Owner Financing

[LimiMan]

Has anyone on here had any dealings with purchasing land and the owner carrying the note? Pros/Cons
He's offering a better interest rate that I could get anywhere else and only wants around 6% down.

 

[hillrancher]

Owner financing is good for both seller and buyer. A good contract keeps the friendship for ever.

 

[backhoeboogie]

Get the paperwork legal and notorized. Make sure the buyer can pay off the note at any time.

I have been on both ends and to me it is a very positive method between two people. The owner gets more interest than he would if he was paid cash and put it in the bank. The buyer pays less interest than he would if he took out a loan. You have essentially cut out the middleman, the banker.

I would never buy or sell an auto or anything else like this.

 

[CUZ]

My advice is BE CAREFUL.

Several (more than 15) years ago ran into a guy who made the bulk of his money by doing owner financing. The problem was he was a WEASEL. He always had a clause in the contract where if the buyer was more than 10 days late he could repossess the property and all previous payments would be considered rent. If the property went down in value he'd work with the buyer to "help" him out, but if the property had gone up in value he'd take the property back and wave the contract as his reason.

 

[dun]

My advice is BE CAREFUL.

Several (more than 15) years ago ran into a guy who made the bulk of his money by doing owner financing. The problem was he was a WEASEL. He always had a clause in the contract where if the buyer was more than 10 days late he could repossess the property and all previous payments would be considered rent. If the property went down in value he'd work with the buyer to "help" him out, but if the property had gone up in value he'd take the property back and wave the contract as his reason.

That's pretty much a standard with contracts, the time frame may vary though.
I knew of one family that would by a place on a land contract. They'ld live thre for a couple of months making payments then quit. It would take another couple of months before they were thrown out, then they would do it all over again to someone else.

 

[ROCKSPRINGS]

Make sure you get, I think its called Title Insurance. They search the title and make sure the owner is the owner. Some property is owned by several family members, some have leins on it, and some is not payed off as to speak. Make sure it is surveyed and filed at the county courthouse, If it is not surveyed, it does not exist. Walk the place, there should be a survey marker at each corner, Ask to see the "plat" which is the survey it self. You can see how big your neighbors are. If you want peace and quit, you don"t want your property to border a sub division with one acre lots. Check the deed restrictions very close if there are any. Mineral rights ?? Owner financing is a good thing for the owner, he gets the interest, not the bank. Just make sure everything is in order. As mentioned before, some will foreclose on you for one late payment. Good luck

 

[CUZ]

That's pretty much a standard with contracts, the time frame may vary though.
I knew of one family that would by a place on a land contract. They'ld live thre for a couple of months making payments then quit. It would take another couple of months before they were thrown out, then they would do it all over again to someone else.

Hey, I agree there's folks out there that do exactly what you're talking about, but the case I'm referring to went something like this. The buyers were salt of the earth type who had made payments like clockwork for about 10 years. Then one month something happened and they got distracted and didn't make their payment and then noticed it the next payment date. They sent in a check with both payments and got a letter of foreclosure back. The only way they could get the guy to not completely repossess the property was to pay him what the property had appreciated in those 10 years. It cost them an extra $10 or $15 Thousand. If the property value had depreciated in those 10 years he would have just charged them a late payment penalty of 5% or 10% of their payment.

There's good and bad on both sides, that's why I said to be careful.

 

[TexasBred]

hmmm....I'm just curious if the legal documents executed at the time of purchase actually gave the seller/financier the authority to do these things or if he just bluffed a nice couple who were uninformed and unrepresented into thinking he could do this. Course these shady characters don't miss too many tricks. Since they already spent this much money I'd spend a bit more and have a good attorney look over my deed of trust and note and make sure I hadn't been snookered. Just my 2 cents worth.

 

[alabama]

Be carfull about taxes too. If you sell somthing owner financing then the total of every payment is income and is taxed as such. It considered rent to the IRS.

 

[GMN]

Same could happen if you went with a bank too, have to make the payments to keep the land, with whatever way you finance it.

GMN

 

[CUZ]

Be carfull about taxes too. If you sell somthing owner financing then the total of every payment is income and is taxed as such. It considered rent to the IRS.

Don't know where you're getting your tax advice, but your statement that the total of every payment is income is not completely accurate.

You show your basis and any depreciation taken on a form 6252, taking the depreciation recapture part over to the 4797 and the profit part of the payments received during the year to schedule D and the interest part of the payments to schedule B. The part of the payment that is just "your money back" is not taxed in any way.

 

[alftn]

I bought 77.5 ac. 20 years ago that way, work out well. 10% down 2 1/2 % cheaper than bank. He was honest. Now days unless I know a man I would have to have the lawyer do a title search and warranty deed, to cover but..

 

[BTRANCH]

Our land was owner financed with 0% interest. The little old lady said she did not want to charge interest because she would have to pay tax on the interest part and she had already given Uncle Sam all she was going to! (She was 87 years young, gotta love her!)

We did the title insurance and went through closing just as if we were doing a bnak loan. Make sure you agree on what the late payment clause is going to be, most give you at least 30-60 days.

