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Here's a hidden "Gotcha" for seller financing.
Every now and then you might be asked by a seller or buyer if seller financing could be an option to make a transaction work.
A common scenario might be for a buyer to ask a seller to take back a small second mortgage (we're talking about a legitimate, recorded, and disclosed second here) in order to help them get into a home.
Being a good guy the seller says "sure, I'll do that and because I like you so much I'll only charge you 3% interest on this $25,000 second you're going to pay off in 5 years."
Sounds like a match made in heaven; a gracious seller and a grateful buyer, a meeting of the minds, and a paycheck for their Realtors.
All goes well and a couple of years down the road your seller goes to his mailbox and there's a letter from the IRS.
"Greetings" says the letter; "We've noticed you're carrying a second mortgage on your former principal residence and only charging 3% interest."
"That's nice but the AFRs (Applicable Federal Rates) for seller financing say you should have been charging 4.88% for a mid-term note so we've imputed the correct interest rate for you and you still owe..............................."
OUCH! You're ... more

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