selling investment property, held in trust

[TrustUser]

wasnt sure where to post this, but i thought this was the most appropriate place. if i carry the loan, does that affect how i claim the sale ?

i think the main thing i was wondering is if this has anything to do with an installment sale ? i may carry 70-80% of the loan

 

[Taxing Matters]

The details of the transaction matter. A buyer is not likely to want the property if the mortgage is not paid off at closing. So exactly what do you plan to do to carry this loan?

 

[FlyingRon]

Your lender will likely disagree with you selling the property without paying off the loan as well. In a period of rising interest rates they can invoke an almost certainly present due-on-sale clause. They usually find out about it when the new buyer gets his own insurance.

As @TaxingMatters points out, no SANE buyer would take property subject to an existing mortgage. They may jump at it if their credit stinks bad enough to not be able to get their own loan, in which case, you'd probably not want to take them on as a debtor. If they stop paying, you're screwed. You're the one who has the agreement with the bank to make the payments, and if they foreclose, their interests come first.

If you want to do an installment sale, that is up to you, but you really are going to need a lawyer to set that up for you.

 

[TrustUser]

sorry, i guess i wasnt clear. i am selling the property. if i go this route, i would be carrying back a first mortgage. i wont go lower than a 20% down, but look for 30%. so i would end up with a 70% LTV first mortgage or first trust deed on the property. i would be the bank - LOL. there is no current mortgage.

 

[TrustUser]

fyi, this opens up opportunities for people who can afford to pay the monthly interest, but cant qualify at a banking institution. so it can be a nice sales tool, for selling the property. most owners wont carry back.

 

[adjusterjack]

it can be a nice sales tool, for selling the property.

Why?

Is the house POS? Rat trap? Hovel?

 

[TrustUser]

that is the type of post that i just got angry about. i am not reporting it, at the moment. but please try to limit your answers to something helpful.

 

[Taxing Matters]

sorry, i guess i wasnt clear. i am selling the property. if i go this route, i would be carrying back a first mortgage. i wont go lower than a 20% down, but look for 30%. so i would end up with a 70% LTV first mortgage or first trust deed on the property. i would be the bank - LOL. there is no current mortgage.

Ah, that's the kind of information I needed. That will trigger the installment sale rule, but you can elect out of it if you wish. See IRS Publication 537 which explains all about the installment sales rule in detail.

fyi, this opens up opportunities for people who can afford to pay the monthly interest, but cant qualify at a banking institution. so it can be a nice sales tool, for selling the property. most owners wont carry back.

You of course take additional risk with this sort of transaction. I hope you are good at evaluating credit risks of buyers. If a bank or mortgage lending company won't take on the risk of that buyer, that suggests that the buyer isn't likely to make the payments under the mortgage. So you'd need to be better at judging the credit risks than those whose job it is to make these loans on a daily basis. That's why most sellers don't do it. I should think that in CA's hot real estate market it would be easy to find a buyer than can qualify on their own for a mortgage, eliminating the need for you do have to deal with it.

 

[adjusterjack]

that is the type of post that i just got angry about. i am not reporting it, at the moment. but please try to limit your answers to something helpful.

It was a legitimate question. Why would you need such a HIGH RISK "sales tool" unless you were trying to unload a distressed property. It might make sense if you were selling a property that needs expensive fix-up, if you can find a buyer with enough cash for 20% or 30% down. A poor credit risk seldom has that kind of money.

It doesn't make much sense in today market where qualified buyers with cash or financing are buying everything as soon as it comes on the market.

 

[TrustUser]

hi tm, as a hard money lender, the biggest thing i look for is equity. 30% down is what protects me. not the credit score of a buyer. but there are lots of reasons why people have problems getting a loan, but are not bad credit risks. it is very difficult for me to get a loan, yet i even have an outstanding credit score. people have so many incorrect thought patterns about hard money lending. first, they think that the only people who borrow hard money are poor credit risks. that isnt really true. although there are some bad ones, for sure. there are some different situations with this deal, that i do not care to discuss. thank you for answering my question. i was thinking that it might involve an installment sale. i will have to read up on it, to see if i want to do that or not, if i end up selling it that way. someone called me, and wants to make an offer, which is why i am asking, now !!

 

[TrustUser]

It was a legitimate question. Why would you need such a HIGH RISK "sales tool" unless you were trying to unload a distressed property. It might make sense if you were selling a property that needs expensive fix-up, if you can find a buyer with enough cash for 20% or 30% down. A poor credit risk seldom has that kind of money.

