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Should I sell this property to our tenant?

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  • Hank
    replied
    One more reason to dislike and avoid HOAs.

    Leave a comment:


  • StarTrekDoc
    replied
    For kicks and giggles would have her run for the board next year and you finance the campaign.....if the bylaws allows for tenants to hold positions.

    Leave a comment:


  • StateOfMyHead
    replied
    Appreciate the update. Disappointing on many levels.

    Leave a comment:


  • Larry Ragman
    replied
    Sounds like you arrived at a reasonable approach. Shame it didn’t work out. The HOA liability insurance is an interesting wrinkle. Haven’t heard that as an issue before. Effective discrimination though if the tenant is unable and you are unwilling to sue them over it. Not criticizing; just observing. I wouldn’t bother either. Maybe the financing works next year.

    Leave a comment:


  • White.Beard.Doc
    replied
    Here is the follow up on the story.

    Our tenant was anxious about the responsibilities of being an owner. I spent some time demonstrating to her the long term financial implications and the benefits to her as she gets older of being a long term owner, of having fixed costs for the mortgage as rents go up. We eventually went into contract with our tenant at last years market price, about 10% below current market. It was a good price for her, and we would be saving the 6% commission as there was no realtor involved. She met criteria to qualify for an FHA loan with 3% down.

    We could owe as much as 90k in capital gains tax, depreciation recapture tax, and state tax on the sale, so we went into contract on a new property in another state, a 1031 exchange that would defer any taxes due.

    Unfortunately, the transaction blew up. The house appraised for over the contract price. The buyer met FHA underwriting guidelines, which are pretty loose. It fell through because the HOA meets criteria for a conventional loan, but does not meet criteria for an FHA loan. The HOA insurance coverage was just a touch too low as far as liability coverage. I did everything possible to get the HOA to increase their liability coverage so the loan could be approved. The cost was only $150 per year. I offered to cover the cost. The buyer offered to cover the cost. But the HOA refused to cooperate.

    It felt like they don’t want to help this buyer who is not as well off as some of the other owners in the HOA. Basically, an attitude of “you aren’t as financially successful as we are, and we don’t want anyone buying a home here who can only put 3% down.”

    Oh well, we attempted to help our tenant of 17 years become an owner, but it didn’t work out. She is now motivated to save up some more down payment money and to try again next year. With mortgage rates ratcheting up, I’m not sure if she is going to qualify. Who knows what inflation and interest rates will be? In June, her rent will go up to cover rising property taxes and HOA fees, but she is still paying 10% less than market rent, about $350 less than the going rate.

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  • burritos
    replied
    If you're in a philosophical-guilt-gratitude-generosity mood, consider doing micro-loans. May I suggest Kiva.org? Keep the renter. Keep the house, I mean you wouldn't cut her a check of 1 or 2 days of stock fluctuations would you? Never raise the rent and peg it to SS#. She's a winner for having a generous landlord.

    Use that income flow to fund loans around the world to people who are WAAAAY worse off than your renter. A lot of these people just want to buy a cow to milk, literally. But you don't GIVE them the money, you LOAN them the money. They pay you back. Then you reloan that money, or put it back in your bank account. You choose. There's about a 1% default rate. Sometimes things hit the fan in these 3rd world countries.

    THEN you could join a team. The 2 top teams are the Kiva Christians vs the Kiva Atheists. This is how tribes ought to battle. Winning for bragging rights anonymously. Helping people with minimal cost and effort(basically clicking a few buttons) is a tangential byproduct.

    Leave a comment:


  • VentAlarm
    replied
    Originally posted by White.Beard.Doc View Post

    This comment got me thinking. What did we do to own this successful investment, to make money while someone else paid to live there? What did we do to get to our current place of financial success and security, where we can afford to do almost anything, where we can give big checks to the local food bank on a continuous basis during the Covid employment crisis, where we have extreme good fortune? Should I feel guilty for having so much? After all, the tenant paid off our mortgage. All we had to do was invest.

