Real Estate Note- Hyperinflation Protection?

[Putin Rules]

Can a seller offer owner financing at a certain interest rate and protect the amount due from hyperinflation or a currency collapse? For example, a seller takes back a note for $150,000 at 5% over 10 years but the country experiences hyperinflation wiping out the value of the note in the middle of the term. How would one draft a contract to protect the seller?

 

[LdiJ]

Can a seller offer owner financing at a certain interest rate and protect the amount due from hyperinflation or a currency collapse? For example, a seller takes back a note for $150,000 at 5% over 10 years but the country experiences hyperinflation wiping out the value of the note in the middle of the term. How would one draft a contract to protect the seller?

That is sufficiently complicated that you really should not be getting information from an internet forum. You should consult a local real estate attorney.

 

[FarmerJ]

If your Attorney draws up for you a valid contract for deed where the buyer is making installment payments ( P & I ) to the seller unless a state law forbids early payoff of principle penalty then that contract cant be changed with out consent and both buyer and seller obligations do not change. Ive had two homes that were bought on a contract for deed and if the contracts said I couldn't do a early pay off I would have refused to buy. there are contract for deed buyers who have enough positive changes financially to be able to get regular mortgages before a contract for deed is paid off. NOW if the seller AKA CD vendor was planning on selling to another person their interest in the CD say at a discount to the new buyer( investor) then the discount to be cashed out is between them. SO if by chance your wanting to sell via CD make sure that the interest amount is enough to make it more enticing should you have to sell your interest to a investor but not so much that you set a buyer up for failure which could cost you dearly in repairs to a property in order to re sell later should the buyer breach the contract.

 

[FarmerJ]

If your Attorney draws up for you a valid contract for deed where the buyer is making installment payments ( P & I Does your states laws forbid early payoff of principle penalty? Once the contract is signed that contract cant be changed with out written consent and both buyer and seller obligations do not change. Ive had two homes that were bought on a contract for deed and if the contracts said I couldn't do a early pay off I would have refused to buy. there are contract for deed buyers who have enough positive changes financially to be able to get regular mortgages before a contract for deed is paid off. NOW if the seller AKA CD vendor was planning on selling to another person their interest in the CD say at a discount to the new buyer( investor) then the discount to be cashed out is between them. SO if by chance your wanting to sell via CD make sure that the interest amount is enough to make it more enticing should you have to sell your interest to a investor but not so much that you set a buyer up for failure which could cost you dearly in repairs to a property in order to re sell later should the buyer breach the contract.

 

[FarmerJ]

I forgot , look at it this way there is no real way to know whats going to happen to a economy , look at how the housing market fell apart and what it was like before that. Before it went bad a lot of people bought high and it all went to crap and the property lost value. When I bought the four plex we had its market value dropped by 18k in about 2 years, one of my friends had bought a home for 40k on a 8 year CD and in her 12th year in it her homes value dropped to 14k , she joked that her property taxes were finally affordable -cheap. I imagine to this day she still lives there since our old neighbor hood ( Back when I rented 2 blocks from her) has become a craphole.

 

[Taxing Matters]

Can a seller offer owner financing at a certain interest rate and protect the amount due from hyperinflation or a currency collapse? For example, a seller takes back a note for $150,000 at 5% over 10 years but the country experiences hyperinflation wiping out the value of the note in the middle of the term. How would one draft a contract to protect the seller?

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.

 

[quincy]

Can a seller offer owner financing at a certain interest rate and protect the amount due from hyperinflation or a currency collapse? For example, a seller takes back a note for $150,000 at 5% over 10 years but the country experiences hyperinflation wiping out the value of the note in the middle of the term. How would one draft a contract to protect the seller?

What is the name of your state?

Why would a purchaser sign such a contract?

 

[Putin Rules]

California.

Any contract using value besides the US dollar, as debased as it is, would be a hard sell. A seller's principal would be protected if the contract required payment in gold, dividing the principal financed by the price of gold at contract date, That does not protect interest and principal monthly payments should there be an reset, devaluation or a "new dollar" introduced to solve the massive debt problem, or a stampede of investors out of markets crashing the financial system.
On the other hand, the deed of trust enable foreclosure in the event of deflation and economic depression where the buyer is unable to make payments in an economic downturn with no inflation.
So, there is a risk to both parties depending on what happens in the economy.

If one can tie a contract to some price index, seems to me one could tie it to gold.

 

[quincy]

Any contract using value besides the US dollar, as debased as it is, would be a hard sell. A seller's principal would be protected if the contract required payment in gold, dividing the principal financed by the price of gold at contract date, That does not protect interest and principal monthly payments should there be an reset, devaluation or a "new dollar" introduced to solve the massive debt problem, or a stampede of investors out of markets crashing the financial system.
On the other hand, the deed of trust enable foreclosure in the event of deflation and economic depression where the buyer is unable to make payments in an economic downturn with no inflation.
So, there is a risk to both parties depending on what happens in the economy.

Where are you located? In the U.S.?

 

[Taxing Matters]

If one can tie a contract to some price index, seems to me one could tie it to gold.

One could. But IMO only a fool would agree to such a deal. The price of gold fluctuates, sometimes wildly, based on factors other than just inflation. Tying the rate to changes in price of any commodity is a risk that as a borrower I wouldn't take when there are mortgage deals to be had for low rate fixed loans today.

 

[quincy]

California.

Any contract using value besides the US dollar, as debased as it is, would be a hard sell. A seller's principal would be protected if the contract required payment in gold, dividing the principal financed by the price of gold at contract date, That does not protect interest and principal monthly payments should there be an reset, devaluation or a "new dollar" introduced to solve the massive debt problem, or a stampede of investors out of markets crashing the financial system.
On the other hand, the deed of trust enable foreclosure in the event of deflation and economic depression where the buyer is unable to make payments in an economic downturn with no inflation.
So, there is a risk to both parties depending on what happens in the economy.

If one can tie a contract to some price index, seems to me one could tie it to gold.

Thank you for adding in your state name.

Do you have some property to sell - or are you just exploring options?

 

[Putin Rules]

My realtor says an offer is coming in on my undeveloped land for sale. bank finance not possible. Likely 25% down, owner finance. With Covid, destruction of small businesses, massive debt and globalists talking about a financial "Reset", I'm concerned about long term, fixed rate financing by me.

 

[quincy]

My realtor says an offer is coming in on my undeveloped land for sale. bank finance not possible. Likely 25% down, owner finance. With Covid, destruction of small businesses, massive debt and globalists talking about a financial "Reset", I'm concerned about long term, fixed rate financing by me.

If you are planning on financing an undeveloped-land sale for the purchaser, you can play around with any kind of financing arrangement you want to play around with as long as you stay within the law - but a purchaser is unlikely to purchase your land with 25% down and a variable interest rate. But anything is negotiable.

It is important to check the credit-worthiness of your buyer.

 

[bcr229]

Why is bank financing not possible? I've purchased undeveloped land and financed it. Banks don't usually do 10+ year loans on those, it's 20-25% down with a fixed-rate balloon note of 3-7 years because they expect the buyer to build on the property and roll the land loan + construction loan into a conventional mortgage after a few years. The rate on a land loan is often 3-4 points higher than a conventional 30-year note, and a large down payment is required, because it's a very risky loan for the bank.

Has the buyer shopped mortgages from banks with physical branches close to the property, or has he only approached the big online lenders? If the former and the underwriters at the local banks are declining the loan, then write off the buyer. I wouldn't take on the risk of that loan if the bank won't.

 

[Putin Rules]

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