Question about Buying w/ Owner Financing? - Posted by Carey_PA

Posted by Carey_PA on February 10, 2002 at 15:59:45:

question. :slight_smile:

And thanks, I will be sure to include that clause. And I’m the queen of asking for discounts trust me lol I may not get 'em, but I always ask for 'em.

CAREY

Question about Buying w/ Owner Financing? - Posted by Carey_PA

Posted by Carey_PA on February 10, 2002 at 15:01:33:

Hi all,

I’m getting ready to make an offer on a house where the seller is willing to finance the whole deal.

My question is this: What types of closing costs are involved with an owner financed deal? I’m thinking I should have an attorney present for this one, only because the seller and his wife are both real estate attornies and I want to make sure I have all of my bases covered.

So, besides what I’m putting down (3-5%) what other costs am I going to need for this 100% owner financed deal??

Just in case your interested:

The house is worth probably about $42k
We’ve agreed on $35k as the purchase price
at 7% interest, amortized over 30 yrs. with a balloon in 10 yrs.
The house is already rented out with section 8 tenants (which is what I was going to do with the property anyway) and the rent section 8 is paying on the property is $1400/month!

Btw, you know when people always say to know your out before you buy, well I know that I want this place as a rental, BUT I don’t know what I’m going to do when the balloon is due. (Hopefully, I’ll be able to take care of that situation in due time.)

The seller wanted a 5 yr. balloon, but that scared me lol so I said, nah, I’ll do 10 yr. and he said, ok. :slight_smile:

Oh yeah and he wanted 10% down…again I said nope, I won’t do that. So, he said 5%, I’m gonna write up the offer at 3% and hopefully he’ll take it, otherwise he can have his stinking 5%!

Anyway, thanks in advance everyone!

CAREY

Re: Question about Buying w/ Owner Financing? - Posted by Bud Branstetter

Posted by Bud Branstetter on February 10, 2002 at 18:48:40:

While a balloon in 10 years isn’t bad you may want a clause to allow you to extend it for a year by payment a a certain amount. With any owner financing you would like to get substitution and subordination of collateral. You can also ask for a clause in the contract that you can get a discount if you can refi within one year.

On a long term basis I would devote much to the income to paying the loan down. If you make it consistent then stop all of a sudden in making extra principal payments it may make them more agreeable to a discount for a complete or shorter payoff period. You can use a seller’s affidavit to make sure everything they said or you believe is affirmed in writing. And don’t forget the title insurance!

Re: Question about Buying w/ Owner Financing? - Posted by jim

Posted by jim on February 10, 2002 at 17:42:12:

Hire a competent real estate attorney of your own to look this over with a fine tooth comb. Your attorney should be able to give you an estimate of closing costs, almost to the exact dollar. Closing costs vary from state to state and even from county to county.

Where are you in Pennsylvania that a section 8 rental worth 45k pays $1400 per month? I am in Maryland, and here it is a rare section 8 rental that pays that kind of money, and one can not be had for what you are speaking of. The key is how many bedrooms the house has. You should check with your local section 8 office to find out what these rentals are paying in your area before proceeding. If the sellers showed you a paystub or two from section 8, beware that those checks may include back rent that was not paid previously. The rent may have been withheld for a number of reasons (repairs, ownership question, etc.) or section 8 may have messed up on their accounting. They have a habit of doing that here.

Re: Question about Buying w/ Owner Financing? - Posted by Brent_IL

Posted by Brent_IL on February 10, 2002 at 16:35:04:

Don?t use their legal services. Spend another $500 to get your attorney to draw up the contract.

It’s true that one doesn’t steal in slow motion, but I think that if a deal looks too good to be true it’s because I haven’t asked enough of the right questions. With two lawyers offering a great deal, I’d ask a lot.

Is the Section 8 program being cancelled? Has the EPA found toxic chemicals? What do they know that you don’t?

In this case, I imagine that taxes, title ins, and prorations would be 2-3%, or so.

