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Forums » Rehabbing and House Flipping » Fair interest rate for owner financing.

Fair interest rate for owner financing.

11 posts by 9 users

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Real Estate Investor · Birmingham, Alabama


Can anyone chime in and give their thoughts on what interest rate you would charge when giving owner financing.

We are going to rehab a 3/1 property that will have an ARV of $60k. We're selling it with owner financing. What would be a reasonable interest rate. Or do you base it on a certain ROI.

I'm thinking 8% but that only yields $440 for a property in good condition, in a good location. As a rental I could get more. Any thoughts?



Real Estate Investor · Amarillo, Texas


12% is probablly the most common, ALMOST NEVER see less than that, maybe 10% every once in awhile, 14% becomming more common.



Banker · Tampa Area, Florida


i put an offer in for a owner financed home that had an arv around 60 here in FL a few months ago. they were asking 50 at 8%.



· Loveland, CO


I've done some 12s, but mostly 8-9. My key is that my SALES PRICE bears no relationship to "real" FMV. Of course I'm only getting about $2000 as a downstroke.

When you offer owner financing (particularly like mine) the buyer DOES NOT CARE ABOUT THE PRICE. He's like a typical new car buyer. His only questions are; "what's the downstroke?" (read-do I have enough cash from this month's pay?) and "what's the monthly total?" (read-after my beer, cable and new truck payment do I have enough to swing this deal?).

In my typical deal sometime during the signing of the contract the buyer, or more typically his wife, will look at the papers and say, "Oh, $95,000 is the price, we kind of wondered how much it was". This is AFTER they've signed!

Too high and they'll refinance on you, although I have a five year prepayment clause. By pricing it above FMV they won't be tempted to refi because the place won't have appreciated up to market quickly enough. I had one that had a prepayment penalty of six month's interest who refinanced from my 12% because rates had dropped enough.

Heck I would have dropped him to 9 or so had I known before he paid the fees to the new lender. I hated losing that income stream. I really hated LOSING THE OPPORTUNITY FOR FORCLOSURE when his wife left him a year later and they let it go. The bank sold it for $8K MORE than I had charged them when I first sold it. I would have sold it for another $12-$15K. OUCH.

Frank



Real Estate Investor · Fort Wayne, Indiana


Ivan,
Although you are taking in $440 and could get more for rent, you are not absorbing any other of the standard rental expenses (50% on average.)

My wife and I have a decent collection of SFR's here in Ft Wayne. I have been mulling this idea around for the last several weeks: Would it be better to sell on a proper land contract deal than to rent them?

I don't have an answer to my own question but I want to pursue this topic to some degree. Frank's answer is exactly what I have been thinking about.

Sell a home with a proper contract and then you keep all of that payment and foreclose when they stop paying.

Upside: no tenant issues. Keep all of the payment.

Downside: you are selling the asset, you will have to take some houses back through foreclosure, less income tax protection (although not my primary concern), ??.

I am certainly intrigued by this concept.
Frank, any more enlightening thoughts?

I don't intend on selling all of our rentals but I want to add this strategy to our bag of tricks.

I apologize for going slighlty off topic but it is directly related to this discussion.



· Loveland, CO


Well Chris, there are good and bad sides to everything. We originally did it because, long term, we did not want to stay in Houston. Driving from out of town to handle turnovers didn't appeal to us. By selling we got a better class of "tenants".

One of the downsides to it is that you forgo any future appreciation, unless you get the ppty back. Since we were in TX appreciation didn't figure much into our plans. Also we had sold ALL of them for well ABOVE FMV.

Another point in our favor is that TX is a "Trust Deed" state and you can do a Trustee's sale in less than 2 months, as long as you're prompt on all paper work. The last two that an attorney handled for me cost about $1,000 each to handle, not bad.

In several cases we've had people deed the ppty back to us when we convinced them that their legal and debt exposure would be less that way. In every case where we got one back we resold for a higher number. About 1 1/2 years ago we got one back that we had bought in '03 for $52K, put $2K or so in and sold for $75K, got back 2 years later, put $4K in and resold for $90, got back in '09 and resold for $100K.

But that's about the only way that your income will go up in the future.

We do ours on 30 year amortization, 10 year balloon loans. We're in our 60s so we don't really want any long term loans sitting around.

Good luck

Frank



Real Estate Investor · Fort Wayne, Indiana


Frank,
Thank you for your time.
That is very helpful.
I have much to think about.
Chris



Real Estate Investor · Springfield, Missouri


Hi, yes Chuck, you need to do some thinking about how you want to conduct your business. The interest rate is one element that usually reflects the risk you take. Some states have a usury rate for installment contracts, in Missouri it's ten per cent per as an APR. You'll find many opinions on sites like this one concerning seller financing. If you'd like to know how to make money at it and stay out of trouble, reduce risks, etc. PM me. Good Luck, Bill


Financexaminer@real estate investor dot com


Real Estate Investor · Carlsbad, California


Great feedback! Thanks all! I had a friend that use to utilize land contracts that his attorney did up for him, here in California, he did quite well. Someday, maybe we will go that route. I am a bleeding heart, so not a good landlord (tenants sucker me with their hardluck stories, and their cute little kids-- which of course they just use, I was actually buying junky tenant furniture, just so that they could pay me their rent, go figure) and I have a hard time charging too much interest, my husband on the other hand... hmmm, luckily, right now he just wants to flip! LOL. I love the advice here on BP, these guys are so knowlegeable and generous with info!!!



Real Estate Investor · Grand Blanc, Michigan


Always go for the state maximum!!

In Michigan it's 11%, and that's what I aim for on every note.



Real Estate Investor · Round Rock, Texas


The typical rate is about 8.5% in Austin.


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