Whatcom Home Stats: Creative Real Estate Strategies Part 2

Creative Real Estate Strategies Part 2

INSTALLMENT SALE/CONTRACT FOR DEED

An installment sale is a form of seller financing where a homeowner takes back all or part of the market price of the property in the form of a promissory note secured by real estate. What does this mean? In simple terms...you finance the property for the buyer and hold title until terms of the agreement have been satisfied.

Benefits

*  Defer Capital Gains
*  Secure Investment (interest earned on total loan amount)
*  Highest possible sales price
*  Faster Closing
*  Lower Closing Costs

Explanation of Benefits

*  Used as Retirement Vehicle this creates a low taxed income stream, which allows Medicare to kick in sooner than it would with a person with a large sum of cash in their bank account. It allows the beneficiary of the note to leave something to their heirs (all tax benefit) upon exiting.
*  Interest only payments-Defers taxes indefinitely. Better/safer investment than pretty much anything.  With interest only payments you receive compound interest on your investment with is an astounding return on investment.

 

Interest Only

Example of a  $300,000 Seller Financed Property 

  • Sale Price = $300,000
  • Down Payment (whatever you decide) = 0
  • 1st Mortgage = $300,000
  • Current Balance $300,000
  • Face Value Note $300,000

 

Terms of the Note 

  •  6% Interest Only
  •  30 Year Term (360 Payments)
  •  $1500 Monthly Payments
  •  Total  of $ 18,000/year in interest
  •  Total of $540,000 in interest over 30 years
  •  Grand Total of  $840,000 ($540,000 + $300,000)

 

Principle and Interest

(same price, balance, terms as above & principle will be paid down)

  • $1798.65 Monthly Payments
  • Total of $21,583.80/Year in interest
  • Total of $347,514.57 in interest over 30 years
  • Grand Total of $647,514.57 ($347,514.57 +$300,000)

Interest Only

 Example of a  $300,000 Seller Financed Property

  • Sale Price = $300,000
  • Down Payment (whatever you decide)
  • 1st Mortgage = $300,000
  • Current Balance $300,000
  • Face Value Note $300,000 

Terms of the Note

  •  10% Interest Only
  •  30 Year Term (360 Payments)
  •  $2500 Monthly Payment
  •  Total  of $ 30,000/year in interest
  •  Total of $900,000 in interest over 30 years
  •  Grand Total of  $1,200,000 ($900,000 + $300,000)

Principle and Interest

(same price, balance , terms as above & principle will be paid down) 

  • $2,632.71 Monthly Payment
  •  Total of $31,592.52/Year in interest
  •  Total of $647,777.30 in interest over 30 years
  •  Grand Total of $947,777.30 ($647,777.30 + $300,000)
Comment balloon 3 commentsTara Camp • May 27 2008 11:19AM

Comments

Hello Tara,

Is this similar to a PMM? (Purchase Money Mortgage)

What if the seller has an existing mortgage?

Jeff Lund

Posted by Jeff Lund (Jeff Lund-Income Property Specialist- Bellabay Realty LLC) about 9 years ago

Thanks for the breakdown.  Looks like a good option for some people.

Posted by Chuck Carstensen, Minnesota Real Estate Expert (RE/MAX Results) about 9 years ago

Hi Jeff,

Yes, this is the same as a PMM. 

If the seller has a mortgage, the seller can use an all inclusive trust deed to wrap the existing loan and any equity they have in the property. 

The buyer then makes payments to the seller and the seller makes payments to the underlying lender.  A servicing company can also act as the middle man to protect each party. 

If the seller wishes to sell the note then they will need to have 40% or more equity in the property.

 

 

Posted by Tara Camp (Keller Williams Western Realty) about 9 years ago

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