Installment sale can lure buyers, ease taxes |
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Sellers aren't the only ones who benefit from this type of arrangement. From a buyer's perspective, installment sales on investment properties can mean spreading the cost of a sale over a longer term without taking out a bank loan, potentially helping to bring an unattainable sales price into reach.
Bending rules
Because the seller acts as the lender in an installment sale, they
set the rules governing who qualifies for financing. If their home
is in a slumping real estate market, the seller may choose to lend
a more sympathetic ear to the buyer than a bank loan officer. The
seller can even offer more favorable closing costs and waive fees
or private mortgage insurance requirements to further save the buyer
money and help make his or her home stand out from the crowd. An
owner-financed deal might be especially attractive if the buyer
had a nontraditional financial situation, such as a small-business
owner who may need a no-document loan that a more traditional lender
may frown on.
But while bending the rules to accommodate a buyer
may help move the house, experts warn that those restrictions are
put in place by banks for a reason and that extending credit to
an otherwise questionable buyer may lead to trouble down the road.
Sharon Lechter, a certified public accountant and
co-author of the book "Rich Dad's Real Estate Advantages: Tax
and Legal Secrets of Successful Real Estate Investors," advises
anyone considering selling a house through an installment sale to
take some basic steps for self-protection.
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| 5 tips for sellers |
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Buy a credit report on the buyer. |
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You are becoming a lender, after all, and jumping into a deal with someone who has questionable financing may come back to bite you later. |
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File a lien on the property. |
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When filing
the lien, make sure you secure the first position
on the title. This protects you in case the
new owner wants to take out a home equity
loan using the home as collateral. The first
lien holder gets more preferable standing
if things go wrong and the property is foreclosed
on. |
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Include a foreclosure clause. |
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This protects you in case the new owner skips any payments. |
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Include a due-on-sale clause. |
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Just as institutional lenders do, make sure this is included to assure you will be paid off if and when the property gets sold. |
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Record the mortgage. |
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This protects you in case the new owner skips any payments. |
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"Now, you should realize, if you have to foreclose you will get the property back," Lechter says. "That may be a blessing in disguise if home values go up. But if they go down, that is a risk that you need to consider."
Due on sale
In order to sell a home through an installment sale, you generally
need to own the property free and clear. That's because most mortgage
agreements do include the "due-on-sale" clause.
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