Need ammo for seller finance deal

[Sam M.]

I found a property owned free and clear by someone that now lives in an assisted living home.
I would like to talk to her about seller financing and need to know the pros of a deal like this for the seller.
I am wondering if she was to sell it outright would she be taxed on the lump sum just like the rest of us or is it different for the elderly. I will be asking her what she needs as far as taking care of herself and how to best structure the deal to help her out as well as making it lucrative as a business deal.
I am just now beginning analysis on this property but I see my exit strategies as being fix and flip sold with or without the adjacent build able lot (included with the house) or move a home on to the adjacent lot and sell as a rental or fix it up and sell to an end buyer. Great neighborhood and excellent view, house needs work though and buildable lot is empty. Well almost empty...It has a "garage" on it that is not safe to walk through
:D

[Jeff B.]

As I have a tenant who has recently asked about owner (seller) financing I did a plus and minus.

Pluses for owner:
You can transform home equity into a monthly income stream, typically earning 8-11% interest

It's easier to sell non-standard property, such as undeveloped land with seller financing (land contract sale).

Your closing costs can be much lower.

With seller financing, terms are set by you and the buyer, giving you both greater flexibility.

Unlike a cash sale, seller financing often keeps you from being pushed into a higher tax bracket.

There are services that will handle billing, calculating the changes in principal and interest, and separating the monies for property taxes and insurance for the escrow. They will also send late notices with fees. noteworld is one company, one person said they pay 14.95 a month but this price varies depending on the level of service they provide.

On an installment sale, you only pay taxes on gains to the extent you receive payments each year.

Minuses for seller:
The IRS taxes the Owner on the interest (income) they receive from the buyer. The minimal rate the Owner should use is called the “Applicable Federal Rate†and is updated monthly and is listed on the IRS website. When creating the loan the Owner would reference the Applicable Federal Rate for the month the loan was written and set the interest rate at a rate greater or equal to the Applicable Federal Rate.

Must report to the IRS the total amount of interest paid by the buyer at the end of each year. (1098 mortgage interest statements)

Seller must record the buyers payment, calculate the changes to the principal and interest, subtract the appropriate amount for property taxes and insurance.

The buyer can destroy the contents or the property and let it fall into foreclosure and all the seller would receive back is the property.

Buyer advantages:
Easy qualification, buyer can have poor credit and still qualify for note.

No loan costs.

Faster Closing then having to wait on a bank to qualify and close the deal.

The buyer has time to repair their credit and then try to qualify for a conventional (bank) loan with a better interest rate

The main hurdle you have is in how you approach the home owner. I would approach them and let them know that I believe I can help them with selling their home. Then be honest about what your intentions are and be able to produce the results you present.

The home owner has one thing going for them and that is if this was their primary residence 2 of the previous 5 years they are exempt from capital gains tax of $250,000 for a single or $500,000 for married couple. Hence they can just sell the home on their own and have the gains now to fund their future financial needs.

[Bill Gulley]

