Posted by Craig (IL) on July 19, 2002 at 13:09:59:
If there is a pre-esisting first, that note may be, in certain cases, formally assumed, or taken “subject to”. In these cases the seller could carry back a second for his profit. This works because no new loan is originanted. However, where buyers are seeking new loans. Lenders simply won’t do it. They want the buyer to have a financial stake in the deal before they, the lender, will accept the risk of a loan.
If you going out looking for the seller to in effect finance your downpayment, you won’t be successful.
I received a full price offer on my 6-plex with the buyer wanting me to carry a note for the down payment. I owe $68,000 on the property, FULL PRICE is $124,900, I would carry a note & mortgage for 20% ($24,980) @ 9% with a 5-year amort. schedule. I would recieve monthly payments of $518.55.
My wife and I are planning to move to Florida in February, we now live in Ohio. Is this a good situation for us to be in out of state? How can we protect ourselves? Should we do a credit check on this potential buyer? Anything else?
In a case like this the character, honesty and ability of the buyer are the most important thing.
You should definitely do a credit check.
You should also ask what other rental properties he owns. Find out if they are self supporting (positive cash flow). Inspect them yourself.Check that they are fully rented. The way he keeps them is the way he is going to keep your property.
There is certainly an element of risk in approaching the sale of RE in this manner. If you focus on what COULD GO WRONG, the answer would be made for you; Pass on it.
However, many have done a similar deal and it has worked like a charm I personally would prefer that the buyer have something at stake, as opposed to a 100% deal. Or, I would much prefer to have the Deed to the property, as opposed to signing away the Deed. Your remedy, in the event that this buyer defaults on you, will be foreclosure. This is expensive! Assuming that the buyer was not only not paying you, but not paying the 1st mtg at the same time, your equity position is continually being diluted, with each passing month. You could endure the costs and hassles of the foreclosure, and still get very little of your equity back, in addition to a much dimished asset, if they did not care for the property condition.
When you consider the downside, I think I would take a pass, unless the investor is a much experienced, and proven to be responsible in their performance. It really all boils down to this, the investors track record, IMHO.
Re: How risky is this for me? - Posted by Craig (IL)
Posted by Craig (IL) on July 19, 2002 at 11:24:00:
Drew’s and BobS’s replies are right on, Heed what they say. If you buyer is hoping to get a nothing-down deal for himself or herself in this way, your buyer is a novice and doesn’t know yet that it won’t work. What risk would he or she be taking? What motivation would he have to make a go of it. Would it not be too risky for you if he is investing nothing?
On the other hand, you know the property what expences a new owner will incurr and whether or not the figures will work for the new owner. You’re actually in a better situaiton to judge the deal than lenders are. You may want to consider a CFD for much of the pruchase price adn then live off the regular payments you will recieve and benefit from all the interest you will collect. There are tax consequences to interest collection, and you may want to review them with a tax advisor.
Yo may consider a CFD where the buyer puts up only a small amount. This could be in cash or other property (a boat, a hot tub). The less down you require on a CFD teh more interest you would charge. In todays market 9–12% would be reaonable with down paymentts of 10% or less, provided this dons’t destroy the buyer’s ability of making payments to you.
You manage risk by planning for it and knowing how you will proceed and what the consequences are for you. I don’t know if finding a buyer is difficult for you or not, but you have a buyer; you know what he or she must do to make a go of it. If the deal you offer will work for him or her all that is left is determining whether or not this buyer is serious and will do what’s necessary to maek a go of it and pay ou. OF course you must check credit. What is the buyer’s history and knowledge? Etc.
Another otption is taht once you’ve created a note you can sell it at discount and get all cash. Yo lose money this way (since note buyers usually pay less than the princple amout owed–that’s how they make money.) But you may feel ok if your purchase price is high and the loss in the discount is worth it to you to have (a) created a sale of your property, and (b)B make a decent profit anyway. If you are inhterested in in this option, get a note buyer involved before you create the note and work with the note buyer is constructing the note that he will buy.
Another option is to hold the note for 3-4 years. You would be collectying mostly interest during this period. Then, sell the note to a discout buyer. This way you can collected the full value+ in three or four years.
Where is the balance coming from? I mean, the other 80% that you are not carrying? Most banks will not approve a loan with owner financing. If he conceals your mortgage note as he secures conventional financing from a bank, he is committing fraud.
I own a house that I sold on CFD 1000 miles from where I now live. I think a credit check is mandatory. THe bank will perform a credit check if the buyer is getting a loan for the rest of the money, but I would want a credit check just to make sure that they pay their bills, and that they are not overexstended on credit.
I also want a buyer to have at least some money down. If the buyer doesnt make any payments they will still collect several months rent before the bank will foreclose or you foreclose. YOU could always ask for additional security, such as their own home, a car,…
That said, if the buyer has great credit, has some equity in their own home,…then this may be agreat deal for you. You have to weigh the risk of having to take the propertry back against the benefit of getting full price, and only you can say if that is worth it to you.
Good luck
RMS
I’m curious to know why this wouldn’t work for the buyer. I’ve heard of many transactions involving a seller carrying back a second equal to or great than the down on the first note. Effectively creating a no-down deal.