Do you have a rental property that you would like to sell, but due to the condition or price, it won’t qualify for a conventional loan?  Is the tenant interested in purchasing the property? Do you want to find someone interested in purchasing the property? Then a Contract for Deed might be the perfect option for both of you!

In a contract for deed, the seller finances the purchase of property rather than a third-party lender such as a commercial bank or credit union. The arrangement can benefit Buyers and Sellers by extending credit to homebuyers who would not otherwise qualify for a loan. Indeed, public and nonprofit housing advocacy organizations have used the Contract for Deed as a tool to help low and moderate-income households attain homeownership.

Nonetheless, this alternative financing mechanism lacks many of the protections afforded borrowers who have traditional mortgages. As a Real Estate Broker, Turn-Key Properties, LLC handles these transactions with great success for everyone!  Yes, the contract is weighted with protections for the Seller, because the Buyer is risky, but if the Buyer makes their payments on time, they will own the house in the specified time-frame.  When loaning money to a risky Buyer, the Seller wants all the protections possible.
 
The following article presents basic facts and features of the Contract for Deed and offers suggestions for minimizing the risks associated with this mortgage substitute.

From Wikipedia:
A 'land contract' (sometimes known as a “contract for deed” or an “installment sale agreement”) is a contract between a seller and buyer of real property in which the seller provides financing to buy the property for an agreed-upon purchase price and the buyer repays the loan in installments. Under a land contract, the seller retains the legal title to the property, while permitting the buyer to take possession of it for most purposes other than legal ownership. The sale price is typically paid in periodic installments, often with a balloon payment at the end to make the time length of payments shorter than a corresponding fully amortized loan without a final balloon payment. When the full purchase price has been paid including any interest, the seller is obligated to convey legal title to the property to the buyer. An initial down payment from the buyer to the seller is usually also required by a land contract. The legal status of land contracts varies from region to region.

ADVANTAGES FOR THE SELLER:

• The property will not pass lenders inspection: Say your property has issues that will prevent it from being financed with a conventional mortgage. Most common are foundation issues, termites, electrical or plumbing problems. It’s still a good house, it just won’t pass the strict lender’s requirement and the issues are ones that the Buyer can repair themselves.  If the Contract for Deed is for the full purchase price and NO Balloon payment, this is not a problem.  When the Contract has been paid, there is no need for additional financing, as with a Balloon payment.  This can be a plus for both the Seller and the Buyer.
• Value is not set by an appraisal: Most often these types of deals are priced much higher than the market would bare in a normal real estate transaction. Since this method is most commonly used by buyers with poor credit and limited funds, this is a way for the Seller to get a higher price for the property and for the Buyer to become a Homeowner, when they otherwise could not do so.
• Seller does not record the transaction: These types of transactions are rarely recorded to protect the Seller.  The Seller is still the legal owner of the property, until the Contract is 100% paid off.  Once the Contract is paid in full, the Deed is transferred to the Buyer.
• Connection to a Lease: The Contract for Deed should be connected to an Addendum, which is a Lease, so if the Buyer defaults, all you must do is file Eviction for non-payment of “rent” and you can easily get possession of the house again.  If the Contract is recorded, it is going to much more difficult to gain possession and it could be determined that the Buyer “owns” a portion of the house.
• The Buyer makes all repairs:   Was one of the reasons you wanted to sell the house was to end the repair bills?  Well this gets you out from under paying for repairs, plus you still have a monthly income! 
• You earn Interest:  The Interest percentage on the purchase price is usually fairly high, compared to the going mortgage rate, because the Buyer is risky.  In addition to the purchase price, no repair costs, you also earn interest every month!  The amount of interest is going to be much higher than you can earn on your money almost anywhere else!
• Taxes and Insurance:  In addition to the monthly payment, the Buyer pays the Seller for Property Taxes and Insurance.  The Seller continues to keep the property Insurance in their name, to make sure the Insurance cost is paid and coverage does not lapse.  The Seller also continues to pay the Real Estate taxes for the same reason.  We divide the Insurance and Property Tax cost by 12 months and add that onto the mortgage payment amount.
• Great value income:  When the Contract is fulfilled, you have likely collected far more than the place was worth.

Don't just 'give" your property away to an investor who only wants to pay a fraction of what it's worth.  Sell your house to a Buyer/Tenant who will pay Top Dollar and earn interest on top of that!  It makes good investment sense!

Turn-Key has one Buyer/Tenant who just has a few more payments to make and in 2017, the house will be paid for.  Over the years of the Contract, the Buyer has made every payment on time.  The Buyer will soon be a full-fledged Homeowner!  The Seller has had constant income for years, with NO maintenance costs!