This worked out great for us also because it did not show that debt on our credit report and our score stayed high. The down side is it is harder to prove timely payments to improve your credit score, if that is important to you...

 

[Arnold Ziffle]

BTR, I seem to recall reading that you recently paid off your land note, so what I'm about to suggest may have limited potential benefit to you. But as to a sale with 0% stated interest, first of all, don't you suppose that the little old lady in effect jacked up the sales price a bit in order to compensate for the fact that she was charging no interest? I's suggest that you talk to your accountant about the "imputed interest" rules. The tax code has provisions that would allow you to deduct a portion of your payments as interest expense since the sales contract did not have "adequate stated interest". In addition, if they discover what she has done (not too likely, I'll admit) the IRS could turn the tables on the little old lady and make her report a portion of the payments she received as interest income and not as principal (capital gain). The "adequate stated interest" rules are in the tax code to prevent sellers from structuring sales that are purportedly all capital gains and no (or insufficient) interest income --- sellers obviously want to maximize capital gains and minimize interest income due to the considerable difference in tax rates associated with each type of income. On the other hand, purchasers would normally like to maximize interest expense deductions and minimize the part of their payments that are treated as non-deductible land cost.

Even if your land is paid off you could still consider filing amended returns for all the years that are open under the statute of limitations, in order to claim interest expense deductions IF you and your accountant deem it worth the time and trouble and after considering other issues that may or may not be lurking in your tax filings.

 

[BTRANCH]

Arnold, you are right about us paying the loan off. I am flattered that you would remember. According to my CPA, I am better off with the no interest loan. It was explained that if I am in a 20% tax bracket, I can only deduct 20 cents on the dollar as interest, the other 80 cents are lost.

We had talked about taking out a loan to pay off the individual to get the deduction of interest and was told it was not a good idea.

 

[Arnold Ziffle]

Hello again, BTR. I'm certainly not trying to talk you into anything, but just to clarify by way of a brief example: If you are in say the 25% tax bracket (there is no 20% bracket) and you were able to properly "reclassify" say $1,000 of what you paid the lady under the imputed interest rules --- to interest expense as opposed to principal --- you would then presumably deduct the full $1,000 on your Schedule F and in doing so would reduce your income tax bill by $250 (and perhaps reduce self employment tax as well). By treating all the amounts paid to her as principal, i.e. land cost, you get no current tax deduction or benefit, but IF you were to in some later year sell the place then of course your tax basis would include all the amounts paid to the lady and, using the current tax law and rates, would yield a 15% tax benefit. By deducting the "imputed interest" as per my example you would get a 25% tax benefit NOW rather than the possibility of a 15% tax benefit in a land sale years from now (or possibly no future tax benefit, if you die while still owning the land). So, I guess I would conclude that it would take a pretty unusual set of circumstances for a taxpayer to be worse off by deducting imputed interest. I'll admit that it is a little bit of a pain in the butt for accountants to make the computation of imputed interest when the sales contract does not provide for adequate interest, but that's what we get paid for. ;-)

But enough of this tax talk from me. Congratulations on getting your land paid for over such a short period time (about 5 years I believe it was) and I hope that you will enjoy your place all the more now that you own it free and clear. Best of luck to you. AZ

 

[TexasBred]

I think it's pretty much a given that with owner financing the price is always inflated a bit. That's the only way they can give you favorable financing and in some cases it's the ONLY financing available for one reason or the other. Done properly it works to the benefit of both parties.

I'd think it would be hard to take any kind of deduction for so called implied interest when the note declares there is no interest charged. If you deduct it she better report it as income.

Glad you're debt free :clap: :clap: :clap: That's everyone's dream.

 

[Arnold Ziffle]

FWIW, when dealing with zero interest loans and imputing interest thereon: See Internal Revenue Code Sections 483 and 1272 and the Treasury regulations thereunder.

 

[TexasBred]

Well I'm not a CPA nor a tax expert but if I have a note that says zero interest rate or no interest due and a deed of trust filed for record you can imply or impute what you want but I'm not taking a deduction and if I'm on the holder of the note I'm not reporting any interest received. No need to muddy the waters just so some tax preparer can charge you more for something that is questionable at best when you're already holding recorded documents which were executed in good faith by all parties to the transaction. sheeeshhhh.... :drink: :drink:

 

[CUZ]

. . . if I have a note that says zero interest rate or no interest due and a deed of trust filed for record you can imply or impute what you want but I'm not taking a deduction and if I'm on the holder of the note I'm not reporting any interest received. No need to muddy the waters . . . for something that is questionable at best . . . executed in good faith by all parties to the transaction. sheeeshhhh.... :drink: :drink:

The IRS doesn't care what you think. You can say "good faith" and even believe it, but the IRS will say there's no such thing as an interest free loan between unrelated parties in an arm's length transaction.

As in a lot of things, you can do whatever you want (even deduct dogs and cats as dependents, write-off your groceries and vacations) and get away with it, UNTIL you're caught.

In your case you may want to just roll the dice on letting it be, but on future deals I'd suggest calculating what the interest would be.