    And I thought back on many things:

    We scrimped and saved to afford the 36k down payment...
    We carefully managed our credit so we could convince the bank to loan us the money to buy the place...
    We used sweat equity in our precious free time in those early years to make improvements so that we were providing a high quality place to live for the tenants...
    We carefully chose appliances...
    We carefully vetted a good handyman...
    We chose cabinets, and toilets, and a lot more...
    We finished the basement to create a space for the tenants' teenagers and we paid for everything up front, when the tenant could only afford $100/month extra...
    We put our blood, sweat and tears into this first investment property...

    So now, decades later, where do we find ourselves? Our first investment property is completely paid off, a mere rounding error on our net worth calculation.

    Why do we own this and why does our tenant rent from us? Why is there so much financial inequality in our incredibly wealthy country?

    In my view, virtually anyone who can manage to save a bit each month to invest will end up in a secure financial situation. Sure, it is easiest to save on a high income. But we did it as residents, with student loans, while living in the most expensive city in the country. As I reflect back, we were living in a marginal neighborhood, in a 2 1/2 room apartment when we bought this first investment property. In my view, to a great extent it is a paucity of financial knowledge that is a big part of this problem. People live on credit and don't understand how that makes the banks rich and makes them poor. For years we have been advising our tenant that she should own this property, but she was too afraid to make the leap of faith to being an owner. She was living too much in the moment to give up a couple of vacations, or shopping trips. She was unable to draft a financial map of what it would take to save a downpayment, to own, to have a better financial life in the future. So much of this relates to education, to mindset. If you have a bit of financial knowledge and some discipline, up front, to create a bit of pain for yourself, to sacrifice now for a better future, financial security and wealth is out there somewhere in front of you. It is a lack of knowledge, not knowing the road map, that prevents most of our fellow countrymen from this positive path.

    Anyway, the success guilt is in there somewhere for me. Please excuse me now while I go figure out how I am going to give back more to assuage those feelings.

    Maybe we need to create a financial curriculum, to educate everyone, in schools, online, and elsewhere, to change this situation? WCI has done it for doctors. Maybe we, as a society, need to do this for everyone? We are working hard to share our knowledge with our tenant, perhaps each or us can become a financial mentor for someone out there who needs the help.
    I wasn’t at all suggesting you should feel guilty. It just seems like you really care for this woman based on your comments thus far. It seems like this could be life changing for her and you would just shrug if your NW dropped by 300k. It seems like it would be a huge blessing for her and not a big deal to you.

    What does money exist for? To give, save or spend. You’ve passed the point where you’re going to spend it. Now it’s just a decision to give it or save it. You shouldn’t feel guilty about saving it, but you’ve also earned the ability to make life changing gifts, too.

    Obviously, by no means am I implying you actually need to, it just seems like at some level you want to.

    Leave a comment:


  • jfoxcpacfp
    replied
    Originally posted by Larry Ragman View Post
    It is lack of knowledge that holds her and others like her back, but also lack of will to act. Giving her the property would not change that. (Give a man a fish, etc) I have a similar situation. One tenant for 30 years who has paid the property off for us. I suggested to her many times that she buy it and we would make her a below market deal. I even tried showing her how the budgets broke out. It never occurred to me to even consider giving her the property. She wasn’t poor per se, just risk adverse. My guess based on your writings here is that you give back plenty to our society that has given you the opportunity to succeed. By all means, do more if you wish - sorry, not as if as if you need permission - but for my part I would not overly empower one persons poor choices.
    I, too, have been in this situation. The tenants finally moved on but they left the property in a mess and I haven’t had a chance to see to it so it just sits. But I never would have considered giving away a $100k asset, much less a $325k asset to non-family (actually, even to family).

    To WBD, yes, residents scrimp and save and make do but it’s in the context of understanding that there is hope for better in a reasonable amount of time. Although I believe WBD would have done the same if he h/b a lowly bookkeeper, the majority of people d/n/h his foresight. I’ve even had to convince residents and new attendings with high SL’s of the same - can you imagine how difficult it is for a couple or single parent with a new family facing a mortgage? I am saying that I agree, education is critically important, but so is the family history, drive to succeed, and low-hanging fruit. Even Bill Gates grew up upper middle class and his parents were able to send him to private school and Harvard Law School. And there are those with every advantage who end up druggies.

