If I sell my house for $175,000 at 6% over 30 yrs...

Lancer · May 31, 2003, 21:49

How much interest will I make? Also, I don't really want it prepaid as it provides a portion of my retirement income, can you tell me how pre-payment penalties work?

Is 6% a good rate?

Anything you think I should put in the contract? Any advise at all?

notyoueither · May 31, 2003, 21:52

Get a lawyer!

MichaeltheGreat · May 31, 2003, 21:53

There's all sorts of capital gains tax and other issues, especially if you move overseas to a cheaper place.

There's also the fact that if the buyer defaults and you're 8,000 miles away, you've got a pain in your ass to deal with. (in other words, sell it outright, let the bank finance the buyer, and then invest the money yourself)

Real estate transactions can be a pain in the ass to do yourself unless they're virtually cash and carry and you know what you're doing.

MichaeltheGreat · May 31, 2003, 21:54

Quote:

Originally posted by notyoueither
Get a lawyer!

A lawyer may cost you more than a realtor, unless you want the lawyer to handle a bunch of other stuff anyway. And beware of small town lawyers and small firms or (especially) solo practitioners.

Lancer · May 31, 2003, 22:00

MtG, these people I trust. They're not going to let me down.

Also, capital gains...you can sell one house every two years and not pay.

MichaeltheGreat · May 31, 2003, 22:24

Quote:

Originally posted by Lancer
MtG, these people I trust. They're not going to let me down.

What happens if they get run over by a truck and are out of work, hospital bills, etc? You're putting your retirement at risk.

Quote:

Also, capital gains...you can sell one house every two years and not pay.

If it's your main home and you own it for five years, live in it for two before sale, yeah. What about Oregon gains?

notyoueither · May 31, 2003, 22:27

Quote:

Originally posted by MichaeltheGreat
A lawyer may cost you more than a realtor, unless you want the lawyer to handle a bunch of other stuff anyway. And beware of small town lawyers and small firms or (especially) solo practitioners.

When someone proposes to become a bank, and bet the retirement on the other party paying, it is time to get a lawyer... As I think you illustrated with your 'what if they get hit by a truck' comment...

notyoueither · May 31, 2003, 22:28

Quote:

Originally posted by Lancer
MtG, these people I trust. They're not going to let me down.

I once trusted someone like that... hahahahahahahahahahahahahahahaha...

Boy was I foolish.

Lancer · May 31, 2003, 22:34

I'm not foolish, these people are worthy of my trust.

MtG, if thre was a situation like that, we would figure something out. I'd come out of retirement to help them out, whatever. Whether they had a mortgage with me or not.

I'll find out about Oregon capital gains.

It is my main home, 5 years, etc...

Lancer · June 2, 2003, 13:11

"How much interest will I make? Also, I don't really want it prepaid as it provides a portion of my retirement income, can you tell me how pre-payment penalties work?"

Damn good question guy! Too bad it seems nobody can answer it.

Az · June 2, 2003, 13:22

MtG is right. Let the Bank finance them. **** can happen. Or they can always put your "trust" at jeopardy. The same thing happened to us, with our relatives. We vouched for them to get a mortgage at the bank, and they started failing their payments. We really dodged the bullet on that one.

Japher · June 2, 2003, 13:45

go to This web site and ask them. They no this stuff pretty well.

MtG is right that in order to avoid the capital gains you have to have lived in it for 2 of the passed 5 years, and then perform some exchange, I forgot the number. Yet, it is only for equal or greater value.

Most ppl will tell you to sell your house out right, but if you are intent on keeping it and eating a good chunk of the capital gains taxes, there are other ways to do sell your house. Lease optioning is a good way to do so.

Also, if you have not already paid off your house the bank won't like you turning it into an investment property, thus you would need your buyers to take out a mortgage, and then arrange for you to hold the second to which the buyer will pay you.

In your contract I would make sure to have a "subject to" clause incase they try and sell in the next 30 years.

I think 6% sounds fine right now, but I think you could do better. Especially by selling your house and buying a true investment property which you could personally refi or depreciate incase markets take a hit or your friends reneg the contract or go into bankruptcy.