It doesn't make much sense in today market where qualified buyers with cash or financing are buying everything as soon as it comes on the market.

there are other situations involved that i do not care to discuss. i dont consider it to be a "high risk" sales tool. it all depends on the down payment. if they offer me a 30% down payment, then it is almost a "no-risk" sales tool. i would be able to foreclose and make money on the deal. people dont walk away from several hundred thousand dollars.

and i will repeat - a person who does not qualify at a bank is not necessarily a poor credit risk. there are many, MANY reasons for not qualifying other than a poor credit score.

if you would have asked me in a nicer way, i would have told you that i put a lot of money into it, and have the best damn house in the entire community of 2000 houses. so you can imagine my irritation at your question, and the way you posed it. and my absolute patience with you. so again, i will suggest that members just answer the question, instead of making what was very close to accusations. that were absolutely incorrect, i might add.

 

[TrustUser]

hi tm, there will be a gain. but the capital gain is gonna be sent to the individual beneficiaries. can you give me any generalities for why it would be better to claim it all in 1 year, versus claiming it in multiple years ?

 

[adjusterjack]

there are other situations involved that i do not care to discuss. i dont consider it to be a "high risk" sales tool. it all depends on the down payment. if they offer me a 30% down payment, then it is almost a "no-risk" sales tool. i would be able to foreclose and make money on the deal. people dont walk away from several hundred thousand dollars.

You haven't said whether you've done this before or this will be your first time.

If you've done it before successfully then I bow to your experience.

If this is your first time out then you are very naive to believe that people don't walk away from large amounts of money.

Been there. A long time ago, when I was young and foolish I sold my very nice home for $72,000. The buyer put up $19,000 cash (a bit more than 25%, assumed my $40,000 mortgage, and I financed $13,000.

I thought I had a sure thing because he put up $19,000 cash and I, like you, didn't think anybody would walk away from $19,000. Well, he did. Payments stopped after two months and I foreclosed. By the time I got the house back, it was a mess, there was a junk car (no wheels) in the back yard and 6 mature pecan trees were dead. I barely broke even when I resold the house.

Multiply those figures by 5 and you get today's dollars.

Now that I've had my say you can do whatever you want to do and good luck with it. I hope it's successful.

 

[TrustUser]

i dont want you to bow to my experience. large is a bit of a relative term. i have done many, many hard money loans. if you talk to lenders, what they stress is LTV ( loan to value ) on a loan.

i would say that the number one most important thing that i have learned is just what i said - people make their decisions based upon dollars, not ltv. so all other things being equal, a bigger loan is safer, because there are more DOLLARS of equity in it.

this property has an asking price of 1 million. 30% of that is $300,000. people do not walk away from that much money. foreclosure costs are peanuts, compared to that sum. whenever i have had to foreclose on a property, it is because the value is not there.

the argument could be made that the property will fall in value by that much. but i would say that is unlikely. although it is true that values are way high, at the moment.

i dont have the sort of wealth that i would ever have anywhere near that much money in equity in a loan. the loans i do are very seldom that large, much less the equity in it. but this one is a complete property, not just a portion of one.

nothing is perfect. but a loan like this is about as safe as you can get, regarding a loan.

nowadays, banks have all these formulas that they use. and their system caused an almost complete destruction of our economy. so i do not have any sort of reverence for the way they do things. i would be more apt to call it stupidity. it used to be that banks kept all their loans in house. and they personally knew their borrowers, etc. things ran much more smoothly.

it is difficult for me to get a loan, because i dont have w2 income, i dont meet their income to debt ratio. money in the bank does not account for much in their system. the bankers themselves, are not the problem. they are all obligated to follow the rules set by the fed or fannie mae, or whomever.

most of the time, i have had enough money in the bank to actually buy the property. i point that out to the loan guy, when he tells me that my income to debt ratio is not good enough. so i find their system to be close to horrible.

i have 40 years of credit ratings. have always paid by bills. have a good deal of funds and properties behind me, etc. etc. yet i cant get a loan. i just chuckle at the ineptness of that system. but i dont need them.

a hard money lender knows that the only thing that saves him is the equity in the property. prior credit ratings do not ensure future payments. if you want to make sure you can get your money back, the only thing that counts is equity in the property.

equity dollars is to a hard money lender as location is to a real estate man.

thanks for your input

 

[Taxing Matters]

hi tm, there will be a gain. but the capital gain is gonna be sent to the individual beneficiaries. can you give me any generalities for why it would be better to claim it all in 1 year, versus claiming it in multiple years ?

Bear in mind that in general for the income to pass through to the beneficiaries to be taxed on the gain they must receive at least sufficient distributions during the to cover that income. So a big part of whether you elect out of installment sale treatment depends on what distributions you expect to make over the next 5 years. You don't want a situation in which there are not sufficient distributions to cover the trust income because then that income is taxed at the trust rate schedule, which is much more progressive than the individual tax rate schedule.

You want to look at the trust's expected income and losses during the next 5 years. Will the trust have losses in some years to offset the income? That may affect your decision on which way to go. During that five years are tax rates expected to change? That of course will also affect the choice. And what other income will the beneficiaries have during that 5 years? If there are some years that they expect high income, that too I would take into account. That would require some number crunching each way to see what the best likely outcome would be.