    Leave a comment:


  • Larry Ragman
    replied
    Originally posted by White.Beard.Doc View Post

    This comment got me thinking. What did we do to own this successful investment, to make money while someone else paid to live there? What did we do to get to our current place of financial success and security, where we can afford to do almost anything, where we can give big checks to the local food bank on a continuous basis during the Covid employment crisis, where we have extreme good fortune? Should I feel guilty for having so much? After all, the tenant paid off our mortgage. All we had to do was invest.

    And I thought back on many things:

    We scrimped and saved to afford the 36k down payment...
    We carefully managed our credit so we could convince the bank to loan us the money to buy the place...
    We used sweat equity in our precious free time in those early years to make improvements so that we were providing a high quality place to live for the tenants...
    We carefully chose appliances...
    We carefully vetted a good handyman...
    We chose cabinets, and toilets, and a lot more...
    We finished the basement to create a space for the tenants' teenagers and we paid for everything up front, when the tenant could only afford $100/month extra...
    We put our blood, sweat and tears into this first investment property...

    So now, decades later, where do we find ourselves? Our first investment property is completely paid off, a mere rounding error on our net worth calculation.

    Why do we own this and why does our tenant rent from us? Why is there so much financial inequality in our incredibly wealthy country?

    In my view, virtually anyone who can manage to save a bit each month to invest will end up in a secure financial situation. Sure, it is easiest to save on a high income. But we did it as residents, with student loans, while living in the most expensive city in the country. As I reflect back, we were living in a marginal neighborhood, in a 2 1/2 room apartment when we bought this first investment property. In my view, to a great extent it is a paucity of financial knowledge that is a big part of this problem. People live on credit and don't understand how that makes the banks rich and makes them poor. For years we have been advising our tenant that she should own this property, but she was too afraid to make the leap of faith to being an owner. She was living too much in the moment to give up a couple of vacations, or shopping trips. She was unable to draft a financial map of what it would take to save a downpayment, to own, to have a better financial life in the future. So much of this relates to education, to mindset. If you have a bit of financial knowledge and some discipline, up front, to create a bit of pain for yourself, to sacrifice now for a better future, financial security and wealth is out there somewhere in front of you. It is a lack of knowledge, not knowing the road map, that prevents most of our fellow countrymen from this positive path.

    Anyway, the success guilt is in there somewhere for me. Please excuse me now while I go figure out how I am going to give back more to assuage those feelings.

    Maybe we need to create a financial curriculum, to educate everyone, in schools, online, and elsewhere, to change this situation? WCI has done it for doctors. Maybe we, as a society, need to do this for everyone? We are working hard to share our knowledge with our tenant, perhaps each or us can become a financial mentor for someone out there who needs the help.
    It is lack of knowledge that holds her and others like her back, but also lack of will to act. Giving her the property would not change that. (Give a man a fish, etc) I have a similar situation. One tenant for 30 years who has paid the property off for us. I suggested to her many times that she buy it and we would make her a below market deal. I even tried showing her how the budgets broke out. It never occurred to me to even consider giving her the property. She wasn’t poor per se, just risk adverse. My guess based on your writings here is that you give back plenty to our society that has given you the opportunity to succeed. By all means, do more if you wish - sorry, not as if as if you need permission - but for my part I would not overly empower one persons poor choices.

    Leave a comment:


  • White.Beard.Doc
    replied
    Originally posted by VentAlarm View Post
    Just give her the house.
    This comment got me thinking. What did we do to own this successful investment, to make money while someone else paid to live there? What did we do to get to our current place of financial success and security, where we can afford to do almost anything, where we can give big checks to the local food bank on a continuous basis during the Covid employment crisis, where we have extreme good fortune? Should I feel guilty for having so much? After all, the tenant paid off our mortgage. All we had to do was invest.

