Contract For Deed?

[GOOFY4DONALD]

When my husband and I first got married we didn't have much money and purchased a fixer upper manufactured home on a full acre. We still live in it and now it is paid in full. We fixed it up and completely fenced the yard. We stayed put longer than we expected, are now debt free, are now ready and finacially able to find move into our dream home. The problem is our home doesn't qualify for a bank loan and we will most likely have to go contract for deed (we are not interested in renting). Now we have an interested party (a coworker of DH) that can put 20% down but doesnt qualify for a bank loan due to bad credit from 2 divorces and lots of child support. His down payment would be tacked onto our downpayment for our new house and so would the monthly mtg payments. But now I am worried about the taxes. Would this be considered income like rental payments? Or will this be more like selling a traditional house? The house we are planning on buying is about 4x's more expensive than the house we live in and are selling. I know that all the advice I get on these boards is just opinions. And when the time comes we will let a professional handle all of it but I just wanted to find out some information beforehand.
Thank you.

 

[moongirl]

I don't know what "contract for deed" means. I can tell you that, if you sell a house and hold the mortgage on it for the purchaser, you only pay taxes on the interest that is paid to you but not on the principal.

 

[Claire&TheBoys]

If I'm following your post correctly, you want to sell your current home to this guy and do owner-financing for him. If so, you would charge him interest of some percent, and you would have to claim that interest income on your tax return. He would be able to claim the interest he paid you on his (you would need to provide him a 1098-int). As far as property taxes go, you could either do like a mortgage company does and split the taxes into 12 payments and add that to the amount he pays you each month, and pay them yourself so that you *know* they get paid. Or you could trust that he will pay them on time (and check for yourself to make sure he did). Same goes for insurance. I would require proof that he's insured the property, because if he doesn't and something happens (fire, flood, tornado), he could walk away and you'd be left paying for the damage.

You would definitely need a lawyer to draw up the sales contract and give you an amortization schedule so you know how much of his payments are principal and interest.

 

[GOOFY4DONALD]

Thanks for the replies. We will go through a title company that he would send in his monthly payment to. His one monthly payment will be divided into principle, interest, water and a reserve... the reserve will be for insurance and taxes. This is done for the monthly fee of 50.00 that he has to pay as well.

 

[seashoreCM]

Contract for deed is a concept whose legal status varies from state to state. The fundamental concept is that it is seller financing; the buyer makes monthly payments to the seller. But the buyer does not actually get the deed until he makes all of the payments due the seller.

If your state does not have specific laws regarding "contract for deed" then the buyer is vulnerable to third parties who sue the seller; those third parties could attach the house as an asset of the seller.

When the buyer makes payments to you under contract for deed, that is treated as a combination installment sale and interest. That portion which is interest (as defined in the loan note) is taxed as interest. That portion which is principal is taxed as capital gain which in turn is computed given that the contract has a "purchase price" and you have a "basis" based on how much you paid to buy the house years ago.

When you accept the taxes and insurance, playing the role of a bank that escrows taxes, you put that money into a separate account with the buyer's social security number but without the buyer's signature and right to withdraw. Money that goes into the escrow account is not income to you. Interest earned on that account is interest income to the buyer.

There is such a thing as seller financing without "contract for deed" where the seller deeds the property to the buyer immediately and takes back a mortgage and then the buyer makes monthly payments to the seller.

"Contract for deed" was invented to evade the non-assumability of (back then, most) bank mortgages. It was easier to consummate the deal when the old bank mortgage was left intact. The new buyer wanted to assume the old mortgage and the seller took back a second mortgage to come up to the new purchase price.

Whereas with an ordinary sale, the bank had the right to demand a payoff of the remaining balance, no matter how large, upon the deeding of the property to someone else.

Neither ordinary seller financing nor contract for deed is obligated to run 30 years. Typically it is written up for between 5 to 10 years with smaller monthly payments on a 30 year schedule but the entire balance due and the buyer expected to find conventional mortgage financing by then.

 

[THERESA522]

I don't want to be rude, but why would you loan anyone money who has bad credit? The reason this man cannot get a traditional loan is because he has a history of not paying his debt! Please be careful and think long and hard about going into contract with someone who is notorious for not fulfilling his obligation (i.e., bad credit).

 

[GOOFY4DONALD]

I don't want to be rude, but why would you loan anyone money who has bad credit? The reason this man cannot get a traditional loan is because he has a history of not paying his debt! Please be careful and think long and hard about going into contract with someone who is notorious for not fulfilling his obligation (i.e., bad credit).

There are many reasons a person can have bad credit not paying what they owe is the most common but not the only reason. If you have another suggestion on how we can sell our home that will not qualify for traditional financing I would great appreciate any advice. I am being completely honest. DH and I do not want to rent our place and we believe this is the only way. If anyone else has a better suggestion I am very open to the suggestion.

 

[mtblujeans]

I would talk to an attorney for this. I would avoid a Montana title company altogether, if I could.