Hi. I've seen a lot of good advice here and now have a question of my own. My mom died in December. We are selling her house in a different state and have received an unconventional offer on it. The buyers want to make a large earnest money deposit now, rent the house from us for a year, then complete the purchase in a year. The purchase is contingent on selling their house, which they are under contract to do in a similar arrangement (I'm waiting now to see the contract). The rent would cover our carrying costs, except for the last three months of the lease. The rent would not be credited to the purchase. We're not crazy about this arrangement for a variety of reasons, even though the purchase price they are proposing is not far off our asking price. Our realtor is also representing these buyers for this transaction.
We are thinking of proposing instead that they buy the house now and we will owner-finance for a year, with a balloon payment due at the end of the year. We'd require a 10% down payment (which shouldn't be a problem, given their proposed earnest money amount) and would aim to charge 4.5% interest.
We would prefer a conventional sale to either of these options, but have had no offers in the three months the house has been on the market and it's a very slow market there. Obviously, if we don't go with these buyers, the next step will be to drop the price, although feedback so far has been that is is priced appropriately.
Any thoughts on either their original proposal or our potential owner-financing? If we did the owner-financing, what info would you want from the buyers before doing this? Thanks in advance for your advice!
With the first option, you'd essentially be a landlord. I would be wary of being an out of state landlord. You'd have to carefully spell out repair contingencies. What happens if they fail to move out after the year if they can't complete the purchase? You'd have to research the landlord-tenant laws of the state the house is in.
With the second option, you'd become the lender. I'd check with a real estate attorney in the state the house is in about the foreclosure process in case they default on the loan. Depending on the state, it could take 90/120 days to foreclose up to 8 years if the house is in NJ (and no, that's not a typo). Then, if they are living there, you have to go through the eviction process. Both of those will cost some serious cash (several thousand dollars).
So you need to figure out if you want to assume those risks. If you drop the price, how much would you have to drop it? It might be worth it in the long run.
Thanks for the reply. Yes, the estate is still open. I totally agree about the potential pitfalls of being an out-of-state landlord.
The house is in NC. The foreclosure process there doesn't seem too awful, although it would be a pain in the ass and would cost us time and money. The down payment money could fund the process, if necessary.
I'd like to make this sale work--because it's the first real offer we've received in three months--but not at any cost. If we drop the price, we'd drop it $10,000 and see how that goes.
I'm not going to be able to answer the questions but wanted to point out/give questions for you to ask. I would start with the estate attorney and a CPA (if you have one).
Your moms estate (I assume) will be a landlord and responsible for filing a tax return with rental income and expenses. I would check with the CPA to see what kind of complications this would have. Also, ask the CPA to make sure when you sell, if the fact that it was a rental property for a year will change anything related to the gain on the sale of the house. Often, as individuals, your gain is tax free (the IRS offers a $250k exclusion per person). However this is not the same when people convert their primary houses to a rental property. I'm not familiar with estate tax law to even make an educated guess but I don't want the estate to pay capital gains tax (or ordinary) on any profit from the house if you wouldn't be subject to it if you sold right now.
Seller financing should be much more clear from a tax perspective. The estate will pay tax on the interest income but that shouldn't be super expensive. However, I would get a real estate attorney involved here but it sounds like you have a good option with having a balloon loan due in 12ish months.
If the CPA and the estate attorney give it a thumbs up, think about how much it's worth to you (and any siblings) to get the estate closed now vs in the future. Nothing sounds like a great option but I think the seller financing could be a good deal if you don't want to drop the price and hold on to the house for a while.
Thanks tealblue. You make a good point about considering capital gains and what a sale after it being a rental property may mean. My brother and I would be the landlords if we rented out the house. According to the NC estate attorney, we are the owners of the house now, even though the estate isn't closed. For example, we had to get insurance on the property in our names, per the lawyer. We can close the NC estate when all debts are paid, even if the real estate isn't sold. This seems odd to me, but is apparently correct given the terms of Mom's will and NC law. If we do either of the options in my original post, we'll definitely involve the estate attorney, who is also a real estate attorney.
If you are out of state landlords don't forget to estimate the costs of hiring a property management company. When all is said and done over the course of the year you may wish you just dropped 10k.
I know nothing of the situation of your potential buyers, but will share that someone down the street agreed to something similar, then the renters/buyers stopped paying the rent, then he had to go through eviction proceedings, and the renters trashed the place and took things like the W/D when they eventually moved out. Unless the market is terrible and you're unlikely to get another buyer, I'd just put the house on the market and get a different buyer.
Thanks everyone. We've decided we don't want to do what they are offering (contingent sale with a one-year lease). We're still considering whether we'd want to owner-finance for a year. I'm leaning against it, but it's such a slow market that it might be worth doing if we can manage the risk. If we can get enough money via the down payment and mortgage payments we could still be okay financially even if things go to hell with the sale. If the market were better, I wouldn't even be considering this...
What I'm hoping for at this point is that the buyers can get a bridge loan if they really want the property. Then we can just be done with it.
Catlawdy, the house is in a small town on the coast of NC. I'm glad your market is doing well--good luck with your offers! I am in the process of selling three properties (two on the market and one under contract) and I'm so sick of real estate stuff.
I would probably do one or the other. Either decide to rent it out for a few years until the market improves or lower the price to get it sold now.
Are other similar houses selling? If other homes are selling and yours is not, then it is probably priced too high and you need to lower it. If not much is selling at all, then that is more of a sign that the market is really slow and you might be better off renting it out for a bit.
We'd really rather sell it than rent it, so I think we're probably going to have to drop the price. Based on what several agents have told us, the average time for a house to be on the market there is about a year. There's just very little traffic--it's mostly people who retire there or maybe buy a vacation place. Practically no one moves there for work. Our listing agreement is up in mid-September, so we're going to change agents then if it's not sold before then.
Post by imojoebunny on Aug 1, 2015 23:15:06 GMT -5
It all depends on what you are willing to deal with. My parents sold their vacation house to their agent, who owner financed it for a drug dealer. That lasted for 5 years, at a good interest rate, then he went to jail and the property defaulted back to the realtor/owner. Meanwhile, drug dealer had done a lot of improvements, and the value of the property had almost doubled. Great return for the realtor for "owner financing". My parents were glad to be done with the place, as they moved far away, but it was also a good opportunity for he realtor or anyone willing to owner finance. The drug dealer aside, and honestly, he was really a very large pot farmer, verses what people think of as drug dealers, owner financing can be a good thing, if you have a property where most of the value is in the land. If the house gets f'd up, the land is still there.
It all depends on what you are willing to deal with. My parents sold their vacation house to their agent, who owner financed it for a drug dealer. That lasted for 5 years, at a good interest rate, then he went to jail and the property defaulted back to the realtor/owner. Meanwhile, drug dealer had done a lot of improvements, and the value of the property had almost doubled. Great return for the realtor for "owner financing". My parents were glad to be done with the place, as they moved far away, but it was also a good opportunity for he realtor or anyone willing to owner finance. The drug dealer aside, and honestly, he was really a very large pot farmer, verses what people think of as drug dealers, owner financing can be a good thing, if you have a property where most of the value is in the land. If the house gets f'd up, the land is still there.
That's a good point about the land. The house is on the water (ICW) so most of the value is the location rather than the house. Thanks.