holencik
    Investor · Coplay, PA · Member since 2015 · 404 posts · 315 votes
    9y

    I agree with Jay, the interest is too low. 

    If I am buying a property that the owner is having a hard time selling I give them 6%. Otherwise I give 8%. 

    If I was selling it would be at least 8%.

    0Reply
  • William H.
    OP
    Investor · Savannah, GA · Member since 2016 · 24 posts · 3 votes
    9y

    So all of these are good points, Thanks for the tips. The delayed sale works too, didn't think about that. Well my thought was something that would increase the roi, So I was thinking something like $1000/m interest only for 24 months, with a option to pay off early,  and after the 2 years have a year that's at 5% with a balloon.  All of this is why I wanted to reach out on BP before agreeing to terms. I am all about creating a win win, but its got to make since.  

    0Reply
  • Ian M.
    Pittsburgh, PA · Member since 2012 · 140 posts · 38 votes
    9y

    I was going to say it as well, but @Jay Hinrichs and @Mark Holencik already said it.  Interest is far too low in my opinion.  Think of it this way, you are making an investment with $100k of your money and getting a 5% (taxable) return.  You might net 3% or so on that.  Could you get a better return elsewhere?  You definitely could.

    0Reply
  • Chris Purcell
    Investor · Philadelphia, PA · Member since 2010 · 739 posts · 372 votes
    9y

    The down payment after paying off your mortgage ($0) is too low

    0Reply
  • Mark Holencik
    Investor · Coplay, PA · Member since 2015 · 404 posts · 315 votes
    9y
    Originally posted by @Chris Purcell:

    The down payment after paying off your mortgage ($0) is too low

     Why do you say that?

    0Reply
  • William H.
    OP
    Investor · Savannah, GA · Member since 2016 · 24 posts · 3 votes
    9y

    Ok new problems... I talked to her and basically came up with carrying back the $105,000 in monthly payments of $1100 (the $1100 being interest only) and doing a balloon or new terms after 2 years, because the idea is for her to get financing in 6 months to a year. The problem is if I were to sell the house today, assuming the same numbers,  the equity ($105k) wouldn't be taxed since this was my primary house for the last 8 years. If i sell and carry back that equity, however, and go over a year its now a investment property, and when she does the final pay off of the $105,000 it would be taxed. 

    So I guess I could do a lease purchase. What I worry with that is say 6 months from now they like something else and don't want to buy anymore. I'd again, just like to sell it.

    My other thought is like someone mentioned, delay the sale and lease to them for 6-12 months but again I am delaying the sale, and the down payment wouldn't be available till closing and there is that option to back out. 

    Any Insight on this? Other than finding a new buyer, I mean I currently have others viewing the place so another offer could change things, but I admit with this person it would be without commissions and closing cost and for full price so I would like to figure out a way to make it work. 

    Thanks again for the help. 

    0Reply
  • Roman M.
    Investor · Miami Beach, FL · Member since 2016 · 486 posts · 216 votes
    9y

    2yr balloon is not Dodd Frank compliant and the realtor knows that. So consult an attorney regarding legal complications. 

    0Reply
  • Roman M.
    Investor · Miami Beach, FL · Member since 2016 · 486 posts · 216 votes
    9y

    when you sell and carry, you sell the property and you have an option to either declare the gain that year or do an installment sale option (which isn't really worth it because your sale is tax free due to homestead). 

    Since you no longer own the property then it cannot be your investment property. All you declaire is interest income on the note.  

    0Reply
  • William H.
    OP
    Investor · Savannah, GA · Member since 2016 · 24 posts · 3 votes
    9y

    @Roman M. I'm with you. I said the same thing, but my accountant says by taking that 1st position on the note that I am changing it from a homestead to a investment. 

    And so here is another option, although maybe not traditional, what about a lease option with a non refundable $170,000 move in fee and a option to buy at $105,000. I mean that would be incentive enough to not back out down the road.

    0Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    9y

    Another choice is to offer a lease and give a ROFR or Right of First Refusal.

    From the Baylor Texas Law Review:

    Although often associated with options, the first-refusal right is not a true option.

    An option is an irrevocable offer that gives its holder a unilateral right to trigger the purchase at the option price during the option period.

    In contrast, a first-refusal right does not give its holder the power to compel an unwilling owner to sell.

    Rather, it merely requires the owner, when and if it decides to sell, to offer the property first to the holder, usually at the price and on the other terms and conditions set forth in the third party’s bona fide offer.50 However, as noted above, the right “ripens” into an option upon notice to the holder of the grantor’s receipt of a bona fide offer and decision to accept it.

    Fixed-price first-refusal rights often are unreasonable restraints on alienation.

