Has anyone issued a private mortgage?

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ncbill
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Has anyone issued a private mortgage?

Post by ncbill » Wed Oct 30, 2019 2:53 pm

I'm the trustee in charge of selling the home of a relative who died earlier this year.

My relative had only taken-at-age-62 SS retirement for income and so let a lot of things (mostly cosmetic) slide.

Didn't get it on the market until around Labor Day, only low-ball offers so far...desirable area, but the smallest home in the neighborhood.

I figure I'll need to take it off the market at the end of the year and put more time & energy into fixing it up.

I'd like to replace the commercial mortgage & HELOC with my funds to cut the carrying cost by ~2/3, but make sure my interest is secured.

Prefer to accrue any interest required then forgive it on sale of the property if possible.

The beneficiaries are also close relatives who can use as much $ as I can squeeze out of it.

Private mortgage, deed of trust, etc? Whichever is the cheaper option for me. Thanks for any feedback...I know this is a weird ask.

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Abe
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Re: Has anyone issued a private mortgage?

Post by Abe » Wed Oct 30, 2019 3:15 pm

If I understand, you want to pay off the current mortgage and Home Equity Loan with you own personal funds, then you will take back a mortgage to cover the amount you paid off but let the interest accrue and then forgive the interest on your mortgage when the property is sold. I don't think this will work because it is my understanding that the IRS will impute interest for tax purposes when there is zero interest on a loan.
Edited to add: You could use a mortgage or deed of trust depending on the state. There shouldn't be much difference in the cost.
Slow and steady wins the race.

123
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Re: Has anyone issued a private mortgage?

Post by 123 » Wed Oct 30, 2019 3:48 pm

The longer a house sits vacant the more difficult it becomes to sell, whether or not it's on the market. Empty house acquire a reputation, deserved or not. In the situation you describe, a home needing work and with both a mortgage and a HELOC I would seriously consider working with one of the low-ball offers. It seems to me you are in a situation that it is likely to consume a lot of financial, emotional, and physical energy that will not be well rewarded. The beneficiaries would like their money as soon as possible, they really don't/won't appreciate your efforts to get them more. I would bet that none of them are exerting any significant efforts to improve the property for sale.

Your are in the midst of the reasons that estate sale houses sell for less. They need maintenance. There is ongoing indebtedness that needs to be paid. And the benefits of repairs to yield a higher sales prices is diluted by multiple beneficiaries who would each only receive a portion of that gain. Make it easier on yourself and on the beneficiaries, liquidate it.
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RickBoglehead
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Re: Has anyone issued a private mortgage?

Post by RickBoglehead » Wed Oct 30, 2019 3:55 pm

As trustee you should not also be the bank.
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Re: Has anyone issued a private mortgage?

Post by Gill » Wed Oct 30, 2019 3:57 pm

RickBoglehead wrote:
Wed Oct 30, 2019 3:55 pm
As trustee you should not also be the bank.
Correct. You are self dealing in your capacity as trustee and could be risking personal liability. In your capacity as trustee you shouldn't be lending your personal funds to the trust. Do you want to be in the position of personally suing yourself in your capacity as trustee?
Gill
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ncbill
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Re: Has anyone issued a private mortgage?

Post by ncbill » Thu Oct 31, 2019 3:17 pm

123 wrote:
Wed Oct 30, 2019 3:48 pm
The longer a house sits vacant the more difficult it becomes to sell, whether or not it's on the market. Empty house acquire a reputation, deserved or not. In the situation you describe, a home needing work and with both a mortgage and a HELOC I would seriously consider working with one of the low-ball offers. It seems to me you are in a situation that it is likely to consume a lot of financial, emotional, and physical energy that will not be well rewarded. The beneficiaries would like their money as soon as possible, they really don't/won't appreciate your efforts to get them more. I would bet that none of them are exerting any significant efforts to improve the property for sale.

Your are in the midst of the reasons that estate sale houses sell for less. They need maintenance. There is ongoing indebtedness that needs to be paid. And the benefits of repairs to yield a higher sales prices is diluted by multiple beneficiaries who would each only receive a portion of that gain. Make it easier on yourself and on the beneficiaries, liquidate it.
Thanks for the replies!

Any maintenance/improvements I make would be sweat equity...time-consuming but little out of pocket cost.

There is no money to the beneficiaries with the low-ball offers...after paying selling costs there would only be enough to pay off the existing debt.

As for self-dealing I doubt carrying the house for free (setting interest to the minimum required under IRS rules, accruing it, then forgiving accrued interest at sale) is going to put me at any real risk.

Selling for a low-ball offer of ~$100/sqft when comps are ~$200/sqft is much more likely to get me in trouble.

