owner financing - Posted by B.R. Camp


#1

Posted by Randy on October 29, 1998 at 09:23:36:

You are correct! When I’m buying I strive to buy with no money out of my pocket Not necessarily no money to the seller. When I’m selling I don’t care what form the buyer’s “Equitable Interest” comes from, as long as it is not I.

You buy a bag of candy, and I’ll split it with you! What’s in it for you?


#2

owner financing - Posted by B.R. Camp

Posted by B.R. Camp on October 28, 1998 at 19:25:33:

We have a single-family residential home on the market, but have had few nibbles via conventional financing. Now, a couple (he has a 12-24 months left in bankruptcy after a “bad business deal”) proposes owner financing at 10 percent with full asking price amortized over 30 years but with a buyout in 3-5 years. He’s also proposing to do the needed repairs and some improvements. The would-be buyers don’t want to take the lease/purchase route. Our real estate agent isn’t very familiar with this, either. This is new territory for us. We really don’t understand this. Is this a second mortgage? Is this advantageous to us? What are the pitfalls we should watch for? Would someone please give us a little advice?


#3

Re: owner financing - Posted by JPiper

Posted by JPiper on October 29, 1998 at 21:55:08:

I’m with Eduardo. No cash into the deal by the buyer means he’s got nothing to lose if he defaults on the payment. He’ll make some repairs?? How do you know?? Don’t do this transaction.

If you want to owner finance run an ad that indicates this. When the calls come in require money down (I like to get 10% or close to it). If you have a realtor involved with this I would have the Realtor carry commission since you’re carrying the purchase. Owner finance situations should get you alot of calls.

You don’t mention whether you have an underlying loan on the property. If you do this impacts how this transaction is done. Understand that transfer of the property triggers the due on sale clause…and at the lender’s option he may accelerate the note if he discovers the violation.

Whether this particular buyer likes the idea of a lease/option is irrelevant. There are many potential buyers out there for “rent-to-own” properties. This is a possibility you should consider. Again, running an ad regarding this type of transaction should cause your phone to ring off the hook. I wouldn’t pay your realtor until such option is exercised. (Therefore the Realtor may object to this strategy. It may be worth pointing out to the Realtor that so far his/her selling strategy has been unproductive.) I like to get a minimum of 5% upfront for a lease/option.

Either way, both techniques can move this property quickly. I just wouldn’t move it to this particular buyer unless he had cash upfront.

JPiper


#4

Re: owner financing - Posted by Eduardo (OR)

Posted by Eduardo (OR) on October 29, 1998 at 12:24:38:

B.R.–

Over my years of investing, I’ve tried to learn where the risks are. In this case I see two risks you are taking: Selling with no downpayment being received by you (“full asking price amortized over 30 years”)! The buyer can get in, live there awhile, and then just walk away without losing anymore than if he had been renting. He could even trash the place before he goes leaving you holding the bag. Second, anybody who has declared bankruptcy in the past has the mindset that if things go wrong they have no obligation to honor their contractual obligations. Sorry guys, but this triples the risk factor in my estimation. Both of these items together (no downpayment, selling to a bankrupt) make this a real bad deal for you. If you’re a risk-taker and you advertised that you would carry the paper with no downpayment, I’ll bet you could quickly get dozens of interested parties without bad credit or bankruptcy in their past. Don’t do it! --Eduardo


#5

Re: owner financing - Posted by Jaydee

Posted by Jaydee on October 28, 1998 at 20:41:52:

Hi ,

A lease option is a terrific way to sell or buy property and since these people are reluctant to go the lease option route tells me their credit is not what they make it out to be . First thing to do is pull a credit report and verify the info they have given you is correct . I suspect that in 3-5 years time if they are unable to qualify they can simply keep the owner financing in place as a safe guard for them . Find someone locally who knows lots about lease options that can help you and encourage the interested couple to go that route .


#6

Re: owner financing - Posted by George Eller

Posted by George Eller on October 28, 1998 at 20:33:13:

I am a Realtor, a landlord, and an investor. A general rule of thumb in this situation is: does the buyer have something at risk (job, MONEY, credit) and does the buyer know that he will lose it (job, MONEY, credit){I will take it!} if he does not live up to his end of the bargain. The paperwork must be done correctly and the terms the buyer suggests are always negotable. 10% at the full asking price is good but try for better. Do you know that the full asking price is the correct fair market value - and how do you know? Did you have an appraisal or a CMA or did you just rely upon a backfence appraisal. This deal sounds almost too good to be true! BE CAREFUL! One way is to get enough MONEY up front so that, worst case possibility, you will not lose. If this buyer does not have something, like MONEY, to put up front, then WALK and find another buyer. Buyers with nothing to lose are a dime a dozen and are easy to find!
The buyer knows that you were selling the house FSBO to save a Realtor’s commission - if he did now want you to pay him a portion of this commission - why?


