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9/22/2017 12:11:25 AM
Posted: 9/19/2005 9:44:08 AM EDT
I'm selling one of my houses. I've never sold a house before, and I need some help.

I bought the house 5 years ago for $75,000 and I'm selling it for around $73,000.

Problem is, the buyers don't have the best credit. The mortgage company is proposing that we do a purchse agreement stating that the home price is $95,000, with the mortgage company carrying a $75,000 mortgage, and me carrying a $20,000 seller financed mortgage. This gives them an 80% loan to value ratio, which makes it easier for them to get financed. I would forgive the $20,000 mortgage after the closing.

So, will this result in me having a $20,000 capital gain on the house? Would the $20,000 loan, once it is forgiven, be considered a gift and subject to gift tax? Is this deal somehow going to come back and bite me in the ass?

Any advice would be appreciated. Let me know if I didn't explain it very well, and I'll try to clarify.

Link Posted: 9/19/2005 9:45:37 AM EDT
Sounds to me like the mortgage underwriter isn't current on his ethics training.
Link Posted: 9/19/2005 9:48:13 AM EDT
As I understand it, you are allowed to realize a net gain of $250,000 tax free after the sale of you residence, not sure of income property.

My concern is the potential implications of falsifying loan documents to get people with crappy credit into a home.

I'd consult an attorney to ensure there are no potential criminal penalties, then about the tax considerations.

Then, jack that house up, drag it out to Kali, wait one week, and sell it for $450,000.
Link Posted: 9/19/2005 9:50:40 AM EDT
Link Posted: 9/19/2005 9:52:35 AM EDT
I try to stay "above board". That certainly isn't.

HTH...
Link Posted: 9/19/2005 10:20:25 AM EDT
I'm not an expert, but participate in a lot of Real Estate deals. Here's my take:

So, will this result in me having a $20,000 capital gain on the house?
Effectively no, if this is your primary residence. (as stated above)

Would the $20,000 loan, once it is forgiven, be considered a gift and subject to gift tax?
Is this really a loan or a “fake” loan (on paper only) to let them qualify?

If this is a real loan, the repayment is not considered a gift. But you would need to charge interest (otherwise it may be considered a gift), and any interest you receive becomes income to you. To protect yourself, you would want to place a lien for this loan against the property. This lien would be in 2nd position, with the bank loan being in first position.

Is this deal somehow going to come back and bite me in the ass?
Probably, I wouldn’t get mixed up with someone who can’t qualify for this limit loan (unless they are family). But for the record regarding the ethics of this deal:

If they are really paying 20K more for your house and you are really loaning them the money then this is not unethical. You are receiving payment for this loan (in the terms of interest payments), and you are entitled to that 20K if they ever sell the house. However, if they do sell (or are forced out of the house) the house may not be worth enough to payoff both the bank loan and your loan. So you would be out your 20K.

If you are not actually loaning them the money, then this is not a good situation at all, and you could be violating fraud laws, so I would stay away.
Link Posted: 9/19/2005 10:22:00 AM EDT
Thanks for the advice so far.

It looks like capital gains tax wouldn't apply, since I meet the requirements of residency for 2 years out of the last 5.

As to the legality, if it's the mortgage company proposing it, wouldn't it be legal? It's their money on the line, right?
Link Posted: 9/19/2005 10:24:52 AM EDT
Link Posted: 9/19/2005 10:27:47 AM EDT
One more thing: The house will probably appraise at around $95,000.

And yes, I'm selling this to a family member, which is why I'm basically selling it for what I owe.
Link Posted: 9/19/2005 10:29:08 AM EDT
[Last Edit: 9/19/2005 10:30:55 AM EDT by PeteCO]
Why not finance them yourself and make even more money? Unless you need all the cash now, you'd be silly not to.

There IS a way to do what you are saying and have it be on the up and up - make the docs say so - make it a "forgivable note". In other words, if they buy the house, the note is forgiven. If they don't buy the house, the note is forgiven.

If the house really will appraise at $95k, then there must be a company out there that will either fund it that way, or perhaps you could take back an actual second for part of the purchase price.
Link Posted: 9/19/2005 10:30:08 AM EDT

Originally Posted By TheTacticalSolution:
I wouldn't do it. You've got to have some really shitty credit to not get approved for a $75k mortgage.



Isn't it more an issue of the percentage of the home value and not the dollar amount. I can get approved for $200k here on a $250k house, but only $160k on a $200k house.
Link Posted: 9/19/2005 10:30:36 AM EDT
Link Posted: 9/19/2005 10:31:51 AM EDT
[Last Edit: 9/19/2005 10:36:55 AM EDT by AZRobbo]
As long as this is completely disclosed on the settlement sheet (HUD1) this is legal. Anything that is done under the covers and not diclosed is illegal.

