The IRS recognizes a Contract for Deed as a sale and therefore if you purchased a home under a contract for deed and meet all the other requirements - you would qaulify for the First Time Homebuyer Credit.
A contract for deed, also referred to as a land contract, is typically used like a substitute for a mortgage or deed of trust. It is an installment contract in which the seller finances the purchase, comparable to owner financing.
In a typical situation, you have an owner needing a quick sale and a buyer with a limited amount of funds, problem credit, or other limitations. The buyer takes possession of the property and makes monthly installment payments of principal and interest until the balance is paid off. During the term of the contract for deed, the buyer is required to pay all of the taxes, maintain fire and casualty insurance, and keep the property in good repair. In essence, the seller is relieved of most responsibilities while the buyer enjoys the benefits of ownership, including the tax deductions.
So, what's the catch? Possession of the deed. The deed, transferring title to the buyer, is held by the seller. The buyer does not get the deed (and ownership) until the contract is paid in full.
Potential Risks
The contract for deed still remains a popular creative financing tool, despite the potential risk to both seller and buyer. When using this method, be aware of the following concerns:
1. The seller is giving possession of their property to someone who may have an increased risk of defaulting on the contract. If the buyer defaults, the seller gets the property back, but the down payment may not cover the expense of foreclosure and repairs. Most contracts provide a clause that requires the buyer to waive their rights of foreclosure in the event of a default, to minimize the expenses of recovering the property. Even with this clause, a buyer may refuse to relinquish possession of the property, forcing costly eviction or foreclosure proceedings. To further protect the seller, at the time of the initial sale, some sellers require the buyer to execute a quit claim deed back to the seller (stating that the deed is only valid in the event of a default on the contract for deed) to be used in the event of a default.
2. It is recommended that the contract for deed always be recorded. If the property being sold is mortgage, technically, a Contract for Deed could trigger the "due-on-sale" clause of any existing
mortgage. Because a sale using a contract for deed is still a "transfer," the lender may call the loan due and payable immediately. If the buyer is unable to refinance or qualify for an assumption, he or she would be forced to transfer title back to the seller or foreclosure could result. Some loans,Administration contain regulations exempting a Contract for Deed sale from the due-on-sale provisions.
3. The seller's financial or legal problems could affect the buyer's ability to obtain clear title. This is especially true in cases where the contract for deed is not recorded.
4. For various reasons, the seller, when the time comes, may be unable to grant title to the buyer. For instance, if the seller has died, the property may be tied up in probate or already have passed to the heirs. You may not be able to locate the seller or they may be incompetent and unable to give title. As a protective measure, the buyer could ask the seller to pre-issue an executed deed to be held by a trusted third party. This deed should clearly state that it is subject to and would only be valid upon satisfaction of the terms of the contract for deed.
5. Most contract for deed forms are seller-oriented documents, which fail to provide adequate remedies for the buyer. For example, most forms do not permit a purchaser to stop making payments to a seller who has defaulted on an existing mortgage.
Even with these possible pitfalls, many property owners have used the Contract for Deed with successful results. Those considering this type of creative financing should seek the advice of an attorney in these areas to minimize risk and maximize profits.
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Tax Credit Can Be Used UPFRONT on FHA loans for Down Payment
Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, on Tuesday said that the Federal Housing Administration is going to permit its lenders to allow home buyers to use the $8,000 tax credit as a down payment.
Previously, buyers could not file for the credit until AFTER they closed. Donavan delivered the news during an address to several thousand REALTORS® gathered May 12th at "The Real Estate Summitt, Advancing the Economy" at the 2009 REALTORS® Midyear Legislative Meetings & Trade Expo in Washington, D.C..
He says FHA's approved lenders will be permitted to "monetize" the tax credit through short-term bridge loans to allow eligible home buyers to access the funds immediately at the closing table.
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Question: I have set up a self directed IRA and I want to buy a buildable lot and then have a duplex built on the lot. Are there any publications that deal specifically with self directed IRAs and this scenario? My main concern is whether or not my IRA can build a spec home and if I can do any of the work on the property.
