Sunday, October 13, 2019
Cash or Terms – Thoughts to be Considered
If you are selling your house, especially to an investor, cash may seem like the best deal as you can take the money and run. Sometimes, depending your needs at the time, this would be the best choice for you. However, you have a silent partner that already has his hand in your pocket or bank account. Sometime he is not so silent if you haven't paid him. He can get downright cranky and vengeful. His name is the IRS.
Even at today's lower capital gains tax rates, taxes can be a significant expense. Although if you are married filing a joint return, the first $78,750 profit is not taxed but it goes up from there. But who knows what may happen if the levers of power are turned over to some of the crazy politicians who view your money as their money. Like I said before you may just have to eat the taxes if you need the cash right now. If you don't there may be better ways.
If you've owned the property for a while – it may even be free and clear - or have made significant improvements to it, you may have considerable equity, particularly if this is a rental property you have been depreciating over the years. Your basis, that is an amount you deduct from the sales price in determining your profit, is going to be smaller that you may like and the tax bill larger than you would like.
If you have something specific you need the money for this may be acceptable, but you are going to put the money in a bank at what amounts to a negative interest rate when inflation is taken into account, you may want to consider taking back a note and accepting payments over a period of time.
It's often been said that it doesn't matter what you make, what matters is what you keep. Taking payments over time will definitely let you keep more. But that's not all! There will be more to keep.
For instance, if you sell a property for $100,000 cash, you will get $100,000. Simple. However if you take the money in 180 payments at 6% you will realize about $151,800. More than 50% more. If you need a little cash you could receive a $10,000 and finance under the same terms and realize about $146,700. And you only report the capital gains as you receive them, so the liability is spread out over several years.
If you are selling to an investor it's pretty much as simple as that. Of course you need to do your due diligence to make sure your buyer is on the up and up. If you are selling to an owner occupant, Big Brother in Washington gets involved. There are regulations that came from two distinguished gentlemen named Mr Dodd and Mr Frank. There are terms like TRID, etc. that describe just how you disclose everything to the buyer. That may be the subject of another article for another day. Suffice it to say that you may want to find a mortgage broker or loan servicing company to handle the paperwork to dot all your i's and cross all your t's. Courts have ruled that if the information is not properly handled, the note is invalid, the buyer can keep the property and the seller is out of luck. It's not worth the risk, and worth a few hundred dollars.
What if things go wrong and the payments stop coming to your mailbox. Foreclosing on the property is always an option – and you keep the money you already received. However this risk is mitigated by doing the due diligence of thoroughly checking out the people you are dealing with. There are several services that do this very reasonably.
If this sounds like more effort than you care to exert, here are a couple of numbers to keep in mind. As this is written, the best CDs will yield about 2.5%. It's better than a few years ago but your local bankster may not be able to go quite that high as many of these rates are quoted by internet banks and brokerage houses. That may not sound too bad until you consider that government inflation statistics show a current rate of around 2.9%. This number never includes food or energy. We are told because these areas are too volatile. So the best CDs aren't just losing .4% but that number, plus price increases in food, fuel, electricity, etc. What a deal!
It's a lot to digest, but take some time to look at your options. The friendly investor or hedge fund buyer offering you a quick cash price may not always be the best deal for you. It's usually a pretty good deal for him (or her) though.
If you find yourself with substantial funds in less than optimal investments, you could even become the bank for real estate investors. Many have more deals available then they have funds to make them work – and they pay much better rates than regular home buyers. Just a thought to kick around.