Owner Financing

[Pelagic]

Anyone have experience with owner financing, on either side. A relative is trying to sell a house and one of the offers for their asking price involves owner financing for half the purchase price for 5 years at 6%.

 

Personally I think this is a good offer since the other half, received as cash at closing, will guarantee the new owner's stake in the property making them less likely to abandon the deal. My relative's lawyer and accountant have both advised against proceeding due to the risks involved, mainly that the purchaser could start renovations then walk away leaving the house worth less. My counterargument is that should foreclosure be necessary and the value of the structure has been completely destroyed, the land alone is worth ~60% of the purchase price.

 

Curious if anyone has any other good arguments for owner financing I could present as a sale needs to happen relatively soon due to expenses associated with the property and this is the best offer they've received. The buyer seems fairly open to structuring the deal as needed to close so if there's additional clauses that could be added I'd be happy to hear them. Or if I'm being unrealistically optimistic and the risks and costs associated with foreclosing are much more than I'm anticipating please tell me.

[rb]

I think you're being unrealistically optimistic about the risks. Why would someone in this day and age pay you 6% interest on a residential real estate loan? It's because he's such a shitty credit that not even the subprime shops want to deal with him. You only ask for owner financing if you don't have any other option. Be careful you're not the sucker at the poker table.

[bookie71]

I've been on both sides.  They have enough "skin in the game" plus it is their home. 

Be sure you are named on their homeowners insurance.

Wouldn't renovations increase the value, thus your relatives security in the house.

I have bought and sold and been on both side of this. 

I would also set up an escrow at bank to protect both buyer and seller.

[Read the Footnotes]

I knew someone who actually did quite well for himself using seller financing as both a buyer and a seller. He basically did it by being a good judge of the risks involved and figuring out how accurately compensate for the risks of the counter party to structure deals that would be beneficial to him. I'm not sure that being on the other side of one of his deals was advisable though.

 

First, the "stake" you are assuming assumes that there will be no other debt on the property. So, if that's an important issue you might look in to whether you can guarantee a level of indebtedness and the seniority of your relatives claim in the relevant jurisdiction.

 

You've laid out 3 main attributes of the deal: the term, the interest rate, and the percent financed. It seems like you're really close to feeling that it's a good deal and potentially convincing your relative also and you haven't even countered their offer, yet?

 

You didn't specify the amortization of the loan, but it seems to me that different amortization schemes present very different risk profiles. To me a 5 year self-amortizing loan would seem most appropriate for someone with significant resources relative to the size of the deal if it was an owner occupied property, but if it was a reasonable term for the buyer that might be very low risk. If it's a non-amortizing interest only loan to a developer, that would have a very different risk profile to me.

 

Hopefully, that is food for thought.

[Parsad]

Anyone have experience with owner financing, on either side. A relative is trying to sell a house and one of the offers for their asking price involves owner financing for half the purchase price for 5 years at 6%.

 

Personally I think this is a good offer since the other half, received as cash at closing, will guarantee the new owner's stake in the property making them less likely to abandon the deal. My relative's lawyer and accountant have both advised against proceeding due to the risks involved, mainly that the purchaser could start renovations then walk away leaving the house worth less. My counterargument is that should foreclosure be necessary and the value of the structure has been completely destroyed, the land alone is worth ~60% of the purchase price.

 

Curious if anyone has any other good arguments for owner financing I could present as a sale needs to happen relatively soon due to expenses associated with the property and this is the best offer they've received. The buyer seems fairly open to structuring the deal as needed to close so if there's additional clauses that could be added I'd be happy to hear them. Or if I'm being unrealistically optimistic and the risks and costs associated with foreclosing are much more than I'm anticipating please tell me.

 

There's pros/cons to both sides:

 

Buyer

- You may be dealing with someone with poor credit

- Could be heavily leveraged even if they have good credit

- Could be someone reestablishing themselves and is trying to improve their credit rating...not a bad think if they are conscientious now about repayment or perhaps struggled when they ran a previous business

 

Seller

- High likelihood they will have to repossess the property

- May have to go through all of the legal hoops to get back possession...make sure contract is air tight.

- Seller should not be leveraged or financial health contingent on sale of property as they may have to take repossession in a down market or high interest rates

 

I'm sure there are plenty of others as well on both sides!  Cheers!

[bizaro86]

You didn't say whether the buyer was putting up the other half in cash and you were getting a first mortgage. If so, the risk seems appropriate to me.

 

If the buyer is getting a huge second mortgage elsewhere and putting up little cash, that is riskier.

 

Riskiest (and I wouldn't do) is the buyer getting a 1st mortgage for the other half of the funds and your half is a second mortgage.

[Pelagic]

You didn't say whether the buyer was putting up the other half in cash and you were getting a first mortgage. If so, the risk seems appropriate to me.

 

If the buyer is getting a huge second mortgage elsewhere and putting up little cash, that is riskier.

 

Riskiest (and I wouldn't do) is the buyer getting a 1st mortgage for the other half of the funds and your half is a second mortgage.

 

Sorry I could have been clearer. It's 50% cash from the buyer (no first mortgage) then 50% self-amortizing over 5 years.

 

The reason owner financing is being considered is because the buyer is retired and has as their primary source of income rents from a number of properties. It would also be their primary residence as they're planning to sell their current residence. If it's worth anything they used owner financing to finance their current residence and offered the previous owner/note holder's contact information.

