Yes, the contract for deed violates the DOS, but so does a L/O. As long as the payments are being made this shouldn’t be a problem. Contract for deed sales have been pretty popular and have been around for years. I haven’t heard of any lenders calling a loan due because of it unless the payments weren’t being made. And if it’s a VA Loan then selling on contract doesn’t violate the DOS since VA allows it.
The home is considered a sale when selling on contract. But if this is the seller’s personal residence and they lived in the property for 2 years out of the last 5 years then they are tax exempt from any gains up to $250k if filing single and up to $500k if filing jointly. So there are no taxes to pay if they sell. And if they didn’t meet those requirements then selling on contract would spread their tax liability out anyway by selling on contract. The taxes would be due as you recieved the payments VS. being taxed all at once on a straight out sale.
A seller I contacted last week called today. He is desperate to get out of his current home. His wife wants to start on their new house in a new neighborhood (actually my neighborhood).
The house the wife prefaced it by saying her husband was very negotiable on the price, $189K. I found out today that they owe $180,000 on a high interest loan. I guesstimate it is around 9% as he didn’t know the rate. The payment is $1650 PITI. They haven’t listed it with a realtor. A realtor told them he could rent the home for $1695 minus his management fee. He said is thinking of renting it himself for $1500 a month. I told him I could lease it long term but for would want to pay less as I would lease it long term and maintain the property. That was before I knew what his payment. He asked how much lower. He even offered to kickback part of the payment so he could show the bank a high rent to increase his lending potential. Bottom line is that he is willing to take a loss per month on the monthly payment. Given this, how would you structure the deal?
I have listened to Legrands L/O course. Problem is that it doesn’t give the downside of a sandwich L/O’s. I searched the archive and found bad tenants and seller bankruptcy. I do not think seller bankruptcy is high risk at this time.
My fears:
Size of deal - My first deal (was just practicing my phone skills). Worried I can not find a T/B willing to pay ~$1800 a month for a 3100 sq. foot home (Alabama). I may run an add this week to guage the market. Good idea? Also thinking about flipping the contract to get out of the middle.
Being able to close on the deal once a T/B exercises the option. I have read it is difficult to close a sandwich L/O because of title seasoning. Comments?
Any other advice???
Ready to jump just don’t want to land in the frying pan my first time out,
Eric
If you don’t have the means to make the payments on this while the property sits empty or if you ended up with a tenant/buyer that stopped paying then the last thing you need is to get involved with a deal like this where you will remain in the middle. You just don’t have the reserves to cover yourself should something go wrong. Based on your post it also sounds like this is a higher end property that is priced above the median priced homes in the area which means it could create much longer holding costs finding someone that can afford a property like this which adds all the more risk on your part. So remaining in the middle on this would not be an option for you. You would need to get in and get out with a quick profit!
The seller is saying he wants to be able to show the bank he’s getting a higher payment to off set his debt ratio and is willing to just kick back something on the rent. Not a good idea!
If the seller needs to show the bank a higher payment and his goal is to off set his debt ratio then here is the way I would handle it:
I would explain to the seller that just renting the property out or doing a L/O that the bank will only allow 75% of the rent to be counted as income. Which means the other 25% is going to be counted against him as additional debt which may affect his debt ratio to much. He won’t be able to get 25% above his payment amount as rent to off set the difference.
So instead the way to go on this would be to sell it on a contract for deed. If he sells on a contract for deed the bank will allow 100% of the payments from his buyer to be counted as income which would off set his payments being counted as additional debt and wouldn’t affect his debt ratio to qualify for the other loan.
Then I would write up a contract for deed that is assignable and make the deal subject to me first being able to find a suitable tenant to place into the property. Which means until I find someone we don’t close the deal and the seller continues to make the payments until you are ready to close in 60 - 90 days.
Then you can write up the contract for deed to where it would mirror his payments that the buyer would have to pay on the contract.
Then run an add in the paper something like:
JUST TAKE OVER PAYMENTS!
$10k down moves you in.
NICE 3100 Sq Ft Executive Home
Call XXX-XXX-XXXX
Then find a buyer with $10k to put down and assign your contract to them taking the $10k as your assignment fee.
Your risk is the advertising cost to try and find a buyer.