Owner Financing and Estate

[luvflyin]

Putting my moms house up for sale. Mortgage rates are going to make it hard to sell for what we think should be a good price. Thinking about owner financing. She's old and won't outlive the Note. 3 Heirs. So we're thinking of some kind of Escrowy type thing that collects the Payments, disburses to her, until death, then to the Heirs per instructions. Probably be thirds. Then to the Heirs Heirs per their instructions should any of us not outlive the Note.. Is this feasible?

 

[Larry in TN]

Won't she have a pretty big tax bill on the capital gains on the house if it sells while she's still living?

 

[luvflyin]

Won't she have a pretty big tax bill on the capital gains on the house if it sells while she's still living?

Nah. Her residence. Never been put out to rent. No gains tax. It's in Oregon. Oregon follows the Federal Rule. There may be some Oregon Estate Tax due.

 

[kmacht]

If a mortgage company sees enough risk to either not lend or led at high rates there is usually good reason and that reason is also something you will need to deal with if you owner finance. What happens if they stop making payments but won’t move out? Your options are even more limited than as a landlord. What if they destroy the place or steal everything inside it and then disappear?

 

[luvflyin]

If a mortgage company sees enough risk to either not lend or led at high rates there is usually good reason and that reason is also something you will need to deal with if you owner finance. What happens if they stop making payments but won’t move out? Your options are even more limited than as a landlord. What if they destroy the place or steal everything inside it and then disappear?

Yeah, I know all that. Wouldn't do it without a big enough down payment to cover the expenses of having to go through that. The banks will be qualifying a buyer based on their Rates. We will be offering a much lower rate. Already put a rough pencil to it. Were looking at close to a thousand dollars less monthly payment.

 

[Baked Potato]

Nah. Her residence. Never been put out to rent. No gains tax. It's in Oregon. Oregon follows the Federal Rule. There may be some Oregon Estate Tax due.

Capital gains is paid to the IRS, reported on her federal tax return.

My understanding: If she's single, any gains over $250k would be considered capital gains. You may know if the profit is under or over that threshold.

 

[Lindberg]

Yeah, I know all that. Wouldn't do it without a big enough down payment to cover the expenses of having to go through that. The banks will be qualifying a buyer based on their Rates. We will be offering a much lower rate. Already put a rough pencil to it. Were looking at close to a thousand dollars less monthly payment.

I'm also confused by this. Mortgage rates have an effect on real-estate prices, but they haven't gone up by all that much. I can't imagine that the higher price would justify you getting paid out over 15 or 30 years. You also have to consider that by charging sub-market rate on the note, you're costing yourself gains. If you think this is a temporary situation, then why not lease it out for a few years instead? And if you think this isn't a temporary situation, then it's an even worse idea. Otherwise, this sounds like a situation for a trust.

 

[luvflyin]

Capital gains is paid to the IRS, reported on her federal tax return.

Capital Gains Tax due will probably not be all that much. It's her Primary Residence. How it's financed, bank or private doesn't change anything. Except that it won't be all at once like if the buyer gets a bank loan and she gets all the money at once. It's the gain you collect per year. That can you have you in a lower bracket. Sellers have been known to do owner financing just for that reason. The Note will carry prepayment penalties.

 

[dans2992]

Yeah, I know all that. Wouldn't do it without a big enough down payment to cover the expenses of having to go through that. The banks will be qualifying a buyer based on their Rates. We will be offering a much lower rate. Already put a rough pencil to it. Were looking at close to a thousand dollars less monthly payment.

If banks won’t accept a lower rate, neither should you.

tbills are paying near 5% now.

 

[luvflyin]

I'm also confused by this. Mortgage rates have an effect on real-estate prices, but they haven't gone up by all that much. I can't imagine that the higher price would justify you getting paid out over 15 or 30 years. You also have to consider that by charging sub-market rate on the note, you're costing yourself gains. If you think this is a temporary situation, then why not lease it out for a few years instead? And if you think this isn't a temporary situation, then it's an even worse idea. Otherwise, this sounds like a situation for a trust.

Mortgage rates have gone up very significantly over the last year or so and will likely continue. Fed says their gonna continuing raising the Federal Funds Rate like they have been doing.

 

[luvflyin]

If banks won’t accept a lower rate, neither should you.

tbills are paying near 5% now.

What denomination?

