which is better for seller?

Hello All,

I’m playing around with some numbers on a seller financing deal, and need your opinions. Buyer is comfortable with a payment less than $900. Which of these scenarios is better for the seller and why?

$140,000 @ 6.5% for 30 years = payment of $884.90

or

$115,000 @ 8.5% for 30 years = payment of $884.25

This is a short term hold for seller, so I’m thinking that it’s not going to matter if the income is from cap gains or interest since it will all be taxed as ordinary income, right? (i.e. - no installment treatment for taxes on dealer property)

In the first scenario, seller would take more of the tax hit up front since the cap gains on the sale would be due in the year of the sale, right?

On the other hand, if the buyer refinances out of the loan, seller gets more money in scenario one than in scenario two.

What do you all think, and what else haven’t I thought of?

–Natalie

You probably thought of it, in case you didnt, the seller in either example is extremely likley to be in violation of the “safe” (secure and fair enforcement mortgage liscensing act) act signed into law on July 30th 2008.

[QUOTE=AmotoXracer;883879]You probably thought of it, in case you didnt, the seller in either example is extremely likley to be in violation of the “safe” (secure and fair enforcement mortgage liscensing act) act signed into law on July 30th 2008.[/QUOTE]

How do you avoid being in violation??

[QUOTE=Brandon (NE Indiana);883881]How do you avoid being in violation??[/QUOTE]

The way I understand it - The SAFE act is a fedaral mandate forcing the states to come up with laws regulating mortgages, mtg origination, and servicing. So you have to refer to the states laws to find specific exemptions.
The underlying theme and intent of the law is simply to train test and liscense anyone who offers or negotiates terms of a residential mortgage loan or services the loan.
I havent spent much time on it. I skimmed the the “model” the feds have set forth as a general guide for the states. As you might expect, the definitions are vague and ambiguous, but its not looking to good for private mortgages created, originated, or negoitated by individuals on property 4 units and under.
Hopefully somone around here has put some serious time in studying the issue and found some legit loopholes, or maybe things have changed.
I will say that it does not seem to apply to commercial property.

I spent some serious time looking into this in 2008 and 2009. And a serious amount of time getting advice that was mostly conjecture from even the most experienced note people. The CA version of the law does not address seller financing and the CA DRE website and FAQ seems to be intentionally not addressing whether or not you are in compliance if you seller finance your own property. There were all kinds of ideas out there on the message boards that as long as you let a licensed mortgage broker “broker” the deal that somehow you are in compliance. There is nothing in the bill that says that getting a broker involved would make you in compliance. The bill says you can’t “offer” or “negotiate” or arrange financing if you are not licensed. So technically that means you can’t negotiate loan terms with a buyer and then hand it over to a broker.

Since everyone was just going in circles and even my RE lawyers were useless and just guessing what was to be done, I ignored the law and sold with seller financing. And am doing so now. I have something for sale right now and every agent that called today wants seller financing for their buyer. They aren’t arranging for a broker in the deal. Seller financing deals are closing every day in my farm and I haven’t heard of a problem yet. The problem is going to be when a borrower sues a lender and cites the Safe Act. Then we’ll have something to go off of. Until then, can we stop bringing it up as a deterrent for seller financing unless we can shed some light on what the real consequences are. If there is something to go off now, a clarification or revision of the law or case law that someone can link to, I’d be much obliged.

[QUOTE=Kristine-CA;883884] I ignored the law and sold with seller financing.[/QUOTE]

Since im a live by the sword, die by the sword kind of guy, I love the action plan quoted above.

Its worth mentioning, there may be a very clear cut and dry solution for the original poster depending on the state laws. CA may be very vague and unclear, no one would be surprised.

Natalie’s question

Natalie: sorry we got derailed by the ever present SAFE Act/Seller Financing issue and ignored your question. In the scenarios you post, you’re showing a 25K difference in value. What’s the real value? If the seller wants to sell that note, now or in the future, you want the face value of the note to be in line with the property value and you want the highest interest rate manageable. There are lots of note buyer’s out there. I got a call yesterday from an agent who has note buyers that will buy them at face value, unseasoned, at closing if the interest rate is 9%. The borrower has to have a down and the value would have to be accurate.

What’s the goal in selling this one via seller financing? I can’t answer questions about tax consequences. But I like to brainstorm about creating a cash flowing asset. Is the goal to sell something that doesn’t qualify for financing? To someone who doesn’t qualify?

I had a feeling the Safe Act issue would come up, and I appreciate the discussion on the subject.

Seller is into the property for around 80k. ARV would be approx 170k, but the place is a real dump. Appraisers in my area aren’t real swift on giving “as is” values. I think if marketed to investors house would pull 100k in current condition, possibly more if put on MLS.

Buyer is going to attempt to get financing, but I’m not sure if the house will pass FHA standards. It will depend on the appraiser. Beauty is in the eye of the beholder, though, and this 9 year tenant/potential buyer would love to buy it. Seller would be happy to not have to put this nice tenant out, and isn’t so worried about getting the cash back out quickly.

I wonder how the accounting becomes even more clouded if seller takes a big gain and then has to take the house back. I hope Dave T is hanging around here.

–Natalie

I believe most State laws have exceptions for Seller Financing under the SAFE act, so I will ignore that part.

I must not understand the original question, because I can not understand why the seller would not just put in a prepayment penalty in the loan to expire one year after his aquisition date, and maybe reduce the $140,000 number a few grand to accomodate the buyer. It seems irrational to limit the options between just those two.