LandInvestors.com Forums **Ask A Question** Payment plan w/o interest vs. with interest

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  • #4221

    Claire
    Participant
    Post count: 138

    @admin

    Hiya. I’m still working on my first terms deal. I see some students have decided to go with a simple payment scheme wherein they don’t charge interest–just monthly payments. But Steven’s land contract definitely includes interest.

    My question is…what would be the advantage to charging interest? It seems like a hassle. At the end of the year, you have to do reporting and fill out forms. Can’t I avoid all that just by making it a simple payment plan like: you pay $4000 down and $162 per month until you pay off the full purchase price? No amortization, no annoying calculations.

    @admin

Viewing 7 replies - 1 through 7 (of 7 total)
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  • Josh George
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    Post count: 42
    Pro

    @lake17
    @admin

    I was wondering this same thing the other day Claire. Have you figured out whether or not you can avoid having to do the reporting and filling out forms if you don’t charge any interest?

    Brandon Price
    Participant
    Post count: 27

    @lake17
    @joshgeorge
    @admin
    @jilldewit

    I asked this question in one of the weekly All-Member calls. Steve said it very straight forward that charging interest is the right way to do business. He didn’t really expound on it more than that. I don’t want to misquote him here at all and would love for him to chime in.
    (I don’t really know how to do the @ thing, just hoping the ones above work).

    Justin Holm
    Participant
    Post count: 15
    Pro

    I would like to weigh in on this a little. I have been selling land by owner financing for about 10 years. It really is not that difficult to do. There are two ways that I typically do it.

    The first way is easy but will cost you a bit. It is to use a title company to handle all of the billing and so forth for you including the reporting and so forth. They will charge a setup fee, which can vary, and usually a charge for each payment that is accepted (around $10 or so. I usually split this with the buyer).

    In recent years I have started to service my own term sales. I use a program called NoteSmith that handles all of the numbers, reporting and so forth. It costs at most $500 for the software. I believe Steve uses Mortgage Care that costs in the $7000 range if not more. The software will give you all the reports and can integrate with your finance software. Not to difficult.

    The real question you ask is why do I want to deal with it. This comes down to doing the math. There is a lot of money to be made from interest and playing the long term game. If you purchase a piece of property for $500, sold it on terms for $10,000 with $500 down, $100 a month, at 10% interest, for 15 years, you have made an additional $8,900 over the term on top of the sale price. That is why I do term sales. The long term gain is awesome.

    For a small hassle, there is much to be gained. Educate yourself on it a bit more and see if it is a fit for you. Personally, I sell whatever I can on terms, unless I need some more cash fast.

    I hope this helps you think about it a little more.

    Justin

    Kyler
    Participant
    Post count: 29
    Pro

    Why not just factor in what payments would be after interest, then charge that amount for payments at “0%” interest.

    That is how I did my first terms deal. Basically you just increase the price of the property instead of keeping the terms price and cash price the same and charging interest.

    You get the same amount of money at the end of terms sale but don’t have to deal with interest.

    Claire
    Participant
    Post count: 138
    Pro

    @daws2536

    That’s exactly what I was trying to ask about. Make the payments equal what they would’ve been after interest; then charge 0%. The math is easy. It’s just the legalities and tax implications for me and the buyer that I’m concerned about.

    I hope @admin will correct me if I’m wrong, but his answer was something to the effect of “it’s a better business practice to charge interest.” But I still don’t understand why. Where’s the advantage to you as a business owner? I’m taking @admin‘s advice and I do charge interest, but I like to understand the why behind what I’m doing, and don’t have a satisfactory answer yet.

    Jerry Dalglish
    Participant
    Post count: 23
    Pro

    The issue appears to be a conflict with a thing called the “Applicable Federal Rate.”

    Basically, a floating market-driven rate that the IRS attempts to assign to “debt transactions” of given lengths in an attempt to standardize the interest a group of people would (on average) receive for the interest portion of their loan to someone.

    If the rate is below the AFR it is questionable. So zero is questionable.

    The IRS has odd ways of looking a things and I am by no means an expert on the subject.

    But I would make it easy and charge interest.

    Luke Smith
    Moderator
    Post count: 1263
    ProAdvanced

    I don’t see my owner financing as debt. I am not loaning them my money I am selling them land they are buying over time. Much more like lay a way that they can use while they are paying. I’m not a bank trying to plug them in and suck them dry with interest over time. I want to sell the land to them and get my money to go do other deals with. If they want my land they can pay cash if they want to make payments then it is a different higher price. I’m not charging usury interest rates above my cash price to get to a reasonable cost of my capital.

    Usury is a bigger no no in my opinion than having two different prices.

    Car ads now are selling low payments or cash back if you pay cash. They are not saying it’s cheap or if you want to make payments on that price the interest is ??? some high number. It is crazy low interest #’s and payments that sells the car.

Viewing 7 replies - 1 through 7 (of 7 total)

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