(Messy) Potential Deal

[Loc R.]

I found a seller who bought her SFR in 2005 (top of the market) for $450,000. It's probably worth $425,000 in today's market.

Did some homework, and no other liens appeared on the title BUT get this: apparently the seller carried back some paper ($90,000) but never recorded it.

So, I took a look at the note itself - it's UNSECURED!

The terms are/were: 10 years, interest only, with a balloon after 10 years.

Uh oh.

So, after more investigating...they agreed to this note in order to save the buyer on property taxes (since property tax in California is a function of the sales price).

The buyer hasn't deducted the private note interest since she bought the house, just the 1st mortgage interest.

So...I'm going to put money that the seller has been collecting these payments without reporting it to the IRS.

Now, as an investor, I'm thinking that there's money to made here, but at the same time, I'm thinking this is a potential disaster.

Thoughts?