 

As far as renovations being a risk, if they decide to do something like remodel the kitchen and then run out of funds partially through the project leaving the house in an unlivable state it would be significantly harder to sell or for a potential buyer to finance. That was the main concern raised by my relative's lawyer.

 

 

[Morgan]

If there's no first mortgage and you have half the sales price in cash, that really reduces the risk in my opinion.

 

If the buyer demos half the house then stops paying, the house will be worth less than before the demo obviously. Also, people who do their own work and can't maintain payments tend to be quite bad at renovation work.

 

I have used seller financing quite a few times to buy apartment buildings. I've always made all of my payments, so I haven't had problems. There is a guy in my town who does rent-to-own deals on single family homes and is constantly crushing people. They make a down payment; usually 3-7k I think, and as soon as they make one payment late they lose the house. Almost all of these people are poor and trying to build a future for their family. I haven't seen the contract, but from what I've heard it's completely tilted in the sellers favor. It depends what kind of person you want to be.

 

If there is a problem it'll likely be a pain in the rear, and expensive to get the house back and to make it saleable/rentable. Since this is the buyers primary residence they'll probably be pretty pissed if evicted and do a fair amount of damage to the place. If you are handy or have a team, the damage isn't the end of the world, but sometimes people being evicted do massive amounts of damage. A third floor tenant of mine who was evicted flooded her apartment around midnight. The water flooded the second floor apartment (2nd floor tenant worked midnights) and the restaurant on the first floor. The cops wouldn't arrest her and getting a judgement isn't worth jack diddly from a person like that. That level of damage has only happened once in 12 years though.

 

Ultimately it's up to you. How you want treat the buyer? What kind of person is the buyer? Will they make their payments or not?

 

 

[Gamecock-YT]

What the price for peace of mind? Guess depends how much skin in the game, but not worth it IMO.

[bizaro86]

Based on the information you've provided, I'd be willing to do this deal if I was selling my house, assuming no suspected character deficiency in the buyer.

 

Some suggestions for risk reduction:

- have the buyer legally hypothecate the seller note they took back.

- sell the note to a real estate investor/mortgage broker type. You may have to take a small discount but it might be worth it to convert to an all cash deal. If the property was in my local area and I agreed with the property valuation I'd pay 90% of face for that note. That would make the sale 95% of the price all cash. You might be able to do better as 6% firsts are pretty attractive - I wouldn't be surprised if you could get par for that after its seasoned a bit.

- get a 2nd on one of the sellers other properties as additional security.

 

Anyway, I've bought a number of foreclosures. Most people who are getting foreclosed on dont destroy the place. Often they will take the appliances, as they aren't attached goods.

[SharperDingaan]

LISTEN to what you are being told. The lawyer, & the accountant are BOTH saying walk away ....

Professionals they were hired 'cause they know this business - they both say no, and a lot of money was paid for that advice.

 

A 'clean' sale, means just that - clean. Buyer/seller pay the money TODAY, exchange the title TOTAY, and walk away - never to see each other again. The seller gets 100% cash, and is NOT in the financing business - it's why we have banks. It smells like this is a forced seller that needs a quick sale - offering inducements to both get a sale, and at the highest price possible.

 

A vendor take-back is not a bad thing IF you need the sellers ongoing involvement for a time.

Buying an apartment block, or a business, etc. - where there is a need for operational transition. If you're just buying a house to live in? .. not so much.

 

SD

 

 

 

[bizaro86]

LISTEN to what you are being told. The lawyer, & the accountant are BOTH saying walk away ....

Professionals they were hired 'cause they know this business - they both say no, and a lot of money was paid for that advice.

 

A 'clean' sale, means just that - clean. Buyer/seller pay the money TODAY, exchange the title TOTAY, and walk away - never to see each other again. The seller gets 100% cash, and is NOT in the financing business - it's why we have banks. It smells like this is a forced seller that needs a quick sale - offering inducements to both get a sale, and at the highest price possible.

 

A vendor take-back is not a bad thing IF you need the sellers ongoing involvement for a time.

Buying an apartment block, or a business, etc. - where there is a need for operational transition. If you're just buying a house to live in? .. not so much.

 

SD

 

Lawyers and accountants that do residential real estate are some of the most risk adverse people alive, and are often not good at evaluating risk-reward, in my experience.

 

The right question for the lawyer isn't "should I go this" the right question  is, "what is the range of legal costs and time elapsed to complete a foreclosure in this jurisdiction"

 

Then evaluate the risk-reward using that information. If there was a cash deal on the table at a similar price great, take that. But I doubt that's true. And that makes the true return on the 1st mortgage effectively higher.

[Pelagic]

Thanks for the help everyone. Some good points and options have been raised. Part of the reason I asked here rather than simply following along with the advice of the lawyer and accountant is that neither gave a case specific outline of the risk. Just a general this is what can happen and why owner financing isn't recommended. Yes there's some risk, but there's also the cost of maintaining the property waiting for another offer. Personally I thought the deal seemed attractive, especially given that even if in some scenario where the house is rendered worthless similar lots have sold for roughly 60% of the price.

 

I will look into potentially reselling the note, that seems like it may be the easiest course. And will be sure to ask what the cost/timeframe of a foreclosure process is.

[bizaro86]

If you're looking to sell the note, I'd contact some hard money lenders and see if they'd buy it from you. The listings at the bigger pockets forum have numerous hard money lender ads.

 

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