I would want a formal release from the beneficiaries before I simply gave it away like that.

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Re: Has anyone issued a private mortgage?

Post by surfstar » Thu Oct 31, 2019 3:26 pm

Those aren't really comps if they are larger and in much better shape.
The value of something is what someone is willing to pay.

If you'd rather put sweat equity into it and take potentially more months in order to get the beneficiaries a bit more money; that's noble. I'd say it's not much different than just giving them [your] money directly, though.

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Re: Has anyone issued a private mortgage?

Post by CurlyDave » Fri Nov 01, 2019 4:29 am

ncbill wrote:
Wed Oct 30, 2019 2:53 pm
I'm the trustee in charge of selling the home of a relative who died earlier this year...

I'd like to replace the commercial mortgage & HELOC with my funds to cut the carrying cost by ~2/3, but make sure my interest is secured...
As much as this sounds sensible, I think it is a bad idea. 1. you are taking on a lot of liability. 2. Even if the legal liability is not a big issue, the family liability still remains. The other beneficiaries could easily decide that you somehow did not do things right and took money from them.

Depending on how much time you intend to put into sweat equity, the value of the home may not increase as much as you, or the other beneficiaries, think it should.

I have been on the other side of similar transaction, buying estate houses where the condition was definitely sub-par but the current owners just never seemed to get around to putting in the time & effort to clean things up. If you have really had more than one offer, not just several offers from essentially the same buyer, and they are all in the same range, that may be what the house is worth.

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Watty
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Re: Has anyone issued a private mortgage?

Post by Watty » Fri Nov 01, 2019 9:11 am

One thing to keep in mind is that to setup a private mortage would cost some significant legal fees so be sure to keep that in mind.
ncbill wrote:
Wed Oct 30, 2019 2:53 pm
My relative had only taken-at-age-62 SS retirement for income and so let a lot of things (mostly cosmetic) slide.
Every housing market is different but you rarely get 100% of the cost of home improvements back when you sell a house. This is especially true if you would be adding holding costs each month that the sale is delayed.

If something is actually broken or non-functional then they might be worth fixing to get the house sold but even then if you need to be real careful since once you start a project you may uncover additional work that needs to be done.

In some areas it can take a long time to sell a house in the fall and winter so you really need patience.

You are likely paying a real estate some significant money for their professional skills to sell the house, be sure to listen to the expensive advice that you are paying them for. What are they saying about the pricing and needed repairs?
123 wrote:
Wed Oct 30, 2019 3:48 pm
The longer a house sits vacant the more difficult it becomes to sell, whether or not it's on the market.
If the house is on the market for a long time then that is longer for Murphy's Law to cause problems. For example thing like this could happen;

1) You could get sick or die
2) The beneficiary could get sick or die
3) interest rates could go up
4) your local housing market could tank
5) New problems can develop in the house.
6) The house could be broken into
etc

There are lots of potential "flippers" who do make lowball offers that should be ignored but if you get a lowish reasonable offer there is a lot to be said for taking it.

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ncbill
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Re: Has anyone issued a private mortgage?

Post by ncbill » Fri Nov 01, 2019 11:55 am

Thanks again!

Asking price is not much above tax value, which was already reduced significantly at last revaluation, post-Great Recession.

Only received one offer so far...low-ball at half asking price.

And when I say comps I mean "houses either literally next door or within a couple of blocks."

House (3BR/2BA) is small, ~1,500 sqft counting the partially finished basement (used as an office)...as an example the one next door (sold for 15% over asking) is ~2,500 sqft.

Nothing's broken...roof, HVAC, etc. are in great shape.

When I say cosmetic...I only partially repainted the interior in order to get it on the market ASAP...got a bad surprise when I pulled up carpet after that and found someone years ago had repainted the bedrooms & the hallway connecting them without putting down drop cloths over the hardwood...Realtor advised showing "as is" which I did but I plan to refinish the floors in those rooms (nearly 1/2 the square footage) & finish painting the entire interior before re-listing if it doesn't sell by the end of the year.

Big decision would be an exterior repaint...can't pressure clean (paint would come off) but the current color is horrid (pea green, almost bilious)...thinking about white, though from finding pieces of old siding it was painted a slate blue sometime in the past.

Taking it off before the end of the year and re-listing in the spring does indeed result in a "new" listing on the MLS.

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Watty
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Re: Has anyone issued a private mortgage?

Post by Watty » Fri Nov 01, 2019 12:27 pm

The tax value means virtually nothing so I would ignore that.

