OWNER FINANCE Q & A

What if the Buyer defaults on my property?

In Idaho, for most sales under 80 acres, rather than a mortgage, the Deed of Trust is commonly used as security instrument. One of the buggest questions Owner's ask, "What if I have to take my property back?" if buyer default occurs with the Owner Financing, there is a more economical and expeditious 120 day process culminating in Trustees Sale. At Trustees Sale, the opening bid may be the principal balance, plus interest and costs incurred to document the Sale. If no bidder buys the property, it reverts to the original seller immediately. The Deed of Trust also enables immediate re-sale after Trustees Sale, without period for right of redemption by defaulting buyer. (Typicall 6 months) The Deed of Trust is provided for by Idaho Statutes. If default occurs, proper notice of default, required advertisement, and notice for Trustees Sale must be followed by appointed attorney for costs approximating $2,000, paid for by seller. This is money well spent to assure proper legal recovery of balance due or the property in return. On the other hand, with a mortgage, the lender recovery occurs after lengthy and expensive judicial foreclosure, followed by a lengthy period of right of redemption afforded the defaulting buyer. The property cannot be sold during the redemption period. Wyoming law requires the mortgage to be used as security for a loan.

Why is this better for a Buyer, giving my property more opportunities to sell?

Some buyers feel reluctant to negotiate a purchase without utilizing conventional lender financing, though properly documented Owner finance purchase is secure and economical. I strongly encourage the use of a third party (title company) Collection Account, to maintain interest accrual and installment disbursement to seller. Owner Finance also allows the buyer to pay the cost of acquisition over years of equity building, minus the costs associated with institutional lenders. If properly documented, the sellers are as secure as any institutional lender, receive the full purchase price, less ordinary broker and closing costs, and earn interest on the principal balance paid over years. This interest earned increases the seller’s return on original investment. The buyer is assured of obtaining clear title and typically can pay off the entire balance due at any time, without penalty sometimes charged by lending institutions.

What are the tax benefits?

Seller carry-back financing allows the seller to pay capital gains tax (currently 15%) on the gain over their basis (original purchase price), and they pay this tax on the gain only received during any given calendar or tax year. Therefore, the tax on gain is disbursed over the term of the loan, including the year in which net down payment is received. If the sale is at a loss, being less than the original purchase price, there is no gain and hence no tax on gain. The interest income received is typically taxed as ordinary income, again over each of the years of the loan repayment period. Sellers generally cannot use the tax deferred exchange to reinvest proceeds from installment sales.

Reciprocally, the buyer has the benefit of acquiring real property by paying over time, rather than cash at closing, and can be assured of obtaining clear title after paying the full principal balance, plus interest accrued over the term of the loan. The re-conveyance fee and document may be paid for in advance so as to be available for recording upon payoff, avoiding any concern for delays resulting from death or probate of seller.

The benefits for both buyer and seller are as follows:

Buyer Benefits to Seller carry-back financing:

*For raw land, the percent cash down is usually less than for institutional loans

*No appraisal fee (generally $450)

*No loan origination or other loan fees

*Competitive interest rates, subject to negotiation

*Secure documentation and accounting procedures

Seller Benefits to carry-back financing:

*Add flexibility and speed to negotiated sale

*Increasing the number of qualified buyers

*Tax on both gain and interest income are spread over the term of the loan

*Interest income increases the return on seller’s investment

*Secure documentation and accounting procedures