    To be enforceable, a first-refusal right must be supported by consideration.

    When the right is incidental to a larger transaction, such as a lease, a franchise, a land sale, or an employment contract, the consideration supporting the larger
    transaction (for example, the rental payments, the franchise fees, the purchase price, or the employment) will support the first-refusal right.

    (“If an option is contained in a contract that is itself supported by a sufficient consideration, no other independent consideration is necessary.”)

    Increasingly, first-refusal rights are created by statute.

    , Winberg v. Cimfel, 532 N.W.2d 35, 39 (Neb. 1995) (holding that a first-refusal right “is not a true option”); Procter v. Foxmeyer
    Drug Co., 884 S.W.2d 853, 859 (Tex. App.—Dallas 1994, no writ) (recognizing a distinction between an option and a first-refusal right); CORBIN, supra note 1, § 11.3, at 468–69 (“A right of first re
    fusal is not an option contract.”); BRYAN A. GARNER, A DICTIONARY OF MODERN LEGAL USAGE 623 (2d ed.1995) (noting that an option and a first-refusal right “are usefully dis
    tinguished in the law of contract”).

    “Option contracts have two components:

    (1) an underlying contract that is not binding until accepted; and
    (2) a covenant to hold open to the optionee the opportunity to accept.” Riley v. WISE.WL(DO NOT DELETE) 8/9/2010
    to compel an unwilling owner to sell.

    Rather, it merely requires the owner, when and if it decides to sell, to offer the property first to the holder, usually at the price and on the other terms and conditions set forth in the third party’s bona fide offer.

    However, as noted above, the right “ripens” into an option upon notice to the holder of the grantor’s receipt of a bona fide offer and decision to accept it."

    1Reply
  • Curt Smith
    Rental Property Investor · Clarkston, GA · Member since 2012 · 2k+ posts · 1k+ votes
    9y

    @Roman M.  Nice tax comments.  Hadn't thought about selling a homestead tax wise.

    CFPB came out a yr ago bringing in 5 yr balloon as ok as long as amortizing.  No interest only to occupants.  , but the key is Ability To Repay meaning:

    - The seller for self interests needs to do full doc on income, debts, savings.  Just like a bank.  

    - Sum of all debt payments including this mortgage is better if Debt/net income is greater than 0.43.   Some banks take up to 0.5 .

    - The statue roughly says: if an owner occupant seller finances (their first deal per year) they just need to do a best effort to make sure the borrower/buyer can make monthly payments.  Of course this makes sense in a self interest perspective of not having to foreclose.

    I'd look for a stronger buyer.  But I do like seller financing to make a ton of $$ off interest.  IE what will you do with the equity?  Have a productive use for it?  Then take payments over time, longer the better.

    2Reply
  • Roman M.
    Investor · Miami Beach, FL · Member since 2016 · 486 posts · 216 votes
    9y
    Originally posted by @William H.:

    @Roman M. I'm with you. I said the same thing, but my accountant says by taking that 1st position on the note that I am changing it from a homestead to a investment. 

    And so here is another option, although maybe not traditional, what about a lease option with a non refundable $170,000 move in fee and a option to buy at $105,000. I mean that would be incentive enough to not back out down the road.

    I am not sure why your accountant would say such a thing. How can you have an investment property if you sold your house and no longer own it. Maybe he/she misunderstood or did not grasp the concept that you will be selling a home. I suggest to get a second opinion on the capital gain.

    Regarding large lease option deposit of $170,000 - I doubt that your buyer will agree. It's too much money on the line.

    0Reply
  • Gerald Hand
    Flower Mound, TX · Member since 2014 · 18 posts · 9 votes
    9y

    If this realtor is any good, they are a good negotiator, hence their low APR. They are trying to throw you an olive branch with a short turn-around of 4 years, but if you are carrying the note, the price must go up and I believe the rate should go up as well. As Jay pointed out earlier, you are not a bank, thus this one investment is very risky since you are not able to lessen your risk over multiple properties, rather, you are seriously exposed here.

    There is a reason the banks are not approving them- risk. Banks are very good at what they do, and often, too conservative, but sometimes taking a page from their playbook shouldn't hurt that much. good luck

    0Reply
  • Greg H.Pro Member
    Moderator
    Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
    9y
    Originally posted by @Gerald Hand:

    There is a reason the banks are not approving them- risk. Banks are very good at what they do, and often, too conservative, but sometimes taking a page from their playbook shouldn't hurt that much. good luck

     When one puts down $170K on a $275K purchase, I would pray for them to default every day.  The issue isn't necessarily one of risk but more than likely a FNMA guideline of 2 years tax returns for self employed

    0Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    9y

    Another option is to lease and give a ROFR or Right of First Refusal.

    0Reply
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