February 4, 2000

Selling that vacation property

By TOM KELLY
The Real Estate Advisor

Our elderly friends had just returned from their Snohomish County getaway. The January snow and rain had not been kind to the mountain cabin - a cozy structure structure tucked between Arlington and Darrington and now used only by the grandkids in the summertime.

"I’ve thought about selling it the past few years," the man said. "The kids are gone and I can’t keep it up - I’m not 37 anymore. I could use some cash, but I don’t need it all right now."

Not all property sellers want cash. The monthly payment income from the sale of a family home, a rental property or vacation cabin can supplement retirement income and serve as a continuing comfort zone.

This man, like many retirees, needed only simple comforts. The mere mention of selling the cabin meant he had re-examined that comfort zone. To another, the cabin sale could now be viewed as an extremely important - perhaps critical - flow of income.

If you no longer can nurse a rental or vacation cabin and want to sell it, you spread any resulting capital gains tax over time. "Carrying back" all or a portion of the proceeds can make a lot of sense. However, if you participate in any sort of seller financing, make sure to build in safety features that protect your investment and sanity. In fact, it's not a bad idea to copy many of the loan requirements a local bank would insist upon. Among them:

* It's a good idea to obtain a credit report on the buyer. Why would you want to sell your home or other property to someone you know nothing about?

* Write into the earnest money agreement that the buyer provides, and keeps current, a homeowner's insurance policy.

* Purchase tax registration coverage from a title company. That way, if the property taxes are not paid, you will be notified.

Include in the earnest money that the buyer make timely tax payments.

* Insist on a "due on sale" clause or that you, as the initial seller, must approve any subsequent sale in writing. That way, if the property is sold before the term of your note or contract, you will receive all your cash upon the transfer of the property, or retain the ability to approve the new buyer.

* If you absolutely cannot be cashed out early (say you need monthly income or do not want to pay taxes on the lump-sum gain) request a prepayment penalty. That way, if you receive a huge balloon payment when you don't necessarily want it, you will be reimbursed for the inconvenience (tax consequences, loss of reliable income, etc.).

* Consider taking a down payment of at least 20 percent. If you need to sell the note before term (illness or other emergency) this will make it easier to sell. Like regular mortgages, lenders require mortgage insurance for loans they write with less than 20 percent down. You will reduce the risk of any future note holder by having an amount at least equal to a conventional down payment.

* Consider a third-party collection account. You can split the cost (about $60 a year) with the buyer, and the service is well worth the money. It provides you with complete tax statements (seller must submit principal and interest amounts to the buyer-payer annually) and receives and deposits monthly payments - especially valuable if you have to go out of town unexpectedly.

When honest, competent parties are involved, seller financing via a real-estate contract or deed of trust can be a wonderful vehicle for buying and selling property. The problem is that some people take advantage of seller financing and make life miserable for everybody involved. If a contract is sold and then sold again, all parties must execute their part of the agreement or the chain breaks.

The erosion of one link in a real-estate contract chain happens all the time - often to older people who have spent their life savings in an attempt to secure a little peace of mind.

Take time to prepare if you are going to assume the position of playing the bank. The bank does.

Previous columns:

• Definition of fixture isn't fixed, 01-28-2000
• New forces changing housing market, 01-21-2000
• Why buy when you can rent?, 01-14-2000
• One analyst can move mountains, mortgages, 01-07-2000
• A look at house of tomorrow, 12-23-1999
• Home for holidays has a new meaning, 12-17-1999
• Buying and selling over the holidays, 12-10-1999
• New loan removes need to refinance, 12-03-1999