 

[Lindberg]

Mortgage rates have gone up very significantly over the last year or so and will likely continue. Fed says their gonna continuing raising the Federal Funds Rate like they have been doing.

So take the cash and buy bonds.

 

[Lindberg]

Let's talk turkey. How much lower than market rate will you offer on a seller's note, and how much more do you think that will get you on the purchase price?

And I'm assuming she owns the house outright now. Otherwise, check her mortgage for a due-on-sale provision.

 

[TCABM]

If mom owns the house right now, why not move it to a trust and when she passes then the trust can liquidate the house?

 

[PaulS]

Interest rates haven’t significantly affected prices on the east coast yet. My daughter is looking and houses still going quickly over asking.

 

[luvflyin]

If mom owns the house right now, why not move it to a trust and when she passes then the trust can liquidate the house?

It's already in a Trust. She's moved out into an assisted living facility. We want to 'liquidate' now. None of us want to manage it as a rental. Nor keep paying taxes and insurance on it. And if we did wait for her to pass, the same issue may be there. High mortgage rates that disqualify many buyers.

 

[luvflyin]

So anyway, does anyone have some answers about my original queastion? "...
So we're thinking of some kind of Escrowy type thing that collects the Payments, disburses to her, until death, then to the Heirs per instructions. Probably be thirds. Then to the Heirs Heirs per their instructions should any of us not outlive the Note.. Is this feasible?"

 

[Baked Potato]

So anyway, does anyone have some answers about my original queastion?

Sir, this is an Arby's.

 

[midlifeflyer]

So anyway, does anyone have some answers about my original queastion? "...
So we're thinking of some kind of Escrowy type thing that collects the Payments, disburses to her, until death, then to the Heirs per instructions. Probably be thirds. Then to the Heirs Heirs per their instructions should any of us not outlive the Note.. Is this feasible?"

Is it feasible if you are willing to takes the risks of nonpayment, property damage by an unhappy owner in financial distress, and are ready get Into the foreclosure process if necessary?

Sure. A good commercial real estate lawyer can put it together.

 

[luvflyin]

Is it feasible if you are willing to takes the risks of nonpayment, property damage by an unhappy owner in financial distress, and are ready get Into the foreclosure process if necessary?

Sure. A good commercial real estate lawyer can put it together.

There are those risks. We'd get enough of a down payment to make them more palatable. Damn, you corrected it already. I was getting to ready bust your chops over "...A good commercial real estate lawyer con put it together..."

 

[Lindberg]

So anyway, does anyone have some answers about my original queastion? "...
So we're thinking of some kind of Escrowy type thing that collects the Payments, disburses to her, until death, then to the Heirs per instructions. Probably be thirds. Then to the Heirs Heirs per their instructions should any of us not outlive the Note.. Is this feasible?"

If it's already in a trust, you might not need to do anything else, depending on the trust's terms. But you're going to want to have a good real-estate lawyer involved in this.

You're not going to have to manage a rental (which third parties will do) but you are going to have to manage the mortgage. Are you going to require an escrow for insurance and tax payments? How will you ensure they're taken care of?

 

[Mongoose Aviator]

High risk. The downside is not commensurate with the upside. I know OP simply wants the answer to his question without the commentary.
This is one of those posts that absolutely begs for the commentary.

 

[fasteddie]

Is it feasible if you are willing to takes the risks of nonpayment, property damage by an unhappy owner in financial distress, and are ready get Into the foreclosure process if necessary?

Sure. A good commercial real estate lawyer can put it together.

Disclaimer: I'm no expert in any of this. But.....

Agreed, it's "feasible." However, maybe I missed something, but it sure seems like you'd be signing yourself and the other heirs up for a bunch of headache vs. just selling the thing outright. Yeah, rates have gone up, but historically they're still pretty low. And we're coming off a huge run-up in housing prices nationally. Whatever you're able to get on the open market right now is probably about as good as you're ever gonna get.

Also, regarding this: "Mortgage rates are going to make it hard to sell for what we think should be a good price." If it's hard to sell, then it's not priced properly.

And this: "Were looking at close to a thousand dollars less monthly payment." That's pretty significant, and sounds questionable. You sure the math is right? (no offense).

Maybe stating the obvious, but assisted living ain't cheap. Sometimes, the bills will eat up everything in the estate, including the house. Food for thought.

Ultimately though, you're talking a complex transaction with big dollars. Advice here is worth what you paid for it (free). Think you'd need to consult with some kind of attorney (perhaps one specializing in estate planning or similar).