Re: Question about Buying w/ Owner Financing? - Posted by JohnBoy

Posted by JohnBoy on February 10, 2002 at 16:02:52:

why not just amortize the note over the 10 years?

$35k with 5% down leaves $33,250 at 7% which puts the payments at $386.06

If the rents are pulling $1,400 per month, that leaves over $1,000 per month in cash flow, minus taxes & insurance! In 10 years you own it free & clear!

What more can you want??? LOL

If you did it over 5 years the payments would be $658.39 leaving about $740 per month in cash flow, minus taxes & insurance. Then you own it free & clear in only 5 years!

I don’t get it! WHY are they selling a $1400 per month income for $35k and willing to finance that where they would get over $1k per month LESS coming in off the property??? Something doesn’t make sense here?

Heck, they could just L/O it for $1400 per month and keep the cash flow off this without the landlord/tenant headaches, if that’s what they want to get away from.

So what is it? Why are they dumping this and willing to carry financing where they end up getting only a little over a 1/3 of what they’re getting now???

how is it 100% financed with 3% down? - Posted by David Krulac

Posted by David Krulac on February 10, 2002 at 15:20:09:

is just one of my questions.

Carey,

I would go for no baloon self amortizing mortgage. I bought a place from a real estate broker and he wanted a 3 year balloon. We settled on 15 years NO balloon.

One clause I always put in seller financing whether its a first or a second mortgage is:

“Buyer has first right of refusal to buy back seller financed mortgage.” Even if the seller has no intention of seller the note, circumstances change and you want to be in the position to buy back your own note at a discount. Why should some third party get the benefit of the discount save it for yourself.

Which brings up a secondary point:

“Always ask for a discount when paying off a mortgage held by an individual.” I had a mortgage held by a seller, I wanted to pay it off and asked for a discount, he gave me a 20% discount on the unpaid balance. You don’t ask, you don’t get.

David Krulac
Central Pennsylvania

Re: Question about Buying w/ Owner Financing? - Posted by Carey_PA

Posted by Carey_PA on February 10, 2002 at 18:19:06:

Hey Jim,

I’m in southeastern pa. and i’m familiar w/ the section 8 programs in 2 counties in my area…and yes u are right, the amount of bedrooms is the key.

this unit is 5 bedrooms. (I just moved to th is county, so i will verify, obviously, the section 8 money to be paid and the lease etc.)
oh and just to give u an idea of what section 8 pays…the county that i moved from…for a 3 bedroom place, section 8 paid almost $1200!

sweet huh?

CAREY

Re: Question about Buying w/ Owner Financing? - Posted by Carey_PA

Posted by Carey_PA on February 10, 2002 at 18:01:20:

Some good points there Johnboy…why not have the dag gone thing paid off in 10 yrs!

Now to answer the why??? They are tired landlords. They are selling all of their rentals. Ohhh and I should mention the owner is pushing 80, so he’s looking to get outta of he’s properties. This particular property was trashed and they just spent a lot of money rehabbing the whole thing.

As for the $1400 month…they haven’t been getting that for a while because the last peeps were evicted and the $1400/mo. tenants JUST moved in.

Now why are they willing to finance the whole thing?? Well, this is exactly the type of neighborhood where the people going to live there could get a mortgage, etc. It’s strictly, for the most part, a rental neighborhood. (section 8 at that)

Also, perhaps they understand the concept of holding financing, etc. (not too well though, because if it was me I’d want more than 7% that’s for sure!)

And as far as the l/o thing…I may try to do that in the future, but around here not many of realtors, investors, attornies, etc. are too hip w/ the l/o thing, if ya know what I mean. And that is ok with me!

Ok, now did I answer each of the very valid points that you had??? (All of which i might add i do indeed appreciate!)

CAREY

Re: Question about Buying w/ Owner Financing? - Posted by Redline

Posted by Redline on February 10, 2002 at 17:29:43:

“So what is it? Why are they dumping this and willing to carry financing where they end up getting only a little over a 1/3 of what they’re getting now???”

Yah, that’s what I want to know. And they’re attorneys so I’m extra suspicious! lol

RL