Answer: If you go to www.IRS.gov you can view Publication 590, this publication defines everything the IRS wants you to know about IRAs. We think of a self directed IRA as 'non traditional' but for IRS purposes an IRA is an IRA. Any IRA that is not a ROTH IRA is considered 'traditional' and would fall under the guidelines listed there. As you will see the IRS rules on allowable work are not very specific concerning the Self-Directed IRA account holder and work performed relating to the real estate purchased. On page 45 of the 2008 publication, you will see what you CAN'T do. The IRS forbids you from receiving any unreasonable compensation for management. Doesn't say you can't be paid - but it does say it must be reasonable.
In general, the IRS permits IRAs to invest in real estate and buying a vacant lot and building on it is real estate. So the question is can you handle the general contracting? I believe the answer would be ‘yes'. Can you be paid to be the subcontractor - I believe that answer is 'it doesn't specifically say you can't be.'
This type of work may be considered similar to how management ‘jobs' performed by the IRA owner are handled. For instance, account holders can arrange for work to be done on the property, but payment for labor and materials must be issued by check from the custodian directly to contractors and suppliers.
Another permissible scenario is account holders can perform maintenance work that does not increase the property's value. This may include examples such as maintaining the landscape, a minor plumbing repair, doing shingle repair on a leaky roof or painting a few rooms between tenants.
Some investors arrange to have an unrelated entity such as a corporation or LLC do the work for the IRA. Then, this company is hired and paid by the IRA - then that company can take those funds and hire or subcontract with the IRA account holder to do the work. Again, there isn't a clear answer as to whether or not the IRS absolutely disallows that but as long as the compensation was not ‘unreasonable' - it is my opinion that it is permissable.
Finally, keep in mind that just because the IRS allows it - doesn't mean your IRA custondian will do it. Some IRA custodians don't want to deal with certain real estate transactions. Check with your custodian before you make the purchase.
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Central Florida Stimulus is Kicking In
Central Florida is beginning to see an impact from their share of the $787 Billion Federal Stimulus package. The projects spurred by the stimulus dollars are expected to create 206,000 jobs across the state. $32.7 million will be pumped into jobs in the four county Metro Orlando MSA.
Top Projects include:
Go to www.FlaRecovery.com to get more details on how Florida plans to spend their share.
If you're a vendor who wants to do business with the government, check out the Federal Business Opportunities home Web site at www.fbo.gov
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Will the housing market rebound?
Historically, it always has and there is every indication it will again. Go back in time and you will find the same doom and gloom predictions for every downturn in the market. Following are a few examples of how the media predicted the future of real estate profits prior to the last real estate boom, investors who didn't listen to these gloomy predictions realized huge profits:
January 2001 - There's some question whether there's a bubble or not a bubble, but we're clearly near the top of the market for much of the nation. According to the Joint Center for Housing Studies, buyers relying on real estate for high returns may be sadly disappointed.
October 2001 - The localities with the greatest likelihood of a significant decline in home prices over the next two years, according to a recent survey by PMI Mortgage Insurance Co., include San Jose and Oakland, Calif.; and Vancouver, Wash., areas; Denver; San Francisco; the Seattle-Bellevue-Everett, Wash., region; South Florida and Phoenix, Ariz. These areas, which were graded as "high risk", are ones that previously experienced strong home-value appreciation.
January 2002 - If you look at the real estate market and see that prices for most of the U.S. are at or near all-time highs - and interest rates are near all-time lows - you have to anticipate a turn - unfortunately the direction is down."
January 2002 - For most, real estate as a lucrative wealth builder is clearly down for the count. The fourth quarter 2001 FHA delinquency rate of 10.97 percent was the second highest for the National Delinquency Survey since 1972.The highest delinquency rate on record for FHA loans, 11.36 percent, was reported in the third quarter of 2001.
The real estate market is a long-term investment that is characterized by peaks and valleys, but over the long term it has consistently gone up since the beginning of time. The saying goes that even if you make a bad investment in real estate, if you just hold it long enough you will still make a decent profit.
For example, even though the media is lamenting the drop in the median home price range, the current $205,000 U.S. median home price is on target to double the average median range of the last decade. This may be a drop for people who purchased at the height of the recent market but it is a considerably large increase for those of us who paid in the low $100s just ten years ago. The key is buying during the low periods and holding on long enough to sell during the peaks. Just taking a look at the United States overall averages for the last seven decades you can see that while there were dramatic low points throughout this time period, overall prices still climbed steadily:
1940-$2,738 1950 -$4,854
1960- $8,900 1970-$17,000
1980-$33,200 1990-$62,100
2000-$109,600 2009-$205,000
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