Help -- Will this come back to bite me? - Posted by Robert Fraim

Posted by Rick Roberts - KC on November 16, 2000 at 20:12:34:

don’t get bit.

Rick

Help – Will this come back to bite me? - Posted by Robert Fraim

Posted by Robert Fraim on November 16, 2000 at 13:35:15:

I’m trying to sell an investment property. Just got a call from an agent (the property is not presently listed, but he happened to know about it) who wants to present an offer. He’s coming by tomorrow (Friday, Nov. 17)

The buyer wants to inflate the selling price and have me take a second mortgage. Then after the deal closes I’m supposed to forgive the note. I haven’t seen all of the particulars and I’m not sure how they are going to word the contract but that’s the basic idea. I’m sure this has to do with wanting to get a larger first mortgage and needing to improve his loan-to-value ratio.

I have two concerns:

  1. If the buyer ever defaulted and the bank had to foreclose, would they take the position that I had been involved in attempting to defraud them somehow – by creating an artificial price?

  2. Since I would be 1099’d for the higher (inflated) price when in fact I’d be getting less if I don’t collect on the note, how do I account for this for taxes? Normally, it seems to me, before you can write off a bad debt you
    have to show a reasonable attempt to collect it. If I just walk away from it and forgive the debt, I’ve really just given a gift to the guy, not taken a loss on a debt.

I’d be interested in any insights from those here who are certainly more experienced and expert than I. Thanks in advance for your help.

Rob

Re: Help – Will this come back to bite me? - Posted by Ron Ohara

Posted by Ron Ohara on November 16, 2000 at 22:55:52:

I have to agree with Rick. You may want to speak to a Real Estate Attorney regarding what the reprecussions could be against you in this sort of transaaction. If you really want to find out if this is on the up and up, have everyone meet at your attorney’s office and them go over as to what it is they think will happen. Your attorney will certainly have questions and hopefully, they have the right answers.

Re: Help – Will this come back to bite me? - Posted by David Butler ANN

Posted by David Butler ANN on November 16, 2000 at 22:10:53:

Hello Rob,

Whelp… Rick already dropped the hammer right where it belongs. What might be worse, is this could be the basis for a sound deal otherwise… but now you have to determine if both the agent and his client are hustlers, or simply yokels who don’t know any better!!! So the due diligence side of it is now more complicated than it would have been otherwise.

With or without these two Yahoo’s though, there are some things you might want to consider. Anytime a fellow is carrying all, or part of the financing, he is giving up something… cash now. So, he ought to be trading that for something else, right? If you are in an average market where seller financing is fairly common, you should be looking to get somewhere close to FMV. If seller financing is not so common, or the local market is hot, or your borrower can not obtain other “normal” financing for this type of deal, you should likely be in a position to possibly even get a small premium over market. I am assuming of course that this is a sound investment property that will meet the buyer’s objectives otherwise.

And their are some compelling reasons to possibly consider financing the deal yourself, without any smoke and mirrors. Many sellers mistakenly think they need to pull all of the equity out of the sale of their property. Uncle Sam doesn?t seem to think that?s such a good idea, especially for investors.

Otherwise, he wouldn?t spank us so hard with those tax hits when we sell for cash out, or reward us for structuring our real estate sales in certain other ways. The U.S. Tax Code provides several strong incentives make it exceptionally profitable for you to “both a lender, and a borrower be!” Section 453 (Installment Sales) allows investors to avoid the bulk of their taxes due on capital gains. Utilizing the Seller carryback technique, we can defer these taxes, paying them in very small increments over a long period of time. There are several other benefits as well.

Seller financing, if structured properly, often creates an opportunity to maximize the sale value of our property. A carryback note also gives us a well secured, high yielding, near-cash asset that offers greater flexibility in building up our investment portfolios. Such notes allow us to add strength to our financial statements, while earning much better returns than cash accounts ? yet still providing a valuable tool for further acquisitions and pyramiding the growth of a tax sheltered wealth accumulation base.

Besides the tax break lending our equity brings to the table, Uncle Sam throws investors another meaty bone as well. By way of Tax Code Sec. 163, we are allowed to write off interest on debt used to finance the purchase of our investment assets!

Financing a high percentage of the purchase price provides a large interest deduction in the early years of ownership. This deduction generates a tax shelter which shields any positive cash flow, and the noncash equity buildup occurring through principal reduction on the loan, from taxation. At times, it may even shelter some of our other income from taxation as well.

So, depending on your objectives, and what you intend to do with the sale proceeds, you may have multiple options to work with. One example might be found by taking a look at a topical post I did last spring, BOTH A BANKER AND A BORROWER BE!, which is redated September 5, 2000, on page 7 of the archives at: http://notenetwork.com/at.cgi?a=118510&e=Messageboard

You might find that discussion helpful in exploring what options you may have that work to your advantage while moving the sale of this property along.

Hope this helps, and best of luck!

David P. Butler VP Broker Relations
America’s Note Network