Disclosure is the key.

(edited to add)

This makes sense now that I understand its for family. This type of thing is very common with deals between family. It's generally referred to as Seller Carryback Financing. This can be done legally but does take some work to setup. (usually loan officers / RE agents help with this.)
Link Posted: 9/19/2005 10:32:37 AM EDT

Originally Posted By Riotgun:
Thanks for the advice so far.

It looks like capital gains tax wouldn't apply, since I meet the requirements of residency for 2 years out of the last 5.

As to the legality, if it's the mortgage company proposing it, wouldn't it be legal? It's their money on the line, right?

No. Mortgage companies don't have any money, and don't lend any money. If it was up to them, they'd just give the deadbeat buyers $75,000 and be done with it. It's YOUR property on the line. That's the only part of the whole transaction that really exists.

If the mortgage company wants to value your house at $20,000 over list, they should find you a buyer who will pay that.

I think what they are proposing constitutes fraud. Don't believe me? Ask your bank. Do not willingly participate in fraud. The scenario you describe is maybe only slightly more legitimate than a Nigerian chain email or a Canadian car buyer who wants to pay $8000 for a $2000 car, but has to do it right away.
Link Posted: 9/19/2005 10:44:10 AM EDT
What does your attorney say?

You *do* have an attorney looking at this don't you? If not, you could really be putting your ass in a sling if this deal goes south. For the few hundred dollars it should cost you really need *your* attorney looking at this deal, IMHO.
Link Posted: 9/19/2005 10:44:22 AM EDT
Since more details have come out, I can repeat: THIS IS NOT FRAUD.

He is trying to loan (or gift) a family member money so they can qualify for a loan and buy his house. This is completely legal if it is completely disclosed.

This happens all the time, especially when parents help their kids buy their first house.
Link Posted: 9/19/2005 10:55:28 AM EDT
More info: Just confirmed that the $20,000 loan will be on the contract, so this will be done with the lender's knowledge.
Link Posted: 9/19/2005 10:56:23 AM EDT

Originally Posted By TheTacticalSolution:

Of course you could always be a jackass and get them to buy for $95k and then not forgive the loan.



Me? A jackass?

<­BR>

Link Posted: 9/19/2005 11:02:11 AM EDT
Upon further information and review, it looks more legitimate, but I would still get some guidance from an attorney familiar with real estate laws in your state.
Link Posted: 9/19/2005 11:46:38 AM EDT
[Last Edit: 9/19/2005 11:47:50 AM EDT by SHIVAN]
Still doesn't sound right.

95k-75k = 20k

20k/95k = .2105

1 - .2105 = .7894 or a 78.94% LTV.

Something sounds fishy.

If the house appraises at $95k, then they will only be borrowing ~78.94% of the value of the house. The lender is not 100% at risk and they would met the 80% LTV rule without having to do PMI.

This doesn't seem right.

Further, I would guess that fees and commissions would be based on the arbitrarily inflated "selling" price of $95k, so they would end up making a little extra off your family members.

I would have a 4th, DISINTERESTED, legal party examine the documents.
Link Posted: 9/19/2005 12:46:09 PM EDT
I would go find another broker. Sounds like they are trying to get more money out of you on the sly.
If your house does apprase for 95k, then there is no reason for the "loan" of 20k. They would only be asking for a loan of 80 percent of the home value regardless. An extra loan by you would only make it worse.
Link Posted: 9/19/2005 2:26:17 PM EDT

Originally Posted By Andrewh:
If your house does apprase for 95k, then there is no reason for the "loan" of 20k. They would only be asking for a loan of 80 percent of the home value regardless.



Yes but the buyer would have to pay the difference between the agreed on purchase price and the loan amount. i.e. the buyer would need to pay a 20K down payment.

This is because at closing both parties sign a HUD1 form that lists all of the monies received and paid, and they need to zero out at the end. So if the seller is selling for 95k, and the buyer is buying at 95k - a loan for 75K, they need to account for the other 20K. (And you have to show where you're getting that money from - checking account, stock account, etc....)

Having the seller "carry back" their profits to the buyer (in the form of a loan) is one way to do this. This is very common. Do a Google on "seller carry back" if you don’t believe me.

Now without knowing the rates and costs that are being charged here, I have no idea if this is a good deal. I'm just saying from what I see here, this appears to be a legit way to make this deal happen.