Hi, BE VERY CAREFUL HERE!
You said some magic words, ASSISTED LIVING. Before your seller finances the sale of the property, you need to gain the confidence of the seller and talk about their position.
If they are, or will be, could be, in a situation where medicare or state assistance is paying for their nursing home/assisted living care they must qualify for benefits. Certain property is exempt from qualification, their primary residence being one, a wedding ring, a car, clothes and small items with no significant value. They can not have more than $999.00 in assets. They could own a $85,000 home on an exempt basis, but if it is sold the income will disqualify them from benefits until they spend down their money and become requalified. If they receive $300 a month, of what ever your payment might be, that too could put them over their qualification limit. If that happens, the assisted living/nursing home will require them to pay their way and if it is not sufficent, they will have all kinds of problems.
Now, if they are well off and paying for their own care, they still need to look at this with the estate and future qualification in mind. There is also a seven year look back period for people who sell or transfer assets which may need to be addressed.
So, a big selling point is that, if they have assets, the promissory note you give them is valued at its market value, not the par value, at the time of qualification for benefits. It is usually up to them to have the note valued, say with three bids for a sale of the asset. This will be discounted. The value between the amount owed (par) and the discount lowers the amount they will have to pay before they become qualified. If the promissory note has alot of unconventional agreements or accruals of interest, options to extend, etc. the market value of that obligation goes down! In fact, some notes may not even be marketable, thus no market value, which means no qualification amount is established. This can be the ONLY WAY, someone might transfer a property and retain anything for heirs in the future. In some states, it is actually unlawful to do estate planning in the contemplation of avoiding transfers for the benefit of the state and qualification for medical assistance, so, anything you do needs to have reason and cause for the terms you design. Let's say you don't head this warning thinking it won't be your problem. You do a note and the note holder becomes incapacitated. The family applies for benefits. The state requires the not to be encumbered. In this analysis, it appears that that attempted to pass assets to avoid paying for their care. It goes to an adminstrative hearing and found to be so, now you have problems, the state can invalidate the deal if they see it as fraud on your part or the seller's and you were a party to it. In the end, you'll have legal problems, court appearances, accounting that is beyond your imagination and if things were determined to be at arm's length, you'll keep the property and will be motivated to refinance the deal to provide cash to the state, when you did not expect to. You probably won't lose the place, but you can have extreme problems, if you don't do your deal properly. And, don't forget, family. They can always come back and contest the deal that grandma did while under medication, etc.
Taxes as pointed out above is a major benefit. I'd suggest you pay the $14.95 for servicing and the seller will not be involved since they have a limited capacity, they don't want the hassle!
Imputed tax rates are usually not a problem in seller financing and an adjustable rate, while manageable for the servicer, is not a beginner note to draft. To stay out of trouble, I suggest that you get the seller's attorney or CPA involved, let them take the heat. If you approach these professionals with the seller, or on their behalf, they are less likely to tell their client to forget it and not talk to you! Many will do that, but not if you explain your deal and your concern for the seller's interests.
When you have an elderly person as a seller in a seller financed deal, beware of potential problems for them as the deal can come back to haunt you. Keeping them in a protected and well thought out plan for their needs is very important! Food for Thought! Bill

[Brian Haskins]

Free and clear deals are great. You have lots of options you can have them owner finance and possibly even loan you money for repairs. The options are endless.

Brian Haskins

[Sam M.]

Bill,
I had to back out of any dealings with my ex as she is prone to "asset shifting" Scared the bejebers out of me when I realized what she was doing. Good feedback.
Most of the properties I see here are over leveraged and it is fun to try working out a deal where they own it free and clear. Just a matter of finding out what the seller needs and go from there.

[Bill Gulley]

That scared you? And you repell? LOL Well I guess you could fall harder if she messed up! Bill

[Sam M.]

Originally posted by Bill Gulley:

That scared you? And you repell? LOL Well I guess you could fall harder if she messed up! Bill

She was trying to pull me into it. Guess I mainly scared myself realizing I was pretty gullible.
Heights are my drug of choice, I just "have to" climb to the top to see the bird's eye veiw :roll: much to my parents dismay.

[Bill Gulley]

Originally posted by Sam Martin:

Originally posted by Bill Gulley:

That scared you? And you repell? LOL Well I guess you could fall harder if she messed up! Bill

She was trying to pull me into it. Guess I mainly scared myself realizing I was pretty gullible.
Heights are my drug of choice, I just "have to" climb to the top to see the bird's eye veiw :roll: much to my parents dismay.

I really enjoyed it years ago too, my son, the Marine, just had to go by himself and fell 30+ feet and broke his arm and collar bone! ON REPELL! No Reply, lol

Back on course, a comment was what happens to the second, a note purchase does not effect any other liens in position, they remain as they were before the assignment. B

[Mike C]

Sam,

There are many variables to consider. The biggest potential problem with an owner in assisted living is if you work out a good deal, either her or more likely her family, may eventually decide you took advantage of their poor, old mom and swindled her. Make sure she is still competent to make decisions and that her family don’t have power of attorney over her assets. Either way, I would want some of her family around in the negotiations just to make sure everyone is on board. I would also get them to sign something saying they understand what you are doing (even though they may have no legal interest in the proprety) just to help ensure they won’t change their tune later. Yes, I am paranoid.