    And I thought back on many things:

    We scrimped and saved to afford the 36k down payment...
    We carefully managed our credit so we could convince the bank to loan us the money to buy the place...
    We used sweat equity in our precious free time in those early years to make improvements so that we were providing a high quality place to live for the tenants...
    We carefully chose appliances...
    We carefully vetted a good handyman...
    We chose cabinets, and toilets, and a lot more...
    We finished the basement to create a space for the tenants' teenagers and we paid for everything up front, when the tenant could only afford $100/month extra...
    We put our blood, sweat and tears into this first investment property...

    So now, decades later, where do we find ourselves? Our first investment property is completely paid off, a mere rounding error on our net worth calculation.

    Why do we own this and why does our tenant rent from us? Why is there so much financial inequality in our incredibly wealthy country?

    In my view, virtually anyone who can manage to save a bit each month to invest will end up in a secure financial situation. Sure, it is easiest to save on a high income. But we did it as residents, with student loans, while living in the most expensive city in the country. As I reflect back, we were living in a marginal neighborhood, in a 2 1/2 room apartment when we bought this first investment property. In my view, to a great extent it is a paucity of financial knowledge that is a big part of this problem. People live on credit and don't understand how that makes the banks rich and makes them poor. For years we have been advising our tenant that she should own this property, but she was too afraid to make the leap of faith to being an owner. She was living too much in the moment to give up a couple of vacations, or shopping trips. She was unable to draft a financial map of what it would take to save a downpayment, to own, to have a better financial life in the future. So much of this relates to education, to mindset. If you have a bit of financial knowledge and some discipline, up front, to create a bit of pain for yourself, to sacrifice now for a better future, financial security and wealth is out there somewhere in front of you. It is a lack of knowledge, not knowing the road map, that prevents most of our fellow countrymen from this positive path.

    Anyway, the success guilt is in there somewhere for me. Please excuse me now while I go figure out how I am going to give back more to assuage those feelings.

    Maybe we need to create a financial curriculum, to educate everyone, in schools, online, and elsewhere, to change this situation? WCI has done it for doctors. Maybe we, as a society, need to do this for everyone? We are working hard to share our knowledge with our tenant, perhaps each or us can become a financial mentor for someone out there who needs the help.

    Leave a comment:


  • jfoxcpacfp
    replied
    You finance the note and sell on an installment contract. That means that you report gain only as you receive payments each year. You’ll report on IRS Form 6252.

    Leave a comment:


  • TXDoc21
    replied
    I think the seller finance to her is a great way to go.

    You must have 1 or more real estate tax people on your payroll for answers to scenarios just like this one?

    Leave a comment:


  • VentAlarm
    replied
    Just give her the house.

    Leave a comment:


  • StateOfMyHead
    replied
    Years ago, when I had no money to speak of, I had a seller finance the mortgage with 10% down and a 5 year balloon. I paid a bit of a higher rate to offset their inconvenience but refinanced easily within two years. Refi is generally easier than acquisition although with rates this low having to refi risks an increase that could possibly make the property unaffordable for her?

    Leave a comment:


  • Hank
    replied
    Originally posted by White.Beard.Doc View Post

    How does a contract for deed work? When would we book the sale from a tax perspective? Is there a taxable event that occurs upon signing, or does the taxable event occur upon final deed transfer, or something else?
    Contract for deed becomes a consummated sale when the would-be buyer fulfills the terms of the contract and the title passes from you to the new owner. At that point, you have the sale of the property for capital gains purposes.

    Depending on the state, the would-be buyers under a contract for deed may get nothing if they fail to fulfill their obligations or they might get quite a bit of consideration. If you have a ten year contract with monthly payments to buy the deed to a property and you make 119 payments on time and just choose not to make the 120th payment, you (as buyer) could be out everything in some states. In other states, you get the value of improvements that you make to the property and possibly some setoff based on reasonable rent for the property.

    Leave a comment:

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