Hello -- new here -- usually hang out on the decorating boards. But have a real estate question.
I am holding a mortgage for a former rental property in a nearby city. I was a "reluctant landlord" and am now a "reluctant" mortgage holder. I was unable to sell the property without a great loss outright. I was able to find a buyer, 15% down payment, 7% interest rate, and am 16 months into a 12 year contract.
While the purchaser immediately set up automatic bank transfer payments and everything seems to be going OK, I am nervous. I do not ever want to take this property back. What if he defaults on his payments. Then I have to do the foreclosure route, make repairs, and start the rental or resale process all over again. The property is right on the border of good and bad neighborhoods.
I have been approached by a company that purchases land contract notes. I understand there is a discount involved if they were to take over the ownership.
I am considering going this route for several reasons. I am 65, single female. I could use the money (little less than $30,000) to purchase a used Class B motorhome outright, I would not be saddled with dealing with foreclosures and its aftermath if it should ever occur, etc.
I have not had my taxes done yet this year, but I am betting it won't be good (first full year of interest).
Does anyone have experience with selling a real estate note. Good/bad experience. I would appreciate any input, positive or negative. Thank you.
"MyLife," If I understand the situation correctly you were able to avoid a loss on selling this property by utilizing a land sale contract where the purchaser has already paid you 15% of the purchase price up-front which means he has a vested interest in equity at this point, has directed automatic deposits to be made and has been current with all payments for the last 16 months, is that correct?
You are receiving 7% on your money ~ a far higher rate than any other secure investment would probably generate on the same amount of money right now. You may or may not owe more taxes this year but the payment of those taxes actually comes off the top of your payments as long as you haven't spent all of them to date so, in effect, those payments are paying any associated taxes they caused.
Of course, you ABSOLUTELY need to consult with a financial tax consultant but they can't help you make the ultimate decision which is "do I want the money now to enjoy OR should I leave things as they are" with possible problems (or maybe not) in the future. No one knows if there will be problems; it could be that the contract will play out in full just as it should.
And, that discount? Are you aware that it will be steep - as much as 25-50% of the balance? So, just for fun, I did some numbers. A balance of $30,000 less 25% discount (at best - probably the discount will be higher) would generate $22,500. which you could use to buy that used Class B motorhome outright and you could begin enjoying right now ~ as long as you realize that it will be worth probably little more than half of what you paid for it the minute you drive it off the lot, say, $15,000.
On the other hand, a contract of 30,000 at 7% over 128 months (10 years, 8 months) generates $333.32 per month (less taxes if any) or $42,664.96 over the remainder of the loan. Yes, it probably would be fun to have the motorhome but you might regret buying it in exchange for a guaranteed income of $300/ per month or more in the years to come. (All figures are approximate - I have just extrapolated from the ones you posted.)
I do understand that you are 65 years old, "My Life," and it would be fun to have that motorhome right now but, you know what? You are actually fairly young and that $300 or more per month until you are 77 years old might actually be MORE fun. Get professional advice but, IMHO, trading a $40000 secure investment over the next ten plus years for a $15000 motorhome that will be losing value every day? Nope, I wouldn't do it ~ but that's just me. Best of luck in making your decision.
I understand your concern, MyLife, but I wouldn't imagine a problem until one actually exists. Yes, it's a potential headache - the buyer is most likely a poor credit risk so he's compensating you in the form of a higher than market interest rate, in exchange for accepting that risk.
Even if you're in the highest tax bracket, you're still receiving add'l interest to compensate you for your risk and the potential headaches. BTW, if you sell your note and unless you can recognize a loss, you may very well create even more tax liability! No way to avoid it -
That said, for myself, I agree with Idaho - wouldn't trade that investment for a motorhome.
OTOH, if you truly want a motorhome, why not shop seriously for one? Great deals are available and you'd probably receive 0%, if you financed it.
You would, however, suffer from both the immediate decline in the motorhome's value and the deep discount received on the sale of the note.
Without reviewing your complete financials and performing the tax analysis, none of us can provide the best answer for you, personally. Sure you can forgo that income in the future?
Thank you both for your insights. And....I agree 100% with everything you have said. I guess I was beginning to panic. I have NEVER had a good experience with renters since I have owned this property (2005). These past 16 months of just collecting money and no repairs, hassles, etc. have been such a relief, but there was still a nagging feeling that he COULD just skip town or stop paying at anytime.
I guess I should have more faith in him -- after all, I did feel he was a solid, good, honest person in the beginning. Plus, I found out yesterday that he is in the process of becoming a police officer for the city. I would imagine that in a year or two he will do a conventional refi and pay me off in full.
And then, I can truly wash my hands of the whole landlord business!
Good luck with your decision. Sounds like you found a good buyer. WE'll keep our fingers crossed for you.
About the motor home - DH and I are planning to do the same thing next year. We are also considering buying a used one because most of the depreciation has already occurred. Plus by looking at prices, we can buy one with low mileage - get our let's travel bug treated - and then sell it after 2 or 3 years.
Good idea to keep the property too, IMHO.
Before purchasing a motorhome, I sure would rent a couple first. Different sizes, if you are unsure what you want. It can be a real eye opener as to driving, parking, maintenance, living in it, etc. I think it worth the time and money for education/experience purposes. Then shop for your own.
Consult a Real Estate Attorney and a Tax Attorney. They can refer you to a reliable vendor to sell your mortgage "to be on the safe side" if that is the route you end up taking.
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