For July, we are going to learn from the tips that we mentioned last month and add a few new ones. There are certain things your banker isn’t going to tell you. Learning these tips and traps can save you time, money and headaches down the road.
Tip No. 8 – Keep Your Loan Amount Private – Save Taxes!
Whenever you finance a piece of property, the deed of trust becomes part of the public record. The dollar amount of your loan is listed on that deed.
The official reason is that, in the event of foreclosure, the lenders and courts want to be able to identify each loan very specifically. However, the reality is that the dollar amount isn’t going to be the only way to identify that loan. (Let’s face it: The chances are good that you didn’t take out additional loans on other pieces of property on that exact same day for the same amount of money. So the records showing a loan being taken out on that piece of property should be sufficient to connect the deed to the property.)
When the dollar amount of a loan is included on a deed, the taxing district can use that information to make assumptions as to the sale price. Most likely, the district will assume that the loan amount represents a certain percentage of the value of the property, so it will automatically assess it under that assumption, which could lead to a higher value and tax rate.
Let’s say you have a piece of property you bought 20 years ago; now it’s worth $5 million. You don’t have a loan on it and the tax district’s assessment puts the value of the property at $800,000. If you go to the bank and borrow $4 million on that piece of property and the tax district sees that amount, it’s going to raise the estimated value of the property. Generally, the tax district assumes that the loan is equal to 80 percent of the property’s value, so it computes a value based on that formula and raises your taxes accordingly. With that value in place, the district will challenge you to produce the sale documents to protest, so you lose. In some states, disclosure of sale prices is mandatory; rules vary. So it’s to your benefit as the property owner to keep that amount private. Legally, if someone from the taxing district called the bank and asked for the amount of the loan, the banker would be barred from telling them. That same sort of confidentiality should be allowed on paperwork that is being filed with the tax district. In Ron’s stomping grounds of Fort Worth, Texas, the tax rate runs about 3 percent of value, so the increase described above triggers additional property taxes of $120,000. Yep, over $2,000 per week JUST for taxes. Most lenders on commercial loans will be willing to leave the amount out; however, it’s much trickier on residential loans.
Just as with other business transactions, you can use a non-disclosure agreement, or NDA, to keep the details private. This can also be placed as a requirement in the contract on a real estate sale, ensuring that you are able to keep the information private. One added benefit is also that you don’t want everyone knowing what you paid or sold a property for.
Tip No. 9 – Keep Your Sales Price Private, Too!
For many reasons, it’s also important to keep the sales amount of real estate transactions private, too. One way to do this is to put a non-disclosure agreement in the purchase contract. The non-disclosure agreement prohibits the buyer and the seller from revealing the dollar amount of the transaction.
Some states require you to include that information, so check your state laws before pursuing this agreement. You can always add a non-disclosure clause; just include a provision excepting those professionals or employees involved in the transaction who need to know (like the party’s accountants) or as required by law.
Remember only you can make business great!
Ron Sturgeon, founder of Mr. Mission Possible small business consulting, combines over 35 years of entrepreneurship with an extensive resume in consulting, speaking, and business writing, with 6 books published. A business owner since age 17, Ron sold his chain of salvage yards to Ford Motor Company in 1999, and his innovations in database-driven direct marketing have been profiled in Inc. Magazine. After the repurchase of Greenleaf Auto Recyclers from Ford and sale to Schnitzer Industries, Ron is now owner of the DFW Elite Auto suite of businesses and a successful real estate investor.
As a consultant and peer benchmarking leader, Ron shares his expertise in strategic planning, capitalization, compensation, growing market share, and more in his signature plain-spoken style, providing field-proven, high-profit best practices well ahead of the business news curve.
Ron is a web expert, but he is also an expert in helping all types of small businesses become more successful and more profitable. He has helped owners in industries from restaurants to law firms with a wide variety of business issues, including sales, promotion, production, financial measures, business strategy, and planning for startups. Whatever your unique challenges, Ron can help you.