Keep in mind….You cannot legally convey a title to a property you do not own outright! 

In other words, you can't sell what you do not own, if you have a mortgage on the property you cannot legally sell it to another party, without the consent of the lender or by paying off the mortgage!

Once the Contract for Deed and attached Addendum/Lease are signed, collecting the payments can proceed in two ways. 

1. You can pay Turn-Key a commission on the sale and collect the payments yourself.
2. The option that every one of our Sellers have chosen is for Turn-Key to continue to be the Kansas City Property Manager for the property, collecting rent and overseeing the transaction to completion.  The same Management Fees apply as with a normal rental property.
   
   PITFALLS FOR THE SELLER:

• Especially, if there is a Balloon payment written in the Contract, the sale may fall through when the Balloon payment comes due.  The likelihood of the Buyer cleaning up their credit and qualifying for a conventional mortgage by this date are very slim!  The Buyer might just trash the property when they find out they cannot qualify for the loan at the time the balloon payment comes due.  Then you get back a trashed house and have to make repairs and start over.

ADVANTAGES FOR THE BUYER:

• You get to tell your friends you bought a house!
• You get to do most of the decorating, maintenance and repairs that suit you! You are free to paint the walls your favorite color, add that backsplash in the kitchen you always wanted, replace that faucet with the shiny one you have your eye on!
• You have the opportunity to become a Homeowner at an affordable price, without spending thousands to clean up your credit first.
• This is a way for you to build credit!

In our experience at Turn-Key, this has been a win-win situation for both Buyer and Seller.  It requires the right Seller, with a property free and clear and a Buyer that is serious and willing to commit to making on-time payments.  We have found this to be a great solution for Kansas City rental properties.

Does this sound like a fit for your property?  Call Turn-Key today and let us advertise your property and get a Buyer in there right away!

A SINGLE GALLON OF PAINT COULD DESTROY YOUR ENTIRE RETIREMENT SAVINGS!  How?  It's pretty easy!

You're a smart investor.  You've done all the right things.  You've set up and funded a self-directed IRA, then used it to purchase properties and hired a great Property Manager (Turn-Key, of course!) to handle the day-to-day business.  You've gotten good legal and tax advice, your portfolio is growning with ever increasing cash flow and equity is growning in your self-directed IRA......nothing but blue skies in your retirement future.

Remember that gallon of paint?  You drove by the vacant house and the front door looked shabby.  You wanted to spruce up the curb appeal and thought you could save a few bucks by painting the door yourself.  It seemed innocent enough, just a cheap gallon of paint and a little time.  Unfortunately, that gallon of paint is about to destroy your retirement savings faster than the very worst real estate crash!

You just destroyed your retirement savings due to a little-known set of technicalities referred to as "prohibited transactions".

WHAT IS A PROHIBITED TRANSACTION?
A prohibited transaction happens when a person interacts with a self-directed retirement account (or the assets of the account) in a way that's prohibited by law.   

For example, when you bought the paint for the front door, you paid for it with cash out of your pocket with the intention of getting a reimbursement from your self-directed IRA.  That's where the damage was done.  The IRS sees that as a loan to your IRA.  It was a small loan, but an IRA owner is prohibited from loaning monty to his own IRA and they give zero exceptions to the rule.  By paying for the paint with your own cash, you've committed a prohibited transaction.

If it wasn't enough that the IRS can sting you for making a loan to your IRA, they can also penalize you for "furnishing services" to your IRA.  By painting the door yourself, you were contributing a service to benefit the assets of your plan.  Unfortunately, the IRS specifically prohibits you (as the account owner) from furnnishing goods, services or facilities to your plan.  This includes using your construction or marketing services and can also be called "self-dealing transctions".  

Painting the door yourself was providing a 'service: to your own IRA, so you have committed a 2nd prohibited transaction.

WHAT ARE THE RAMIFICATIONS?
In one word..severe.  If you commit a prohibited transaction with your self-directed IRA, your IRA will cease to be an IRA as of the first day of the year when the prohibited trasaction was committed.  You are in for a firestorm of past-due income taxes along with very severe penalties and interest.

How bad can it really get for you?  Unfortunately, it's actually possible to wipe out the entire value of your self-directed IRA as a result of a prohibited transaction committed long ago.  That's because most prohibited transactions are not discovered until many years later when a self-directed IRA is being audited by the IRS. In the intervening years, the income taxes, penalties and interest you could owe have grown, compounded and expanded!  It's a bad situation.

