Q: I appreciated your article on the advantages and disadvantages of holding title to a home in a limited liability company (LLC).
I have a house in Maryland that is valued at around $350,000 with a mortgage of around $140,000. A friend would like to buy the home from me for $210,000 and we’d have a promissory note for the difference between what he pays us and what we think the home is worth. We’d like to sell the home in about 6 months. When we sell it, he’d get his $225,000 back and we’d have a formula for distributing the rest of the money.
My mortgage would have to be paid off at the time of the second sale. Can we do this between ourselves or do we need a title search, title insurance, etc. and closing?
A: At the time you sell your home to your friend, the real selling price would be $350,000 and not $210,000. You’re not paying off your lender at the time you sell your home to your friend. Accordingly, your friend is buying the home and taking the home subject to that mortgage.
The net effect of that sale is that your friend is paying $210,000 and taking the home subject to a mortgage of $140,000. Even if your name is still on the mortgage, it would seem to us that the true purchase price would be $350,000. We don’t know if this changes anything in your situation but it would seem to us that you and your friend are trying to create a financial arrangement that doesn’t appear all that sound, especially when you’re talking about a resale in the very short term.
You will have costs associated with the sale of the property to your friend. Those costs should be based on the sales price of $350,000, but you won’t be paying a real estate broker a commission for the sale. Given that you might have paid an agent a 5 percent commission, you are saving that expense by selling without a Realtor.
Later in the year when your friend tries to sell the home, he may have to hire a real estate broker to list and sell the home. At that time, the best comparable for the home will be the price of your own home. Given that your friend will have additional closing costs and the commission, your friend will have to sell the home for about 10 percent more than your sales price to make any money.
As for the costs of the transaction, you and your buyer will incur all of the same costs relating to the sale of the home along with any fees owed to any municipality, state government, recording charges, filing fees, title company costs, along with others. When the property is sold a second time, your buyer will have all of those charges to pay again.
In most stable real estate markets, it would be unusual to see real estate prices rise by that amount in a 6-month period. Furthermore, if you felt that the real estate market was improving so quickly, we don’t know why you wouldn’t want to wait and sell your home for more later on and reap all of the benefits of the sale.
We suspect you may have other ideas in mind that you haven’t disclosed to us. Otherwise, your arrangement seems quite unusual.
Having said that, it is possible to sell real estate and take back a shared-appreciation mortgage. In a shared-appreciation mortgage, the lender agrees to give the property owner money in exchange for a future interest the profits from the sale or refinancing of the property. The documentation for this type of loan is out of the ordinary and we’d definitely recommend that you obtain the services of a real estate attorney to assist you in the process.
One additional note relating to your current lender. When you sell your home and don’t pay off your current loan, your current lender may have the right to call the loan. That means, the lender can decide whether the loan can still remain after the property sale or simply tell you that you need to repay the loan in full when they find out about the sale. The lender should find out about the sale. Most lenders require borrowers to carry homeowner’s insurance on their homes. When the homeowner sells the home, the insurance coverage should be cancelled and the new buyer must obtain his own coverage.
When you go to cancel your insurance coverage, the lender will get notice from the insurance company of the cancellation and will require new coverage. The lender will see that the new insurance coverage on the home has a new owner.
In addition, you should know that you will still have the obligation to pay your lender what is owed on the property. If you borrower fails to make payments to you, you still owe the lender the money and that obligation will continue until you pay off the loan.