 

[luvflyin]

If it's already in a trust, you might not need to do anything else, depending on the trust's terms. But you're going to want to have a good real-estate lawyer involved in this.

You're not going to have to manage a rental (which third parties will do) but you are going to have to manage the mortgage. Are you going to require an escrow for insurance and tax payments? How will you ensure they're taken care of?

Yeah. The Trust can be amended to specify the terms of the distribution of the asset, the house. It's the 'mechanics' of doing it I'm wondering about. None of the Trustees want to mess with it. My question is who can we hire, so to speak, to manage it. Like as a said, some kind of Escrowy type thing that could do it. @midlifeflyer said a Real Estate Lawyer could put it together and that makes sense. I may find one and buy an hour of their time to see how the nuts and bolts of it would work.

 

[luvflyin]

High risk. The downside is not commensurate with the upside. I know OP simply wants the answer to his question without the commentary.
This is one of those posts that absolutely begs for the commentary.

Nah. I enjoyed all the related commentary and will still participate. Was getting a little impatient for an answer to the question though I guess.

 

[midlifeflyer]

There are those risks. We'd get enough of a down payment to make them more palatable. Damn, you corrected it already. I was getting to ready bust your chops over "...A good commercial real estate lawyer con put it together..."

If I ever learned how to type...

 

[Lindberg]

Yeah. The Trust can be amended to specify the terms of the distribution of the asset, the house. It's the 'mechanics' of doing it I'm wondering about. None of the Trustees want to mess with it. My question is who can we hire, so to speak, to manage it. Like as a said, some kind of Escrowy type thing that could do it. @midlifeflyer said a Real Estate Lawyer could put it together and that makes sense. I may find one and buy an hour of their time to see how the nuts and bolts of it would work.

When you talk to the lawyer, you'll know you found a good one if he tries to talk you out of this.

 

[Van Johnston]

3 1/2 years before my mother died, she sold the place where I grew up and moved into an apartment near my sister, and financed the sale (to someone she knew and trusted; her hairdresser). The new owners sent her a check each month. No 'escrowy thing.'

After she died, I (her executor) sent a letter to the owners and asked them to start making the check out to 'the estate,' and send to me. I held the funds in a separate estate account until we settled the estate, and then disbursed the accumulated funds to my brother and sister and self. Then my brother and sister and I formed a simple partnership, with me as the managing partner. I sent the owners a new letter asking them to begin making their checks out to 'the partnership,' and I disbursed a third each to my siblings and kept my third each month. Again, no 'escrowy thing.'

Each year I prepared a simple K-1 to report the interest, and sent to IRS and brother and sister, and kept a copy for myself. When you file your taxes you have to report the total received, which includes the CG. But then there is another line later where you subtract the CG out, so you only pay tax on the interest.

It was all pretty simple. Maybe yours is more complicated if the house is already in a trust. Good luck.

 

[TCABM]

… None of the Trustees want to mess with it.…

That alone should tell you everything you want to know about self-financing this effort.

Upside: maybe a few more bucks spread across the heirs across years while providing the purchaser with the appropriate info for the buyer to claim a mortgage deduction.

Downside: Repo’ing the home after the deadbeat buyer gets finished changing the oil in his harley in the living room while his free range chickens have been roosting in the spare bedroom.

Seriously, mortgage rates don’t disqualify a buyer. Rates may dissuade some purchasers from entering the market, so the pool of buyers is smaller. Those that are in the pool hey’ve already decided they can afford the payment given the rates. The logic you’re using to justify this doesn’t make sense.

 

[luvflyin]

3 1/2 years before my mother died, she sold the place where I grew up and moved into an apartment near my sister, and financed the sale (to someone she knew and trusted; her hairdresser). The new owners sent her a check each month. No 'escrowy thing.'

After she died, I (her executor) sent a letter to the owners and asked them to start making the check out to 'the estate,' and send to me. I held the funds in a separate estate account until we settled the estate, and then disbursed the accumulated funds to my brother and sister and self. Then my brother and sister and I formed a simple partnership, with me as the managing partner. I sent the owners a new letter asking them to begin making their checks out to 'the partnership,' and I disbursed a third each to my siblings and kept my third each month. Again, no 'escrowy thing.'