The bottom line...Prohibited transactions are the mortal enemy of self-directed IRA owners.  One prohibited transaction can literally cause you to lose everything you've worked so hard to build for your retirement.

While this may be a very simplistic example and it seems unlikely the IRS would ever connect the paint to the asset (unless you asked for a reimbursement from your IRA), this is a very realistic senario that you need to keep in mind.  Having a Property Manager make all repairs to your property is a must, when owning rental property in an IRA!  Always be sure to get good legal advice from your attorney!

"Most people fail to realize that in life, it's not how much money you make, it's how much money you keep" - Robert Kiyosaki

Well said and something to think about.  Taxes, inflation, market movements and miss-managed investments all can take your money away from you.  Real Estate can be one of the finest methods to pass on wealth through the generations.  Being a real estate investor, you not only get to own a physical asset and receive rental income, but with careful planning/structurning, you can create a stable source of income for your retirement.  It's a very common practice among realtors and investors to keep some properties to fund their retirement.

SELF-DIRECTED IRA:  WHAT DO YOU NEED TO KNOW?
The key to sustainable wealth generation through real estate investing is to start as early as possible.  It is equally important to find ways to preserve your wealth.

Self-directed IRAs are one of the best options to invest in real estate.  They are often called Real Estate IRAs, due to their ability to invest in real estate and real estate-related assets.  

FEATURES OF A SELF-DIRECTED IRA (SD IRA)
A self-directed IRA is a qualified retirement plan that offers complete control over the investment choices available to the retirement account holder.  These investment options include real estate, private placements, tax deeds, tax liens, mortgage notes and similar alternative investment tools.

HOW DOES A SELF-DIRECTED IRA BENEFIT A REAL ESTATE INVESTOR?
If you are a real estate investor, a self-directed IRA can help you buy houses and offer tax-deferred growth of your assets until distribution.

As a private lender, all points and interest on your loan to a flipper or real estate investor would be subject to taxation in the year you generate those incomes.  However, if the same transaction is done in the tax-deferred environment - those incomes will be sheltered from taxation until distribution.

Under a regular house flipping transaction, you purchase a home at below market rates, put in repairs and then sell it for a profit.  Your profit will be subject to taxation.  The IRS terms it as capital gains and for assets held for less than a year, these rates could be as high as 35%, although the maximum taxation subsides to 15% or less for assets held for a year or longer.

However, if you purchase real estate through a self-directed IRA, the entire process remains the same except for the fact that you don't have to pay taxes until distribution.  In short, you can defer your tax bills until retirement.  Please sure to consult with a CPA experienced in this area to ensure that this is not considered business activity, otherwise you could be subject to taxation. You can also fund more purchases from the profit generated by your previous transactions.

Real estate investing options using a self-directed IRA:

• Residential properties
• Commercial properties
• Multi-family units
• Farm/agricultural land
• Apartment buildings 
• Condominiums
• Raw land and much more

ROTH ADVANTAGE FOR TAX-FREE GAINS
In addition to the benefits offered by a self-directed IRA, you have the option to do investing inside of a Roth account.  Under a Roth self-directed IRA, you pay taxes upfront and receive tax-free distributions at the time of retirement.  Generally, most real estate investment transactions done within a Roth self-directed IRA account does not require taxation, allowing you to picket the returns entirely.  However, there are some exceptions.

CONSIDERATIONS INVOLVED WITH REAL ESTATE INVESTING USING SD IRA
Investing in real estate IRA comes with a unique set of legal considerations and some are listed below:

• The plan/owner cannot use the property for personal benefit.
• You cannot do business with the IRA, which includes using your construction or marketing services for the sale or repair of the property.  The same rule holds true for your ascendants, descendants and even spouses.  These can be called self-dealing transactions.
• Your self-directed IRA can only use non-recourse financing for a purchase, which means you cannot offer a personal guarantee.  In the case of a default, the lender holds no claim other than the property itself.  Any cost involved in the transaction should come out of the IRA only and any income generated from the property should go back to the plan itself.
• Unlike regular real estate ownership, you will lose depreciation deductions for properties owned by a self-directed retirement account.

In summary, a self-directed retirement account allows investors to use their retirement finds for real estate investing add alternative assets to their retirement plan.

If you are considering investing in a retirement account, it is vitally important that you consult with a CPA or Retirement Advisor experience in this area!

Turn-Key Properties, LLC has managed numerous properties owned in retirement accounts, but we know how to handle and manage properties owned by this means, however we are NOT qualified to give advice on how you should invest by this means.  Only an experienced CPA, attorney or financial advisor can give you the best advice, based on your situation.

We wish you the best with your investments!