Even though I seem to talk a lot about Sub2's and seller-financing, I'll honestly admit I haven't done either one yet (although it's not because of lack of trying!). There are a few issues that I still have with both. I'm seriously thinking of scheduling some time with a very prominent real estate attorney in Austin to get feedback on what I need to do to protect myself and my potential buyers/sellers when doing a acquiring properties Sub2 and using seller-financing as an exit strategy.
Some of the issues I have are ...
Insurance - On a Sub2, I've heard differing views. William Tingle suggests leaving the existing insruance alone and getting a new policy. This will add to the monthly costs, but won't cause any ruffles with the lender when trying to adjust the existing insurance policy. I've heard other people say just add you (or your entity) as "additionally insured" to the existing policy. When sold via seller-financing, John Locke suggests converting your insurance policy into a landlord policy. He also says to have the new owner get liability insurance as well as content insurance. Definately would like clarification on which is the best way to go for both Sub2 and seller financing.
Property Taxes - With Sub2's, I'm not worried so much. If escrowed, the escrow company will pay the taxes at the end of the year automatically. If not escrowed, the owner on record (i.e., ME) will get mailed the bill. My conern is really about the new buyer, although, things should still go along as normal. Just want clarification from someone who knows precisely.
Interest - Aside from the insurance issue, this is one of my biggest concerns. If taken Sub2, one of the first things you do is make yourself POA (Power of Attorney) for the property. This gives you legal power to conduct legal matters for the property. You should also submit a change of address form via the old owner to the existing lender, so that year-end 1099's come to you and not the old owner, since you are now the owner and are qualified to take the interest deductions. However, what exactly happens if I turn around and seleer-finance the property? I now of a wrap that includes payments (with interest) to an existing loan and payments (with interest) to the new owner. Can someone say HELP! :-)
I guess I should really get these and other matters cleared up sooner rather than later!
BTW, I got in touch with a lender today who I will work with on a couple of properties right now. I came to me as a referral from my agent, so we'll see how it works out.
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Steve, I have done a couple of owner finance in Texas. Never a sub2 though. It is a realativly easy process and much cheaper closing cost about $300 depending where you live. I always included the taxes and insurance in the payment and I held it in a personal escrow account. That way I always had control over it. Once the buyer is listed on the lien they can take the tax deductons. You can to on the mortgage you have, and the taxes and insurance you just have to claim the income from the buyer. We also rented the propety for at least 12 months to a buyer at a rent amount very close to what the mortgage+tax+insurance would be to make sure they could make the full payment. It is easier to evict a renter then to have to forclose. It also helped with capitol gains since we held on to the property longer before selling. If you have any questions about owner finance I will answer anything that I know good and bad.
Brian
Hi Brian. Thanks for the info. I was a little confused by your statement:
Once the buyer is listed on the lien they can take the tax deductons. You can to on the mortgage you have, and the taxes and insurance you just have to claim the income from the buyer.
Could you clarify this for me? I'd be taking the property over with the original note in place (still in the original owner's name). Since I am now the owner (ie, person on the deed), I can take the interest deductions. As soon as I sell the property via seller-financing, the buyer is now the owner and takes the interest deductions from MY loan to him/her. Are you saying I can still take the interest deductions on the original loan even though I'm not the owner of the property? Thanks!
Steve,
sorry for the confusion. I may have what you are doing wrong but the way it was done for me in the past was:
First lien betwen me and the mortgage company. As a rental I could take the taxes, interest, and insurance as a deduction.
Then owner fianced it becomes a second lien between me and the buyer. I can take the tax, insurance, and interest from the first mortagage as a deduction. The buyer can take the interest from the note I have with them. I just include the tax, insurance, and full mortgage payment the buyer pays me as income on my taxes.
If this still doesn't make sence let me know and I can explain it over the phone too. It is not really that complex just their are so many variables some times it is difficult to explain it with out trying to write a book.
Brian
Thanks. Okay, I'll think out loud for a moment ... I can understand you taking the deductions if it is a rental. However, I thought the only way you could take a deduction (interest rate, insurance, property taxes) - excluding business write-offs against the income - is if you are the owner of the property in question? With a cash for deed (which, unfortunately, is now outlawed in Texas), I could understand as the deed is still in my name. But I actually signed the deed over to the new buyer, so they are now the legal owners. I mean if what you are saying is true, I'll be even more happy. :-)
BTW, I really appreciate your input!
Thanks Brian. Good advice. Actually, Sub2's aren't illegal in Texas, only CFS (contract for deed) and Lease/Options are (and even then, they aren't TRULY outlawed, just next to impossible to do - for instance, with L/O's, you must have no liens on the property and own it 100%, and even then there are stipulations).
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