Real Estate Professionals
Real Estate Professional Education
We recommend that the real estate professional consider charging the seller a fixed fee (not the usual percentage of the selling price), so they can assist both the landlord-seller and tenant-buyer in negotiating a mutually acceptable price for the home, often the most difficult part of the process.
Have you considered the following:
Consideration #1
Most sellers will be landlords of separately deeded homes, whether single family or condominiums. They will have expertise in rental operations, including accounting, finance and loans, and repairs and maintenance.
Consideration #2
The first area to assist them is in the valuation of the home for sale to an owner-occupant.
We have provided a sample Home Value Analysis process worksheet. (Click Button Below)
Elements of valuation to consider are current and area rents (the income method of valuation), and ownership costs. These include property taxes (which may increase upon recording of the contract), insurance, repairs and maintenance, and utilities included in the rent. Market comparable properties also should be considered when setting a contract value.
A “willing buyer and seller” is the definition of established value for most appraisals, and the contract price should also consider the eventual refinance process of the home by the buyer to a conventional mortgage and deed conveyance.
Consideration #3
We recommend a down payment in the 1 to 1.5% range of the home’s value, depending on the buyer’s rental history, credit information, and employment. If the buyer is an existing tenant, the security deposit and any prepaid rent when the contract is signed, should also be considered as part of the down payment.
Consideration #4
Amortization of the principal. The normal recommendation is for a 30-year term. This term provides for principal payments in the approximate amounts of 1.7% of the contract value in the first year, and 1.8% of the contract in the second year. This will give the buyer a refinance “paid in” value of 3.5% of the contract plus the down payment for refinance consideration.
This built-in contract principal reduction could be viewed as a “savings” plan for the buyer if the home maintains its value. In some situations, the sellers may choose to offer “interest only” contract payments, with possible periodic payments of principal on the contract balance as mutually agreed, depending on the buyer’s position. This would reduce the monthly cash flow required by the buyer.
Consideration #5
The portion of the contract payments that are interest and the property taxes may be deductible for income tax purposes by the buyer, with savings dependent on taxable income, rate bracket levels, and other deductions available to the buyer. (Consult a tax professional.)
Consideration #6
The landlord/seller normally collects (called “servicing”) the monthly contract payments and property taxes, with proof of insurance as mutually acceptable. The seller should provide annual accounting of the principal and interest paid on the contract to the buyer for the IRS. (Consult a tax professional.)
Consideration #7
The seller (subject to IRS dealer rules) will normally have installment treatment for tax purposes on principal received on the contract. (Consult a tax professional.)
Consideration #8
The seller normally recaptures depreciation taken on a rental property in the year the contract is put in place. (Consult a tax professional.)
Consideration #9
Contract termination. The seller may offer or agree to a contract termination provision prior to a mortgage refinance, where the buyer can complete the contract payments to an agreed date, terminate the contract, and have no further obligation to the seller, who is then free to resell the home.
Consideration #10
We recommend that the seller consider purchasing and providing the contract buyer with an appliance and systems warranty for the initial phase of the contract until refinance to conventional mortgage. This will give the buyer access to various professional repair contractors, as contrasted with current tenant calls to the landlord, and may also provide some financial benefits to the contract parties.
Consideration #11
Counselling. It is expected that HUD and many local housing groups will develop and make available ownership courses and education for what will often be first-time home buyers under this program.
We have further arranged for the Legal Shield national plan provider of legal services, to provide QCD™ contract review and suggestions to the buyers (and sellers as desired.)
To assist in this process, we have also arranged for Rocket Lawyer to provide an interactive Contract for Deed for the buyer and seller, which a real estate professional if involved can assist in preparing.
Consideration #12
QCD™ elements. (See the website section outlining a QCD™) The seller should consider providing an updated title insurance report to
the contract buyer at contract closing to disclose existing liens and financing. The contract should be recorded to protect the buyer from seller default, and the deed may be placed in escrow with the title insurance provider for eventual conveyance at contract fulfillment or refinance. Both buyers and sellers should consider legal counsel, and state specific statutes governing these types of sales.