Yes, if she receives cash, she has to pay the taxes. The best angle to use from her standpoint is that if she does owner finance the property to you, she can then pay those taxes over time as an installment sale instead of all at once in the year of the closing, ignoring any tax savings or exemptions she may have/be eligible for, i.e. maybe she just moved into the assisted living center and thus the property may qualify as her primary residence and so on. Things you need to find out and haven’t indicated here that may affect what you can use to sway her to sell on owner financing. Depending on her and her family’s circumstances, they may be much better off with the income stream of owner financing as opposed to receiving a lump sum.

The only way to answer these questions (and many others) is to talk to her and her family and see what you can work out. If nothing else, it can be a good learning experience for you.

Best of luck

Mike C

[Bill Gulley]

Hi, I have to disagree with Mike here on getting family involved. You should not suggest that as a course of action to do any negotiations, if you can help it. Absolutely ensure that your seller is competent. I have even asked nursing staff questions about persons I have delt with in those situations. Interview them, get to know them , ask about family. I always say something like, what are the kids going to say if you sell the house? This is where you'll find out if they feel like they are in charge or if they better ask the kids. Go from there. If they want a family conference, then do that, if they say, "well, it's my house, I can sell it if I want to!" Deal with them confidentially. Later after you strike a deal and enter into the contract, I always suggest we talk to their attorney and I tell them along the way that we will be doing that if they wish to. If they do, then do so. Make an appointment and run it by them. I always ask the attorney if he would like to close the deal (if you look for opportunities for an attorney to do work for their client they will eat it up! Walk into that meeting as you have the deal, because some will try to screw it up so they can have it in the estate or what ever their motivation is, but many will say, "well that's fine Mary Lou, I'll redo your will". Seek advice from their attorney, that's all the better. To this point the kids have not been involved. When kids get involved and they argure about the matter in the first thirty minutes, walk away, because if the family gets all hot over the deal, 99% of the time, the seller is going to fold to their wishes. The kids will always think they can get more! Ask what they think it is and then take an option on it and tell them if they get an offer for a grand more, you'll release it and they can sell it. Guess what, they might have it appraised, they might have a Realtor look at it, they may even list it for awhile, but chances are it won't sell, why, because every time there is a contrcat the kids will get involved. When your option has held for 90 days, call them. You can tell the kids that it's been on the market and it didn't sell. Mom needs the money or whatever, and there you go! Work with older people, you'll learn alot. If the family sees you really are trying to help, you shouldn't have a problem, unless one of the kids wants the house. If that's the case, you would have heard that a long time ago and if you had bought it, and kept the family away, you would really hear about it.

By the way, if there is a foreclosure, in minuses for the seller outlined above, it was mentioned that they only get the property back. They are also entitled to any deficiency judgement if state law allows it. Private lenders have the same recourse as institutional lenders. Bill

[Myka M.]

I am agreeing with Mike and Bill here. Competency was the first concern that popped into my head. I say this with experience as my mother is technically incompetent, however, not legally incompetent as of today. Like any caring family member I would question any large decisions like this coming from her at this point.

Not to discourage you from deal-making with with of age adults. Just watch the length of your deal, disclosure, make double sure there is complete understanding and make sure that you have a lawyer draw up your paperwork for this, even if you have standard forms that you already use. In all seriousness, if this person passes on and you still have a balance you want to make sure your deal is secure.

I think bringing the family in would be like asking a bank for a short sale at below listed value and then calling your end buyer right in the banks face and setting up a double close for a $100,000 profit.

If you bring the family in and it is ever in question that she is incompetent then you could have a situation where someone could say well if you thought she was competent why did you invite her family to see if it was okay? Not to mention that it could possibly be a slap in the face to the current owner.

Or I could be wrong. These are our personal opinions, I am not a lawyer. In a nutshell, consult your lawyer to get the best answers.

[Bill Gulley]

Hi, yes I have asked tha question before and got an ear full about, "it's my house and I can seel it if I want to!" It can seem like a slap in the face as you put it. You need to be tactful!

Hows, the deal going? Bill

[Sam M.]

I have a more seasoned investor working that deal. I will just be doing the rehab for him if he gets something put together.
Still pluggin away though. I will be able to post a "got my first deal" before too long I hope. :)
On the other one I was talking about whererin I believed the aunt was the executor of the estate. I just learned that she no longer has athority over the asset as it is now in the boys' name. I am working on that one again.