Hmmm, now that I think about it; sell your home out right. If you want investment property than buy investment property, don't play the bank. While these people may be friends there are too many ways that you can get screwed doing this without being any of their fault. Buisness and friends don't mix. Though, if you just want to help them out and take out your money on the place in a few years the lease option may be the way to go, and then you can decide on a contractual time fram whether you really want to continue collecting from them or if you want to take all your money out... All along they are building their down payment for the property... It's a win/win IMO.

rah · June 2, 2003, 13:49

Yep. Sell the house, buy an anuity. Less worries.

Pre-payment penalties are not as popular anymore. Putting one in the contract could weird many possible deals.

Tingkai · June 2, 2003, 13:58

Quote:

Originally posted by Lancer
"How much interest will I make? Also, I don't really want it prepaid as it provides a portion of my retirement income, can you tell me how pre-payment penalties work?"

Damn good question guy! Too bad it seems nobody can answer it.

Well if you're intent on doing this, and ignoring all the capital tax and other stuff, it depends on what the inflation rate is like in the next 30 years. If inflation shoots up to 10% then you're losing money.

Also, what could you sell the house for now. If it is only worth $100,000 then maybe it would be worth it.

Then again, I'm drunk and I should go to bed.

Lancer · June 2, 2003, 14:13

This is all good advise. I would be selling the place, which is free and clear, for $105,000 more than I bought it for maybe 15 years ago.

The bit where I have to step into a replacement property is the pits. I thought I could sell a house with no capital gains every two years. Are you sure about this?

I don't want to own an investment property in this country because I'll be living in the Philippines. Kinda hard to manage it.

I guess I'll lose the prepayment penalty idea Rah, thanks.

MichaeltheGreat · June 2, 2003, 14:16

Quote:

Originally posted by Lancer
"How much interest will I make? Also, I don't really want it prepaid as it provides a portion of my retirement income, can you tell me how pre-payment penalties work?"

Damn good question guy! Too bad it seems nobody can answer it.

If you go with simple monthly interest (a pain if they're consistently a few days late, because there's no easy way to adjust the interest: $1,043.99 per month. If you go with daily compounding, $1,045.61 per month. There's no property tax, insurance, or anything figured in those - just a straight loan amortization.

Prepayment penalties in general work on the idea that if someone prepays the loan off, you have a lost earning opportunity on the balance - say they pay off at the halfway point, and then you can only get three percent earnings by treasury bills or whatever.

The first part is that whenever they pay off, you have to be able to figure exactly what the principle balance is. (One of you needs to figure principle and interest each year so they can deduct the interest portion.) Dirt simple if you have Excel.

The second part in general is you have to compare the "future values" of the two investment streams (a - they continue to pay at 6% for the life of the loan, and b - the three percent (by example) you get now that they've prepaid the loan, until the loan would have ended normally) The difference in the two future values is your opportunity loss, the ideal amount you'd like to recover. In practice, except in commercial financing, wordsmithing that mechanism into a private, personal loan agreement in a way both people understand is a pain in the ass. Most consumer loans that still have prepayment penalties just put in a flat percentage of the balance, but prepayment penalties in general are a pain in the ass, so they're less and less common, and less accepted by consumers as they've become less common.

JohnT · June 2, 2003, 14:22

Quote:

Originally posted by Lancer
MtG, these people I trust. They're not going to let me down.

You know, I actually thought the same thing about my parents.

Trust no one. Especially when it comes to your own money.

Lancer · June 2, 2003, 14:23

Thanks MtG!

I'm trying to figure how much interest there will be over the term. With the info you gave it should be easy 'nuf.

Lancer · June 2, 2003, 14:33

John, I wouldn't trust my father (until he died) or my brother, but these people I trust. I don't want to get into the history, and I don't know if that would convince you. I've been ripped off by friends, but this is different. Plus, it's a morgage, they have to pay it, right? I always figured that if a person didn't pay their morgage they lose the property. Not that I'll have to ever worry about thesevpeople being up front with me. If it was a family disaster, death in the family, like I said, we would work it out.

MichaeltheGreat · June 2, 2003, 14:39

Quote:

Originally posted by Lancer
Thanks MtG!

