Real Estate Dealers Sell Owner Financed Notes to Pay Taxes – The Partial to the Rescue!
The subprime meltdown forced many dealers/rehabbers to sell their properties using some form of owner financing. People just couldn’t get the bank financing, so to move the properties, they provided the financing for the buyers. Now, they’re sitting in front of their CPA and gasping! The IRS considers the note they took back in profit is the same as cash, and Uncle Sam wants his share!
What can note holders do to cover an oppressive tax liability?
They can sell a portion of their note, a partial. Let’s say the dealer owes $30,000 in taxes, and one of his notes is $100,000 at 9% over 360 months giving him a monthly payment of $804.62.
He doesn’t need to sell the whole note, he just needs $30,000. So what if he sells the next 5 years of payments? What would that look like?
The note buyer pays $30,000 for the right to receive $804.62 a month for the next 5 years. $804.62 x 60 = $48,277.20. This represents a 20.59% yield.
The note seller gets $30,000 now to cover his tax liability, and he gets the note back in 5 years. When he starts receiving the payments again, the note will still have a principal balance of $95,880.34! He gets his money now, his principal balance is only $4,119.66 less than when he sold it, and he still has 25 years of payments to collect! $804.62 x 300 = $241,386.79 + $30,000 (from note buyer) = $271,386.79 total income from his $100,000 note!
- I want to carry paper, please help me create a valuable note.
- If I Carry Paper, How Much Will I Get Each Month?
- How Much Will You Pay for My Note?
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Dawn, WOW! This is very interesting. I have been learning so much about notes thanks to you!
Irina, as always, thanks so much for the feedback! And for the mortgage referral last week. You’re really a great resource in the area.
What happens if the borrower – the person making the payments – stops making them? What recourse do I have?
Let me restate my previous question….If I buy the next 30 payments of the rehabber’s note for 30K,…and the borrower – the person making the next 30 payments to me – stops paying, what recourse do I have?
What happens to the rehabber?
What happens to the borrower?
Hi Alan,
Thanks for stopping by, and these are great questions. What happens when a Payor defaults is that the note holder forecloses (in California and other trust deed states)in order to sell the collateral to satisfy the lien.
If the Payor defaults during the 30 month period, then there is a separate agreement between the Note Seller and the Note Buyer stating how the funds will be distributed. It is whatever they agree to.
The Note Buyer didn’t buy the whole note, so it would not be fair for him to get the full payoff in case of default. The Note Buyer is entitled to get the yield he bargained for plus maybe a premium for servicing the foreclosure, and the rest goes to the original Note Holder/Seller.