Each year I prepared a simple K-1 to report the interest, and sent to IRS and brother and sister, and kept a copy for myself. When you file your taxes you have to report the total received, which includes the CG. But then there is another line later where you subtract the CG out, so you only pay tax on the interest.

It was all pretty simple. Maybe yours is more complicated if the house is already in a trust. Good luck.

I see how that works and it wouldn't be that big a deal for me to administer up to that point. The thing that complicates things, at least in my mind, is the Heirs Heirs. I have two children, my sister four. If we don't outlive the Note, then the kids gotta deal with it. That's why I'm thinking just get the whole thing specified and on autopilot by a third party. I've just got off the phone with a Note Servicing Company. Guy said they do stuff like this. He was talking about Fractionalized Notes and Trust Deeds and stuff. Everything would be set up. Kids just have to send in Death Certificates as the old folk start dropping.

 

[luvflyin]

That alone should tell you everything you want to know about self-financing this effort.

Upside: maybe a few more bucks spread across the heirs across years while providing the purchaser with the appropriate info for the buyer to claim a mortgage deduction.

Downside: Repo’ing the home after the deadbeat buyer gets finished changing the oil in his harley in the living room while his free range chickens have been roosting in the spare bedroom.

Seriously, mortgage rates don’t disqualify a buyer. Rates may dissuade some purchasers from entering the market, so the pool of buyers is smaller. Those that are in the pool hey’ve already decided they can afford the payment given the rates. The logic you’re using to justify this doesn’t make sense.

The buyers ability to repay the loan does. A ratio of income to the Mortgage Payment. The higher the Rate, the higher the Payment. So in that sense, Rates can disqualify, or should I say cause a disqualification.

 

[Chip Sylverne]

If banks won’t accept a lower rate, neither should you.

tbills are paying near 5% now.

I got a 11 month CD from Capital One at 5%. Short rates are better than long rates these days.

 

[luvflyin]

I got a 11 month CD from Capital One at 5%. Short rates are better than long rates these days.

I’ve seen that. Same for Tbills.

 

[Zeldman]

May I suggest....

no, no....of course not.... I was just showing what bad gas looks like...

 

[kyleb]

Sell it outright. Be done.

 

[Warlock]

Hilarious some of the advice…if the mortgage is secured by the property and the numbers work for her and the the heirs why not? I have done this several times with both commercial Medical space and private property. My wife calls it mailbox money…I don’t manage property…I have no overhead and bank from my kitchen table with remote deposits. Vet the buyer…my doctors were always leveraged because of student loans and equipment that made banks balk…but never have missed payments and regularly pay off early…

 

[Lindberg]

Hilarious some of the advice…if the mortgage is secured by the property and the numbers work for her and the the heirs why not? I have done this several times with both commercial Medical space and private property. My wife calls it mailbox money…I don’t manage property…I have no overhead and bank from my kitchen table with remote deposits. Vet the buyer…my doctors were always leveraged because of student loans and equipment that made banks balk…but never have missed payments and regularly pay off early…

I fully support mailbox money. But the OP is planning to intentionally do this at less than market rates. I'd make a low-risk loan to someone I knew at less than market rates, but I sure as heck wouldn't lend a few hundred k to a stranger on those terms.

 

[Warlock]

I have no overhead and been quite successful at below market rates…with the right buyer. Half a point and a decent down payment on a secured note…it’s a no brainer.

 

[Mongoose Aviator]

I'd make a low-risk loan to someone I knew at less than market rates

100% agree. But not unless I am willing to write it off as a gift if it goes sour. Not worth a family feud.

but I sure as heck wouldn't lend a few hundred k to a stranger on those terms.

Also 100% agree. If I want to donate money to strangers then I will find a cause that I believe in.

I have done this several times with both commercial Medical space and private property.

Would you be willing to say what your ROI was on the commercial and the ROI on the private?

Thinking about owner financing.

I assume you have calculated out your ROI on the owner financing? Would you be willing to share numbers? It might help to better understand your thinking.

I got a 11 month CD from Capital One at 5%. Short rates are better than long rates these days.

Exactly. Virtually risk free. 20 year Treasuries are also reasonable for a virtually risk free investment. There are many options for what to do with a decent chunk of principle.

 

[Lindberg]

I have no overhead and been quite successful at below market rates…with the right buyer. Half a point and a decent down payment on a secured note…it’s a no brainer.

The OP said "much lower" and a thousand dollars a month. That suggests to me a lot more than .5%. but it ain't my money.