Q: I own 2.4 acres on a major highway and have received offers for it. I'd like to minimize the capital gains tax by using the installment method. However, I'm fearful of subordination arrangements: I understand that financial institutions have prior claim in the event of default and that it is possible to lose everything except the down payment. Is it possible to sell vacant ground via the installment method without agreeing to the subordination clause?
A: Yes, it's possible. But it may be difficult. This is because a first lien (your mortgage) on the land may make it difficult or impossible for the purchaser to get development and construction financing and, ultimately, a permanent mortgage. You'll simply have to try on this one. But a purchaser may feel it's not possible to accomplish what he must accomplish (i.e., turn the ground into improved, income-producing real estate) without subordination of your land mortgage to a construction, and later a permanent, mortgage.
Q: I'm selling 240 acres of land in Minnesota for $100 an acre. The real estate broker told me I have to pay $50 to pay for the rezoning of the land and also have to pay for some kind of title insurance. Is this correct?
A: It's hard to give you a fully authoritative answer when you furnished so few facts. With respect to the rezoning, the broker apparently takes the position that the land must be rezoned to be salable at $100 an acre. If this is true, then your paying this rather small fee for rezoning is not unreasonable. Who pays the premium for title insurance (buyer or seller) depends largely on local custom where the land is located. It's a negotiable item. Sometimes the buyer and seller will negotiate so that the seller pays the premium, sometimes so that the buyer pays the premium. Discuss this with your broker.
Q: Can you explain the workings of a reverse mortgage? Are there specific advantages and disadvantages to both the mortgagee and the mortgagor?
A: A reverse mortgage (you may also hear the term, reverse annuity mortgage -- they're not quite the same) works this way, with some variations among different lenders. A mortgage is executed for up to 80 percent of appraised value of your house for a 30-year period. (the house should be paid for, or nearly so.) Each month during a period of say, up to 10 years, you get a check from the lender (mortgagee) for an amount that's agreed upon by you and the lender. You also receive a billing that covers interest on the money you've received to that date, one month's taxes and hazard insurance cost and, perhaps, a small amount of principal reduction.
The payments to you are structured so that the net amount you keep each month after paying the monthly billing is approximately the same during the period. At the end you (the borrower or mortgagor) have several options.
First, you can request that your house be reappraised to determine if further payments may be made by reason of increased or remaining equity. Second, a regular amortization schedule can be started for the remaining years of the original 30-year period.
Third, the loan may be paid off through sale of the property or with other funds, without any penalty.
In every case, the plan is spelled out in detail and most lenders will encourage you to review the program with your attorney, accountant and your family.
This is a true reverse mortgage. It contains none of the complexities usually associated with the annuity approach.
Probably the chief advantage to you (the mortgagor) is that it permits you to use your equity for living or other expenses over a period of up to 10 years. Perhaps the chief disadvantage is that you have a mortgage to reckon with at the end of the payment period to you. The advantage to the mortgagee is that he is lending his funds at a profitable interest rate in what is usually quite a secure environment.