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When Even 'Free and Clear' is Too Much

I recently received this email:

“Dear Dawn,

I saw your recommendations in the Tribune article on waiting for Recovery. My question to you is should we sell our home now or next year?

We bought this home 7/2007 for $950,000.  We have spent $150,000 plus. The last project is to have the outside of the house painted, which is scheduled for July.

We have been told that we could probably sell for $950,000.

The lot is about ¾ acre, the house is about 2500 sq feet.

We realize we are losing money and our proposition 60 taxes.  But the lot has proven too much for us.  We would expect to buy a replacement home for about $850,000.

Our property taxes will increase ($6,000 to about $11,000 a year).  We will look for the same size house, but a smaller piece of property in the same city.

If we wait, replacement house prices could rise and the property taxes could also rise.  We do not have a mortgage. We are retired.

Thanks so much for any help you can give us.”

First off, it’s encouraging that they have a realistic view of the market and the value of their home. Too many sellers these days would insist that the value of their home is $950K + $150K = $1,100,000.

This couple seems to understand that the market doesn’t care how much you put into it. The market is just the market. A stock is worth what Mr. Market says it is, whether you’re making money or losing it.

[But wouldn’t it be great if the government would step in and make sure we don’t lose money in the stock market any more?  Maybe they could set up a special fund and buy GM shares at $30 a pop for anyone who paid that much or more for them . . . it’s only fair]

And then those property taxes . . . it makes my stomach churn to think of this couple losing their Proposition 60 base year value transfer.

If they could somehow manage to become ‘severely and permanently disabled’ they could transfer the tax basis one more time . . . but, um, that’s probably going a little too far.

The market is not going to be better next year.  Of course, I could be excruciatingly wrong, but I don’t buy the ‘green shoots of recovery’ story.

If you can wait 7-10 years, maybe . . . but in a year we’ll still be unwinding, and things could be the same, and they could be much worse.

What happens if interest rates have a sudden change of heart? Jumbo loans are already difficult for many people to qualify for.

So back to the couple at hand.

Because they own their property free and clear, they have more options than the average seller.  If they are willing to offer terms, they could get top dollar regardless of market conditions.

My guess is that they could easily inch up to $1mil if they agreed to finance a buyer who just couldn’t qualify for a conventional loan for some reason.

They could take a $250K down payment, and carry a $750K first at 7.5%, due in 5.  Then they’d have a monthly cash flow of $5,244.11.

(If they wanted to preclude the possibility of foreclosure, they could put the property in a land trust first.  This would also preserve the existing tax basis on the property just in case they ever got it back again).

And if they have other cash reserves to buy their replacement property outright, then they’re set, because cash is king, and they should be able to get the lowest possible pricing.

But what if they don’t have $600,000 sitting around to polish off the cost of their new home?

What if they could find someone with a nice 5.5% fixed and ask them to leave it in place?

Purchase price $850K, down payment $250K, take over the existing financing at $600K (or less), for a monthly liability of $3,406.73 plus taxes and insurance, so $4,000 (for an overall positive cash flow of about $1,200 per month).

If the replacement property is also in a land trust, then the existing loan cannot be accelerated by the lender, and the existing tax basis (probably lower . . . $6,000?) could also be preserved to give this couple the equivalent of their Prop 60 base year value transfer.

I call the title holding (land) trust “Seller Financing on Steroids.”  Especially in the jumbo markets, this strategy is empowering buyers and sellers and putting deals together where they otherwise wouldn’t be possible.

Always consult with your CPA, tax attorney and/or financial advisor before selling any real estate.

Dawn Rickabaugh is a real estate broker with expertise in seller financing and real estate notes.  www.NoteQueen.com  626.641.3931 dawn@notequeen.com.

June 29, 2009

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Dawn Rickabaugh


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