Seller Concerns To My Subject To Deal
I am putting together my first subject to deal and the seller is a little bit uncomfortable with the fact that the loan will still be in their name after they sell me their home. In parcticular, they are worried that if they decide to buy another home or finance a new car and their credit report shows the existance of their home loan, they will be turned down because of their bad debt to income ratio. The sellers are retired and make very little income. Are the sellers righfully concerned that keeping the loan in their name will negatively affect their ability to get another car or home loan? What can I tell them to calm their fears?
Finally, if I want to give the sellers the tax benefits of the loan that I am assuming on their home, can I just send them the 1098 form I will get at the end of the year so they can submit it with their tax return?
Thanks ahead of time with your help. If the sellers decide not to allow me to take over their loan I am not sure if it will still be worthwhile to do the deal because of the hi closing costs of getting financing.
-Doug
why would you want to give them the tax benefits. Your the one paying the loan thust it is your right to claim the tax benefits.
Quote:
On 2003-12-08 03:17, demosthenes wrote:
why would you want to give them the tax benefits. Your the one paying the loan thust it is your right to claim the tax benefits.
demosthenes, why would HE be paying the loan on a Sub2??
The buyer would be paying the loan.
My understanding is in a L/O he would get the write off but in a contract for deed the BUYER would get the write off.
Mike[ Edited by MrMike on Date 12/08/2003 ]
To answer your question DFresh,
It is just like landlords around the country that conventionally and continually get loans in their name to buy rental properties....How are they able to get new loans and blah blah blah?
Simple, they are not making the payment. Income is coming in and offsetting that debt. The same thing with your sellers, the debt is there, but also income is coming in and offsetting that debt. There is no longer a payment being made out of their pocket. That payment is being made from some other sources, some other funds...i.e. not theirs. So now they can go get a new loan because that debt is offset due to the income.
Some may ask, will I have to pay taxes on this new "income"? No, because there are no capital gains.
Explain to them the payment is not coming out of their pocket so it is no longer an expense to them.
Oh, and don't give them the tax break...for one, they didn't pay it. Secondly, I'm not sure about all the tax laws, but what if I wanted to give you all my tax breaks on all my houses and you didn't pay a dime?
If they didn't pay it, how are they benefitting from it?
Doug,
The fact is, you taking their house sub2 may well hinder their ability to buy a car or another house in the future. If their debt to income is so high that the lender is worried about it, it may not be approved.
There are lenders who will take the documentation you can provide as evidence that the home has sold and someone else is making the payments but that is on a case by case basis.
A responsible investor will always disclose these possibilities to their seller so that they can make an informed decision as to how to proceed.
As for the tax deduction. If the sellers sell to you, they no longer own the property, you do. You take the deduction and the depreciation. These are 2 of the biggest benefits to owning real estate.
William Tingle
WilliamGA
I really appreciate your answers.
I'm pretty sure at this time that the sellers are not going to want to proceed with my taking over their loan. I have already started to talk to some friends who are mortgage brokers to see what type of loan I could get to replace the existing ****Must Reach Freshman Investor status before posting URL's***f I can get a low cost loan with minimal closing costs it just might make sense to still do the deal. However, if I need to pay a few thousand to close a loan, it wouldn't make that much sense to do the deal since I intend to flip the property.
Thanks again for the good advice.
-Doug
The fact of the matter is that the loan will still be on their credit and will affect their ability to obtain new credit. In a case such as DFresh has brought up, where the seller has very little income, this is a very valid real concern.
Nobody has offered any advice on how to deal with this concern in such a manner that the seller will fell comfortable. This is a subject I would also like to hear some input on as well.
Any takers?
I believe that WilliamGA did answer your question.
My accountant and I have discussed the tax ramifications. He told me that for the interest deduction you have to own the home and be the person in debt. On a subject to deal, you are the owner, though being that the debt does not transfer to you, you are not indebted.
I don't know what the final answer is...
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On 2003-12-14 00:42, rup wrote:
The fact of the matter is that the loan will still be on their credit and will affect their ability to obtain new credit. In a case such as DFresh has brought up, where the seller has very little income, this is a very valid real concern.
Nobody has offered any advice on how to deal with this concern in such a manner that the seller will fell comfortable. This is a subject I would also like to hear some input on as well.
Any takers?
I've never purchased a home sub2, but I did sell one in Santa Cruz, CA about ten years ago.
What made me comfortable with the deal:
1. The buyers put down a wad of cash. I don't remember the exact number, but it was close to 20%. i figured that having that much skin in the game would make them reasonably likely not to screw things up. (At the time, 20% was about $40k.)
2. I could always call the bank and say Joe and Mary bought that house and the bank should investigate, and maybe do something about the situtation. IE, please make them get another loan.
Sure enough, they stopped making payments a year or so later, and it showed up on my credit report. (They sold the house before the actual foreclosure happened.) When I went to get another loan my new bank saw that, gagged, and asked me what happened. I sent them the paperwork (which by that time had litteraly become invisible, since I had the second page of triplicate forms, rather than a photocopy. Triplicate forms fade, FYI.) and the new bank shrugged and said, OK, fine, no problem. I was pretty surprised it wasn't a big deal at all.
MAJOR CAVAET - this was a decade ago. Don't rely on my experience to mean anything now.
So, my personal feelings: yes, it's going to be a hassle to be the seller in a subject2 deal. If the deal makes sense, though, don't be too frightened. As long as the buyer will suffer major pain if they stop making payments, you'll probably be just fine. If the buyer can screw up later on and not suffer quite a bit, then this is likely a deal you don't want to do.
If you're trying to put together a deal where you're the buyer, and are trying to do nothing down, you probably don't want to pass my advice on to the seller. But think about it - they've got a legitimate issue. Just figure out why your deal is strong enough to outweigh the down side and explain it to them. If your deal isn't strong enough to convince them, it's possible that they're making the right decision when they pass.
You have to remember, the type of seller who would consider a subject 2 deal is a motivated seller! An issue of not being able to purchase another home immediately might not be that big of an issue to a really motivated seller. It is prudent to let the seller know that if the they are planning on buying a new home soon, they need to know that it might be difficult for them if their credit or debt to income ratio is not so good. But, if the seller is facing foreclosure, it is already going to affect their credit if they don't act fast. So in that case I would think it would be less of an issue. It sounds like your seller may not be that motivated. Often times in this case you might want to try and negotiate a L/O deal and then turn around and find a and sell it on a lease option or a Land Contract. Anyway, just my 2 cents.[ Edited by dlukas on Date 12/14/2003 ]
Doug,
Why don't you just call the lender and see if they will let you assume the loan? I got Washington Mutual to do it for $400. If the sellers won't let you take it sub2, this sure would be MUCH cheaper than you getting a new loan and it would remove the loan from them personally, thus not killing their DTI. If it is a good deal and you have enough margin, I would do this rather than losing the deal.
Good luck !
Jason
The Frances and Bob Meister use a land contract worded in such a way that it is satisfied as soon as either the purchase price is paid in full, or more importantly, the deed passes. If the seller is moving and needs to obtain new financing right away, they get the name of the bank the sellers are applying to, fax over the land contract as proof of income, and then take the deed the next day, satisfying the land contract. Most banks will accept 100% of income from land contract, but only 85% or less of income from tenants, such as in a lease option situation. Note that this method only helps with loans immediately on the horizon, not loans the seller may attempt to obtain down the road.