Hopefully, some people have some insight into the following scenario…
I’m in the process of negotiating for a raw piece of land and the owner will consider seller financing. What are the steps involved and what are fair terms for the following:
Offer price of $150,000-$200,000
Fair Interest rate?
Fair Term (Seller in 70’s)
Down payment?
How much capital gains will the owner have to pay? The land was inherited.
What are the steps to complete such a transaction?
Thanks all!!!
Price: Offer $150K.
Interest Rate: Offer 7.25%. If the land is undeveloped, it could take a lot of money to increase the value.
Term: Depends.
If you are going to just flip the land to another investor/developer, I would do a 25-30 year amortization with a 3 year balloon, or a 5 year balloon, and explain to the seller that your goal is to cash him/her out as soon as possible. If you are going to develop it, I would still do a balloon payment in a shorter term, but give yourself enough time and cushion in case you run into zoning, construction, financing, selling issues…
Also, if you are going to subdivide the land into smaller parcels to sell the smaller parcels, or record them in the land records office, you will need to pay off the seller entirely to be able to record the smaller pieces of land. This is because the land will be used as the security for the seller’s note. There is a way around this, and that is to build a substitution of collateral in the note agreement to the seller. For example, if you need to subdivide, you would be able to offer up a sufficient amount of collateral equal to that of the land that is securing the seller’s note. So when time for the subdivision came, you would present your subsitution collateral to the seller, they would release the deed of trust on the land and place it on the new collateral being offered. That way, they are still protected, and you can subdivide the land into new parcels, etc.
Capital Gains: Ask an accountant that one. I forget how the cost basis is handled on inherited property.
Steps to Make it Happen.
- Get the property under contract.
- Contact a Title Company/Real Estate Attorney.
- Explain your goals, in a simple bullet point email.
- Have them prepare the contract, and perhaps the note and deed of trust if the seller does not have an attorney.
- Have the attorney/title company handle everything.
- Remember, all you need to do is get your agreement/terms that are agreed upon, onto a yellow legal pad. The attorney can help complete the entire deal.
To your success!!
This sounds like a real opportunity. Think of the seller, he has a piece of vacant land that isn’t earning him a dime. You can offer him the opportunity to convert that into an interest earning asset simply by holding the note on the deal. To determine the interest rate you should offer consider what other forms of financing will cost you and also what the seller can earn on his cash, somewhere in between is where you should fall. Given the sellers age he would probably be more receptive to a balloon note due in say five-ten years, but of course you can still ask for a 20-30yr amortization. As far as the seller’s tax payable that depends upon his basis in the property which would likely approximate the fair market value on the date of his inheritance (consult a cpa).