The last time I sold a house my real estate agent would always contact the other agent when the house was shown to get feedback including about how it was priced. Be sure your real estate agent is doing that.
ncbill wrote:
Fri Nov 01, 2019 11:55 am
Taking it off before the end of the year and re-listing in the spring does indeed result in a "new" listing on the MLS.
With the internet relisting it and getting a new MLS number means almost nothing and will not fool anyone. All the prior listings will still show on most internet house search web pages. That tactic is long out of date.
ncbill wrote:
Fri Nov 01, 2019 11:55 am
~1,500 sqft counting the partially finished basement (used as an office)
It may vary by state but in my area appraisers often do not count below ground finished basements in the square footage not so you may want to discount that square office footage in your thinking.
ncbill wrote:
Fri Nov 01, 2019 11:55 am
Nothing's broken...roof, HVAC, etc. are in great shape.

When I say cosmetic...
It sounds like a great house for someone that wants to live in that area but could not otherwise afford the area.

It may just take patience to find that person.

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ncbill
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Re: Has anyone issued a private mortgage?

Post by ncbill » Fri Nov 01, 2019 12:37 pm

Watty wrote:
Fri Nov 01, 2019 12:27 pm

It sounds like a great house for someone that wants to live in that area but could not otherwise afford the area.

It may just take patience to find that person.
Yep, someone willing to live in a pre-war typically-sized home.

May have caught a break...need to review original records downtown but based on comments from a repeat showing where the couple brought an architect the home may have been designed by a famous local architect...if so it will become "a historic home designed by noted local architect John 'Bubba Gump' Doe." :)

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Re: Has anyone issued a private mortgage?

Post by DiamondplateDave » Fri Nov 01, 2019 12:53 pm

Good luck with the the 'historic home' angle. I like it better than the following "Franken-house" proposal, but...
The only thing that occurs to me in reading this is that there is a desirable neighborhood in my area, with a bunch of smaller, bungalow/cottage type houses. People have been buying these and putting huge additions on them to make them saleable to people wanting more current styles of housing-think great room, humongous kitchen, three car/RV garage with storage...would this be possible?
I know I've seen real estate advice of "buy a smaller house and bring it up to par with the other houses in the area" and, conversely, "don't build/renovate a house so it's considerably higher than nearby properties". If you could interest somebody who wanted to do this, they wouldn't care about the cosmetics, the whole thing would get vinyl siding, floors redone, etc. when the dust settled. My thought is maybe you could interest somebody that wasn't actively looking for this opportunity, but would be able to follow through, and could pay a decent price for it. Not the "I buy houses" lowballer people who just want to lipstick the pig and flip it.

jaj2276
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Re: Has anyone issued a private mortgage?

Post by jaj2276 » Fri Nov 01, 2019 1:01 pm

I (a private citizen) provided a mortgage to my sister-in-law for the purchase of their townhome. The mortgage document looks like other mortgage documents I've seen on the mortgages I've taken out. I know that when my sister-in-law either refinances or sells the townhome, I will give a payoff amount that is some amount lower than what the amortized loan would be.

donall
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Re: Has anyone issued a private mortgage?

Post by donall » Fri Nov 01, 2019 9:37 pm

I think it is a bad idea. But if do, Make sure you file the mortgage papers with the county clerk. Also make sure you have house insurance for a vacant house.

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ncbill
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Re: Has anyone issued a private mortgage?

Post by ncbill » Sun Nov 03, 2019 3:14 pm

DiamondplateDave wrote:
Fri Nov 01, 2019 12:53 pm
Good luck with the the 'historic home' angle. I like it better than the following "Franken-house" proposal, but...
The only thing that occurs to me in reading this is that there is a desirable neighborhood in my area, with a bunch of smaller, bungalow/cottage type houses. People have been buying these and putting huge additions on them to make them saleable to people wanting more current styles of housing-think great room, humongous kitchen, three car/RV garage with storage...would this be possible?
I know I've seen real estate advice of "buy a smaller house and bring it up to par with the other houses in the area" and, conversely, "don't build/renovate a house so it's considerably higher than nearby properties". If you could interest somebody who wanted to do this, they wouldn't care about the cosmetics, the whole thing would get vinyl siding, floors redone, etc. when the dust settled. My thought is maybe you could interest somebody that wasn't actively looking for this opportunity, but would be able to follow through, and could pay a decent price for it. Not the "I buy houses" lowballer people who just want to lipstick the pig and flip it.
Yes, "cottage" is a good description & there's plenty of room in the sloped side yard to add a large master suite level with the main house plus a two-car garage, but I wouldn't do so just to sell.

Got a higher offer from those who originally low-balled...they came up ~15%...I had assumed they were flippers but searching online they're a professional couple whose workplace is within a few miles of the home...so maybe there's light at the end of the tunnel.

Thanks again to all who replied!

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