Rental Deposits On An Owner Financed Loan

21 Replies

Hi, 

If you are entering an owner financed loan, can you ask the current owner to transfer the current rental deposits over to you, or can you leverage it towards the down payment? I know in some states you are required to place them in a interest barring account, but not sure if this was an option.

Thanks in advance! 

Deposits are not the landlords money to keep, so I don't see how you could leverage them in any fashion. I would think they would need to be turned over to you along with all the current leases. 

Originally posted by @Bailey Sessoms :

Hi, 

If you are entering an owner financed loan, can you ask the current owner to transfer the current rental deposits over to you, or can you leverage it towards the down payment? I know in some states you are required to place them in a interest barring account, but not sure if this was an option.

Thanks in advance! 

You are the LEGAL owner of the house now! everything from maintenance to tenant issues to citations are your responsibility. the owner is just now Bank of america/ chase/ wells fargo. they are the bank, thats it. 

 

@Bailey Sessoms , I have not, but it is my understanding that the majority of owner financed homes go back to the owner through default so I would make sure you do your due diligence. The only real reason I can think of that someone would owner finance is because the buyer cannot obtain a loan through a traditional lender. So it is more of a risk for both parties. 

I am actually working on my 1st one if the owner bites (older lady)

the reason why you would want a owner finance is. 

1. no paying for points, loan docs etc.

2. some TO no money down. 

3. owner wins buy getting paid interest

4. Buyer wins by not using (1st time home buyer option, not having a mortgage listed (note payable), no real upfront cash

5. Seller sometimes get there closing cost paid for by buyer

6. Owner might need the down payment to do other things (usually this is below 20%)
these are some of the reasons. 

I think he means it can be some money down or no money down. It is all negotiable. 

@Ryan Lee . In #4 even if owner financed the note is recorded as a lein against the property. Not sure if you are saying a private lender doesnt exclude you from 1st time buyer programs in the future. It depends on the program.

Originally posted by @Bailey Sessoms :

@Ryan Lee thanks! In line item "2" you said "TO", what does that mean (still learning)? Also, what percentage are you looking to put down if she says OK?

Like "some money" TO "no money down". that part is where you have to negotiate with the seller.  If you pay the seller closing cost, then you might get away with no downpayment or a very small one. 



structure the deal that you win and your seller wins.




+ you might pay a larger interest rate than what the banks are offering,

btw down the line you going to want to do a cash out refi the loan, so make sure there is enough equity to do so. 

 

@Bailey Sessoms the deposit is transferred to the new owner. Even in states where you are you are not required to hold in an interest bearing account, you are still required to hold the funds as cash. Spending someones deposit would be considered fraudulent. Deposits are not for down payments, repairs or any other operating expenses, because the money needs to be there waiting to return to the tenant when they move out.

I just recently listen to a real estate investing audio book that touched on this topic. The deposit can be transferred over to you; however, if at the time of owner financing you do not specify in the contract that you want the deposits transferred to you, the previous owner do not have to transfer the deposit over to you. 

I am working on what I think will be my first Seller Financed purchase right now. The owner ONLY want to sell using Seller Financing for several reasons.

His goals it sounds like are: no realtor fees, spread out capital gains (will likely keep him in a lower bracket) and a steady safe income stream for the next 15+ years.

Some of the benefits to me would be; smaller down payment, being able to buy property with my Self Directed Accounts with only 10-20% down instead of the normal 40-50%, a good locked interest rate, a LOT less paperwork.


We  have purchased notes from sellers in the past just to reduce the risk, sometimes we purchase 30% up to 100%.

In all honesty you never want to consider the tenants deposit as yours. Its true they can offset damage or missing rent but it can be a real problem if funds are used as if they were yours just to meet your bills.

PS; If seller keeps tenant deposits you should request you be copied on all tenant security deposit bank statements. If you are the new owner and the old owner helps themselves to the funds you are on the hook to tenants.

Frank

Arlington Funding Solutions

From what I have experienced each side has a motive and they are usually the same to make the two come together.

From the sellers side its usually because the house is overpriced and wont appraise for the number the buyer needs to qualify for the loan. If he offers seller financing he gets his number (usually).

The buyer on the other hand has a different situation an its usually because they can't come up with the down payment required by the lender or they have bad credit. 

So basically each helps the other and they both get what they want. What we have done in the past is if the seller is agreeable and holds half in a note we will finance the other half even if the buyers credit is not too good. 

Just FYI

Good Luck