Real Estate Note- Hyperinflation Protection?

[quincy]

Buyer wants to keep it undeveloped and do permaculture, so no home planned with construction loan.

It sounds like an awfully big risk for you, regardless of how you structure the loan.

 

[Stephen1]

There are a number of ways to deal with that. The most straightforward is to use a variable interest rate tied to some common interest rate index, like the prime rate for example. Then if we hit a high interest rate period (like the infamous stagflation of late 70s early 80s) the interest rate would go up along with it. You need to draft in a cap to account for any usury law limits, of course. Get an attorney to help you draft what you need. There are other options to consider but that is more a topic for a finance forum than a legal one. And I'd expect a buyer might not want to enter into such a mortgage deal. With interest rates being pretty low right now a buyer would generally want the fixed rate low interest loans that are available now.

True that variable interest rates tied to some rate index such as the prime rate, when the prime rate goes up your interest rate goes up. But don't forget that if the prime rate goes down then the contract interest rate goes down too. Unless you were able to write into the contract a floor to the contract interest rate. Personally I would see a contract with a floor to the interest rate even less enticing for the buyer.

 

[quincy]

True that variable interest rates tied to some rate index such as the prime rate, when the prime rate goes up your interest rate goes up. But don't forget that if the prime rate goes down then the contract interest rate goes down too. Unless you were able to write into the contract a floor to the contract interest rate. Personally I would see a contract with a floor to the interest rate even less enticing for the buyer.

I personally see nothing at all appealing to a purchaser of property in the type of contract proposed or, for that matter, I see little appealing to the seller of the property. If the purchaser does not qualify for a bank loan - for whatever reason - a seller would probably not want to take on the risk of financing a loan either.

 

[Taxing Matters]

True that variable interest rates tied to some rate index such as the prime rate, when the prime rate goes up your interest rate goes up. But don't forget that if the prime rate goes down then the contract interest rate goes down too.

However, in a low interest environment that downside risk is not that large. Of course the fact that the variable rate is more likely to go up than down in a low interest environment is a main reason buyers would not be keen on entering into them.

 

[FarmerJ]

It doesnt really matter what a buyer wants to do with it once they own it as long as it meets local zoning rules since what a buyer does with it after they own it , But I gotta tell you if I were to buy again on a CD I wouldnt buy with a adjustable rate interest Id want one set amount or Id take my hard earned cash down payment some where else , When I bought my first home for 32k I put down 3,200 CASH and had a CD with a 10% interest rate and yes bank mortgage interest was less. When I bought the 4plex that one was a seller who needed out , 1,000.00 down 10 % interest 20 yr CD again interest was alot less going thru a bank but then the market had begun to improve alot by the time we sold and left the city and the CD vendor -seller still needed some cash and chose to do it by selling off a set number of our payments in the second or 3rd year of the contract ( he told me of it just in case something happened ) even though it had no bearing on the contract between us. I suspect we are not going to see a easy recovery from the financial wreckage due to Covid -19 and I think theres going to be another foreclosure mess coming so where im going with this is if you create a really weird contact for deed you improve the odds of getting the property back in worse shape since what the buyer tells you could be the exact opposite of what they do once they have the property .

 

[Stephen1]

I personally see nothing at all appealing to a purchaser of property in the type of contract proposed or, for that matter, I see little appealing to the seller of the property. If the purchaser does not qualify for a bank loan - for whatever reason - a seller would probably not want to take on the risk of financing a loan either.

Not everyone who goes 'seller financed' doesn't qualify for a bank loan. We once were the buyer of a property for a rental. Interest rates for non-owner occupied property was higher than for owner occupied. The seller offered a rate that was between the two so we took it.

 

[quincy]

Not everyone who goes 'seller financed' doesn't qualify for a bank loan. We once were the buyer of a property for a rental. Interest rates for non-owner occupied property was higher than for owner occupied. The seller offered a rate that was between the two so we took it.

True. But with today’s interest rates, seller-financing is not as attractive - unless you cannot qualify for a bank-financed/conventional loan.

 

[FarmerJ]

Both the properties I mentioned had zoning issues my first house was in a area I think it was zoned M2 or M3 anyway it was not residential but zoned for commercial /business use ( non conforming use ) a 30 yr mortgage with Norwest ( now wells fargo) back then would have cost me 104,000.00 over 30 yrs If the taxes never increased and no idea about the insurance, that 12 yr CD with me paying T&I and no allowance for T&I increases would have cost me around 70k over the twelve years The four plex also non conforming use so I didn't even try to get a mortgage the guy we bought it from was happy with the interest rate , the one he got some cash out of had to be happy over the life of the original cd terms would have generated 83 k in interest alone over the life of the contract.

 

[quincy]

Both the properties I mentioned had zoning issues my first house was in a area I think it was zoned M2 or M3 anyway it was not residential but zoned for commercial /business use ( non conforming use ) a 30 yr mortgage with Norwest ( now wells fargo) back then would have cost me 104,000.00 over 30 yrs If the taxes never increased and no idea about the insurance, that 12 yr CD with me paying T&I and no allowance for T&I increases would have cost me around 70k over the twelve years The four plex also non conforming use so I didn't even try to get a mortgage the guy we bought it from was happy with the interest rate , the one he got some cash out of had to be happy over the life of the original cd terms would have generated 83 k in interest alone over the life of the contract.

Sure. There are reasons for a buyer to look at seller financing. It can be a risk for the seller doing the financing, however.