(I hope I don’t offend anyone here. I'm a full-time Real Estate developer so I have a little knowledge here and thought I'd help out. It's rare that something is posted here that I can help out with; I'm usually absorbing your guys knowledge.)
Link Posted: 9/19/2005 2:40:26 PM EDT

Originally Posted By AZRobbo:

Originally Posted By Andrewh:
If your house does apprase for 95k, then there is no reason for the "loan" of 20k. They would only be asking for a loan of 80 percent of the home value regardless.



Yes but the buyer would have to pay the difference between the agreed on purchase price and the loan amount. i.e. the buyer would need to pay a 20K down payment.

This is because at closing both parties sign a HUD1 form that lists all of the monies received and paid, and they need to zero out at the end. So if the seller is selling for 95k, and the buyer is buying at 95k - a loan for 75K, they need to account for the other 20K. (And you have to show where you're getting that money from - checking account, stock account, etc....)



Uh, the guy is selling at $75k...his mortgage broker is telling him to "sell" it at $95k.

Maybe I'm reading it wrong, but if he sells at $75k and the buyer needs a mortgage of $75k, and the property is worth $95k then they are below the 80% LTV necessary for most loans to avoid PMI.
Link Posted: 9/19/2005 2:47:59 PM EDT

Originally Posted By TheTacticalSolution:
I wouldn't do it. You've got to have some really shitty credit to not get approved for a $75k mortgage.


From what I've seen lately, the opposite is true. The banks are getting so little for the money on mortgages and they've already loaned so much out that they don't care whether or not they lend the money.

My great-nephew is closing on a place this week. He makes more per year that the place sells for and was planning on putting 50% down. His credit is perfect, and he's leased or bought more $ in cars than the place is worth. He was denied by three different banks. Relatives of mine work at two of the banks and even they couldn't get the loans approved. He ended-up selling his car to get enough cash to buy the place with cash. Then he got a 0% loan on his new car so he's paying less interest and no closing costs.

A few weeks ago my great-niece and her husband ended-up taking a high interest loan on a house, because they couldn't find a traditional bank that would do the loan. They were buying a house equivalent to 75% of their yearly income and were paying 40% down. A year ago they sold a house for almost 3x the amount before moving here and have perfect credit. They had shown that for over 5 years they made payments on time for a much more expensive house. Still the local banks weren't even interested in taking their application.z
Link Posted: 9/19/2005 3:13:52 PM EDT

Originally Posted By Andrewh:
Maybe I'm reading it wrong, but if he sells at $75k and the buyer needs a mortgage of $75k, and the property is worth $95k then they are below the 80% LTV necessary for most loans to avoid PMI.



Excellent point, somehow I missed that. If the house is indeed worth 95K then the LTV should be good.

Does the lender know that the market value of the house is 95K or are they assuming it's 75K?

I would agree with the other posters, that you should probably get a second opionion from another loan company? (you could also try checking eloan.com)
Link Posted: 9/19/2005 7:26:41 PM EDT
OK, I think I've got the solution.

First, the house was appraised at $90K 2 years ago when I had it on the market. I got into a time crunch with the closing on my new house, so I rented my old house to a family member. While this worked out well for him, it was the only way I could get into my new house without carrying two mortgages myself. I'm sure it's going to appraise for at least $95K now.

I told him that I would sell him my house for what I owed on it, if he would buy it before I retire. I was trying to give him a helping hand in buying his first home. That's what we're doing now.

AZRobbo is correct, in that the lender wants to see the difference between the value and the selling price accounted for, otherwise it looks like something screwy is going on.

The seller carryback is going to accomplish a few good things. It shows the lender where the other $20K of value is. Also, it keeps me from gifting $20K of equity, which would be subject to the gift tax. It also keeps me from having a $20K capital gain.

After thinking it over, I am not tearing up the note right after closing. I am going to forgive the debt at a rate of $5000 per year as long as he owns the house. This keeps me from gifting enough to pay the gift tax, and it keeps him in the house for at least 4 years, so he actually owns a home, rather than strip my equity out 2 months after he buys it. Like I said, I want to help him own a home.
Link Posted: 9/19/2005 7:32:08 PM EDT
That sounds very unethical to me. Take a pass on that sale.
Link Posted: 9/19/2005 8:08:01 PM EDT
I sell real estate so I have some background with this type of a deal. Run this by a real estate attorney, not a general practice or any other type but a real estate attorney!

I presume the mortgage your buyer is getting is a standard conforming type or fannie mae underwritten mortgage. If so, then it's my understanding that you would be participating in a fraudulent loan and have the same legal issues as the mortgage broker and the appraiser in this situation. In my opinion it's a bad deal and you're getting screwed with by an unethical lender, unfortunately there are more than a few right now due to the "hot" market. I can't wait for it to cool down and flush them out.
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