YOU HAVE QUESTIONS, WE HAVE ANSWERS!
VIVA ESCROW Q & A SEGMENT
(Real questions sent to us – verbatim!)
QUESTION:
I am considering an offer for the purchase of my property in which the Buyer wants me to give him a loan for part of the sales price. Can you give any recommendations as to the terms on this loan that I should be asking the Buyer for?
ANSWER:
Unfortunately, escrow professionals are not attorneys or CPAs so we are not allowed to give any legal or financial advice, particularly in a transaction that we are handling. However, as this is just a general question and not directed to a specific transaction, I can give you a few “pointers” that you might want to take into consideration as you negotiate with the Buyer. It is also important to keep in mind your long term financial circumstances as you turn this from one type of asset to another. And it is also important that you obtain legal counsel on each item as some conditions are dictated by what is allowed by law. By the way, in real estate language, this is called a “Seller carry back” transaction. Here we go:
- Interest rate – use the current rate offered by financial institutions as a baseline for the rate that you want.
- Term of the loan – how long do you want the loan for? 1 year? 5 years? 10 years? 30 years like an institutional loan?
- Monthly payment – There are several variations. Interest only each month? Amortized or calculated over the life of the loan? Or amortized over a certain period but due sooner?
- Late charge – On this, you need legal counsel as what you can charge is designated by law.
- Due on Sale – This clause, when part of the loan, states that if Buyer sells the property, then the loan to you has to be paid off. The next owner cannot continue the loan.
- Prepayment penalty – if you do not want the loan to be paid in full before the end of the established term of the loan, you can add a penalty for early payoff. You must obtain legal counsel as the penalty that you can charge is prescribed by law..
EDUCATIONAL MOMENT:
Carrying a loan for the Buyer is a good way of turning a non income producing asset into something that can give you steady income in the future. However, as mentioned above, you must speak with your financial advisor before this step is taken. Your real estate representative might not be qualified to help and definitely not your escrow professional. Here are some other things to consider:
- Is the Buyer’s income stable? A financial institution will qualify the person for a loan; you should also qualify this person to make sure he can keep making his payments until the loan is paid in full.
- Do you have sufficient equity? Do you have any loans that need to be paid off on this property? Once your loans and debts are paid and all closing costs, including real estate compensation are paid, will your remaining equity balance allow you to carry back a loan for the amount the Buyer wants?
- One thing of importance: If you cannot claim an exemption from California’s Withholding laws, you need to let the Buyer know that throughout the life of the loan, every time he makes a payment to you that includes principal, he will be responsible to first deduct 3.33% (or the alternative withholding calculation allowed by the State) from the principal amount and send it to the State of California on your behalf.
I have had many Seller carry back transactions that fall apart when this last withholding matter was brought to the parties’ attention.
A refresher on the California withholding is below in my YouTube Offering of the Month section.
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~ Video of the Month ~
5 Essential Exercises for those of us who are over 60
Go for it!
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~ Two Fun Thoughts for the Month ~
People still play the lottery even though most of us can’t insert the USB correctly on the first try and those odds are 50/50.
A lot less people would buy a lottery ticket if the rule was, “Pick a number between 1 and 300 million. If you guess right, you win.”
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My YouTube Offering for the Month
California Withholding Taxes Part 1 (refresher)
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You Have Questions? We Have Answers!
Juliana Tu, CSEO, CEO, CBSS, CEI, SASIP
“Escrow is my FOREMOST language!”
Advance Disclosure:
The opinions expressed in this blog are solely the author’s.
Your comments and viewpoints are always welcome.
Info @ VivaEscrow.com