How Do You Wirte A Forgiveable Owner Carry Back Note?
I am in an agreement to purchase an investment property. It appraises for substantially more than the agreed price with the seller.
I want to buy with little money down. My lender suggested doing an 80/20 LTV with the 20% coming in the form of a seller carry back that they will forgive after closing. Since the home appraises for so much more than I need to give the seller, I can write the contract for the full appraisal amount and the 80% from my lender will cover all my costs and then some.
My question is two fold: Are you familiar with writing owner carry back notes which are to be forgiven? How do you write the part that stipulates that the note will be forgiven?
And do you know how the seller would account for the 'forgiven note' from a tax standpoint?
My lawyers and CPA are involved; however, I am just seeing what type of people and advice are on these sites. I appreciate you time in reading this and if you have an opinion would welcome it. Thank you.
First, there is no such thing as a forgiveable note. The lender (the owner in this case) can choose to forgive the note, but they don't have to do so. Also, trying to set it up this way (making the note forgivable) is a very good way to be charged with loan fraud. The question that I'd ask you first, is this a suggestion by your primary lender OR is it a suggestion by the broker or loan officer. This is a big difference.
The tax question is better left to a professional, their professional, though it would be hard to be taxed for income that you didn't receive.
I think a better solution is to have them create a note and you purchase that note from them at the same closing. Example, 2nd note created for $20K, you contract to buy this note at closing, for $1K.
This way, the note was created and the owner of it sold it for a profit, thus no possible loan fraud. As the new note holder, you can choose to forgive, or considered it paid in full, if you wish.
If your lawyer(s) and CPA are involved, what are they telling you to do?
Roger
FYI: It was my primary lender - not my broker surprisingly enough. I thought it was grey area and appreciate your feedback.
I understand what you are suggesting. May I add a few details for you?
Amount Seller Needs: $227k
Amount of Appraisal: $300k
I want to now write the contract that includes financing provisions for 80% from my primary lender in the amount of $240. I then will have a separate contract for the $60k loan with the seller. I then will have a separate contract for the $60k loan in which I agree top buy it for $1k. Can the contract go down with all of these contracts going down at the same time.
I am writing the contract draft tonight and sending it to my attorney so I would be glad to share his feedback in a day or so.
Livingston9011
I did a deal a while back similar to yours. Property was apraised at 240k and I had an option on the property for 185k. I assigned my option to an 85% LTV buyer so he would'nt have to put money down. The seller carried a 2nd mortgage which was to be forgiven. I had the sellers sign a letter stating that the buyer was forgiven and released from the 2nd mortgage. He signed the letter before the closing so that the buyer would know that he would not be held to the 2nd mortgage. 30 days after the closing, the buyer takes the notorized letter to the courthouse to be recorded and wipes out the 2nd lein. The seller would not send the buyer a 1099 for the forgiveness of debt, so I would think that the buyer would not have anything to worry about declaring the forgiven debt as income. I'm sure there is a better way but this is what I tried and it worked. The title company wrote up the 2nd mortgage but never knew that it was to be forgiven. I hope this helps.
in this case you would want a seller credit in the amount of $73,000.00
The thing about notes is once they are recorded people forget they have to be satisfied regardless if they have to be paid or not. That costs money , time, and useless energy.
Lori
[addsig]
Almost every commerical mortgage lender I have talked to will not allow seller concessions over 6%.
Know a way around this? You are right, a big concession would give me all the equity in the world!
Quote:
Livingston0911 wrote:
Amount Seller Needs: $227k
Amount of Appraisal: $300k
I want to now write the contract that includes financing provisions for 80% from my primary lender in the amount of $240. I then will have a separate contract for the $60k loan with the seller. I then will have a separate contract for the $60k loan in which I agree top buy it for $1k. Can the contract go down with all of these contracts going down at the same time.
What happens to the 13K difference between your supposed sale price of 227k and your lender given loan of 240k?