BiggerPockets

Owner financing is a fantastic way to sell a house in today's market, and a tenant that you have had for 7 years is a great candidate!

You don't have to worry so much about foreclosure costs, IMHO. This is actually much better than renting - they will have more pride in ownership of the house than they had previously. Foreclosure is only expensive if you hire an attorney to do it for you. Carpet and paint is all you will need to get it back in good condition - you don't expect your tenant of 7 years and buyer to walk off with your copper or AC condenser, do you? (I'm sure you wouldn't be considering selling them the house if so!)

Instead of focusing on the amortization of the owner financed note, I would focus on the monthly payment. Your tenant is already renting in terms of monthly payment anyways. So reach an agreement on the sales price, down payment, and monthly payment (PITI and use a loan servicer). This way, you maximize your monthly income off of the note, and the buyer is incentivized to refinance to a lower fixed interest rate as quickly as possible.

Give me a shout if you need more help on this. I specialize in owner financing and we've done over 800 transactions in Texas.

We don't sell the financing based on interest rate. We sell based on monthly payment. So in other words, if the house would rent for $1000 per month, then the buyer's monthly payment is $1000 per month PITI.

Negotiate from your side of the table, not theirs. You want to most possible cashflow out of the deal, right? They want the lowest possible interest rate out of the deal. So frame the conversation to be negotiating over the monthly payment and not the interest rate. If they want to talk interest rate, tell them they will get a lower fixed interest rate when they refinance. This way, you get the most possible cashflow, and your buyer is incentivized to refinance quickly.

We had to pay an attorney to customize a contract that protected all of the parties in the transaction at the same time, so I can't offer it up to the entire internet. :)

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you said the payment would be the same thing they are currently paying in rent, but now they should be responsible for insurance, taxes so your "net" will be much higher, also they are now responsible for maintenance

By owner financing the property, you eliminate the maintenance and repairs (the buyer now has to take care of that), and the owner should have higher pride of ownership than a renter - since they do own rather than rent. You've also put an exit strategy in place if you are trying to get that equity back out. (Selling a tenant occupied property is otherwise very difficult).

Due on sale clause isn't functionally a problem. The bank just wants their monthly payment on time every month, they don't care where it comes from.

First, I'd have to preface this by saying that I'm not an attorney, and I am NOT qualified to give you legal advice.

What I can tell you is what we have experienced. We have owner finance wrapped hundreds of houses. To our knowledge, there is only one other person / entity in DFW who has conducted more owner finance wrap transactions than us. We have never had the due on sale clause exercised, nor have we ever heard of it happening. There has been one instance where the bank called up and threatened to exercise their due on sale. We told them to go right ahead; they took no further action. We do not hide the title holder by first putting the property into a trust, then transferring beneficial interest in that trust. If you have to hide the transaction from anyone, you probably shouldn't be conducting that transaction.

Think about it from the bank's perspective. How does a bank make money on mortgages? Well first they originate the loan and charge closing costs / fees. Next, they turn around and sell the note to another institution, at which point they become a loan servicer on behalf of that institution, and are collecting monthly fees for that service. So - having one of their mortgages wrapped does not, in any way, impede their business model or take away from their profitability. In fact, I would argue quite the opposite - letting us wrap the note is actually beneficial to the bank. Reason being that if we did not wrap the note, the (motivated) seller would not be able to sell the house or keep the mortgage current. If the note is current on the payments, then the bank has a performing asset - which fits into their business model.

Furthermore, the bank has substantial costs associated with exercising a due on sale clause. First, they would have to pay an attorney to process the foreclosure (on a performing asset!?). Next, they have substantial holding costs while they try to find out a way to get rid of this property which they now hold on their books. Banks are not in the business of holding property - they are in the business of lending money and collecting fees. For investors, property goes on the asset side of the balance sheet, and debt goes on the liability side. For banks, that is reversed - property is a liability, and debt is an asset.

If you are genuinely concerned with the due on sale clause, I would recommend that you either partner with someone who has conducted many owner finance wraps over the years to assist you, or simply don't get involved in an owner finance wrap transaction.

There's a million strategies out there - you don't have to do them all!