I'm trying to figure how much interest there will be over the term. With the info you gave it should be easy 'nuf.

The total? That's easy by hand once you know the payments. Year by year you have to calculate it out, since it's different every month.

Lancer · June 2, 2003, 14:40

Damn, that'S OVER $375,000! Can that possibly be right?

HershOstropoler · June 2, 2003, 14:43

Why do you want to chose this structure? It would be much simpler to sell it to them, and they take out a mortgage with a bank or another lender, while you invest the money. Any reason for that?

If you don't want it prepaid - would you have to accept prepayment as a private "lender"? You could exclude that here, but I don't now about the applicable state law.

As for trust - whatever the story, I wouldn't rely on trust or anything else for 30 years into the future.

Btw: If you want a mortgage on the house, you'll need a lawyer anyway, or?

Lancer · June 2, 2003, 14:46

Damn, that'S OVER $375,000! Can that possibly be right?

Principal & interest...

$200,000 in interest.

I'm starting to feel guilty about this...

HershOstropoler · June 2, 2003, 14:48

~6000 per year, x 30, yeah, 200k sounds right.

Lancer · June 2, 2003, 14:49

Hersh, I'll be using my accountant plus a title company.

I want to be the one holding the morgage because I doubt I could get a 6% return that I feel confident in. Again, I do feel confidant about this...

HershOstropoler · June 2, 2003, 14:59

I suppose you want a fixed income stream? That reduces your return rate, but I'd advice against the whole structure, no matter how confident you feel. If you have to go into foreclosure, it's a pain in the ass and a potential loss.

As for the 6 % rate, 30 year fixed mortgages are now at 5.3 or 5.4 %. IIRC.

MichaeltheGreat · June 2, 2003, 15:03

Quote:

Originally posted by Lancer
Damn, that'S OVER $375,000! Can that possibly be right?

Principal & interest...

$200,000 in interest.

I'm starting to feel guilty about this...

That's the consequence of dragging out payments over 30 years. If they pay you cash on the barrelhead, they have to cough up the whole 175 grand then and there. This way, they're (on average) only paying six grand a year in principle (way less at first, way more at the end), so they're getting the benefit of the 175 grand house, while paying off only six of that. That would suck for you, but be great for them, if they didn't have to pay any interest. So the interest payments are just a way of balancing the deal, to make it equally good for both parties. They get to not blow their savings, or work another ten years and spend nothing to save up the whole price, you get compensated for getting your money spread out instead of all at once, everyone's happy.

Lancer · June 2, 2003, 15:21

I see that, the number just gave me a twinge. I'm over it.

Plus I get an apartment in the house for 10 years, for free. It started as a duplex and I added on two small apartments. That will allow us to either work here and save or go back to the Phils, at our whim. For 5 years we'll be working here to save for a place on the ocean over there, but that's really at our whim too. I just really want the ocean breezes, and if I don't do it I'll kick myself later on.

The ten years apartment is for a reduction in the true value of the place, plus selling it to them now instead of 5 years from now. Plus, if I don't have to look after the place I might just get another job for a while.

Japher · June 2, 2003, 15:21

Don't feel guilty, especially if they are putting nothing down, they are the ones getting the deal since anywhere else they go they would be paying the samething. Only with zero down they would probably paying more when you figure in the fact that they would have to take a 100% loan or pay for mortgage insurance. In that case they would be paying something like 4-5% on the first (80%) and closer to 9-12% on the second, and that would suck. Especially if some weasel of a broker sticks them with a Balloon or ARM loan. So, really, you are the one giving them the out with a nice stable interest. They would be taken either way...

Maybe, you should raise that interest if they are putting nothing down... Teach them a real life lesson.

Still, I would make sure there is a "subject to" caluse in there, even if you do trust them. Most contracts already have it, I would just make sure... This is so if they decide to move, or have an emergency and need to retain their capital in the house they would be able to without you losing on it... CYA policy in effect.

JohnT · June 2, 2003, 15:23

"Plus I get an apartment in the house for 10 years, for free."

Is that going to be in the purchasing agreement?