#7

Re: owner financing - Posted by B.V. Hughes

Posted by B.V. Hughes on October 31, 1998 at 17:54:43:

Don’t sell to this guy unless you get significant money up front and a contract that really protects you. Also, be sure to charge an interest rate that is much higher than the current rate of mortgages.

In selling on contract, you still can get the property back if he walks, but it’s a real pain to go through.

I have some experience in contract sales, both through my employment and personal deals. I sold a property on contract to a person who was a professional investor, with a balloon payoff due in 5 years. It was a good deal: I had cash flow, no maintenance and a down payment of 15% of the purchase price. We signed the contract.

The following year my buyer went through a divorce and he filed chapter 11 bankruptcy. He was permitted to stop paying me until he appeared in bankruptcy court, so I lost cash flow for a while and I had to hire a lawyer to represent me in his bankruptcy hearing. I gave the lawyer instructions to get the property back so I could resell it, but my buyer elected to honor this contract and said he would start making payments. I was forced to go along with this. He didn’t make the payment on time, so I had to get really hard-ball with him to get the payments started back on a regular basis, but he never caught up the two back payments.

So I kept careful records and track of the interest. He was already behind two payments, so interest accrued upon interest. He was responsible for my legal expenses, so all legal fees were added to the principal balance. (I saved legal fees by keeping track of the payments and interest calculations myself.) To make this long story short, at the end of the 5 years, he tried to get me to agree to another balloon. I said no, I wanted paid off. We negotiated a win-win deal whereby he assumed the existing mortgage and and I got all the the money owed me, complete with reimbursement of all back interest and legal expenses.

What did I learn from this? People who are good risks today may be in bankruptcy next year. All things are negotiable and try to make every deal a win-win. As a result of my experience, I offer the following hints:

In selling property on a contract basis be sure to satisfy the following:
#1 Seller automatically gets the property back if buyer defaults and all legal expenses resulting from buyer’s default are reimbursed as part of the settlement;
#2 There are clauses in the contract that protects seller in case buyer decides to trash the place;
#3 There is a good down-payment;
#4 There is enough interest income to give seller the incentive to carry the buyer’s credit and service his payments because in essence, the seller is a bank lending money to the buyer to buy his property.

I hope this lengthy explanation helps.


#8

Re: owner financing - Posted by BRCamp

Posted by BRCamp on October 29, 1998 at 06:16:02:

Thanks, Jaydee. Good advice.


#9

Re: owner financing - Posted by BRCamp

Posted by BRCamp on October 29, 1998 at 06:21:55:

Thanks, George. This potential buyer currently has nothing to lose except dollars for materials and “sweat equity.” We do have a Realtor who helped us come up with the asking price by looking at sales in the area and determing sale price per square foot, etc. This would-be buyer, so far, has not hinted at any sort of down payment. It seems that he is suggesting that in lieu of a down payment, he will do some of the repairs (which, for the most part, are relatively minor. I truly appreciate your perspective.


#10

Re: owner financing - Posted by Tony_PA

Posted by Tony_PA on October 28, 1998 at 23:22:12:

George,

I just read your follow-up to this question. Now I have to warn that I am a newbie just starting out, but I have to ask this question. You stated/asked (in so many words) if the buyer had anything to risk in this deal? But as creative investors, aren’t we trying to do the samething without putting anything down? What’s the difference with this scenario compared to what I would be trying to do when I make my first offer. I am assuming that I want to go into an offer with as little risk as possible? Please correct me on my assumptions. Thanks in advance.


#11

Re: owner financing - Posted by George Eller

Posted by George Eller on October 29, 1998 at 21:57:11:

Tony pa had a question about RISK. In any situation you want the OTHER GUY to carry the maximum risk and you want to carry the MINIMUM risk. Whether it is money, job, credit, reputation, etc, you want to risk as little as possible. As a seller, you want the other guy to carry an acceptable risk. If he has nothing to lose, he will lose nothing if he decides to walk. As a buyer, you want to ‘put up’ as little as possible and get the max out of a deal. If you can give him something other that money, so much the better. (Sometimes money is the best answer. Last year I bought a house for $13000 of my own money. I now get $426 per month rent for it {crunch the numbers}.) It is best if you do not use any of your own money. The other guy has a real estate problem and you want to solve it for him but you don’t wish to lose money - you wish to make money from the deal. (If you like giving money away - send some to me!)