How to structure a owner finance house contract

Question

I have a house that I put up for sale by owner,  I was approached by an agent telling me he has a client looking to buy my house with 25k cash and I would have to owner finance the remainder for the next 6 years untill the buyer can refinance.

I still owe $83k on this property through wells fargo

How do I structure something like this, and also how much should I charge as far as interest rates.  I've never sold owner financed before , thanks for you guys' help.

I live in San Antonio Texas,

the house is for sale $139,000

minus buyer's down of $25,000

balance to be financed  $114,000

Brian Gibbons · Answer

Texas seller financing requires an expert attorney.

See

http://www.lonestarlandlaw.com/Wraparound.html

http://www.lonestarlandlaw.com/Due-on-Sale.html

http://www.lonestarlandlaw.com/Executory.html

http://www.lonestarlandlaw.com/Foreclosures-Texas....

http://www.lonestarlandlaw.com/Texas-Land.html land trusts

http://www.lonestarlandlaw.com/Lease-Options.html

http://www.lonestarlandlaw.com/owner_finance.html

http://www.lonestarlandlaw.com/Redemption.html Redemption rights after foreclosure

http://www.lonestarlandlaw.com/Right-of-First.html Right of First Refusal

http://www.lonestarlandlaw.com/safe.html SAFE Act

http://www.lonestarlandlaw.com/Shelf_Advantage.htm... Shelf Co Asset Protection

http://www.lonestarlandlaw.com/subject-to-transact... Sub 2 Transactions

Dion DePaoli · Answer

The question of the day really is, if the Buyer can't get financing today how do you know he can get financing 6 years from now? The Realtor is likely not qualified to answer that question for you.

Since you would not be paying off your mortgage, that can be problematic for your plans moving into the future. The property sale is Subject To the existing Wells mortgage which comes with risks that you may not fully understand.

The Buyer here is just a renter with some decent cash reserves. Maybe rent to him for 6 years, one or two years at a time and let him fix his credit to get financing and then buy it from you. That is to your benefit and keeps you in the driver seat. An option contract exceeding 36 months is treated more like Seller Finance than a rental agreement, if it comes up. Do your homework if you pursue exotic ideas so you have an understanding of what you are getting in to.

The make sense idea here is simply put it on the Buyer to bring either cash or financing to the table to payoff your mortgage and not try and become the finance guy/bank. There are threads in the Creative Finance forum here on BP which talk about some of the risks involved with some Seller Financed structures. Look for Subject To (Sub2) and Due On Sale and Lease Option topics. Get an understanding of just what you are contemplating and make sure it matches your desires. Try not to take on unneeded risks which do not serve your interests and that serve the interests of other involved parties.

Hattie Dizmond · Answer

@Ricardo G.

With apologies to all of my learned colleagues and with the upmost respect, there are a lot of folks who have gotten scared off by anything that smacks of a "Subject to" deal, which yours does, since you would not be paying off the original mortgage.  Unfortunately, Dodd-Frank has scared people off on any number of fronts regarding wraps and seller financing.

I'm not going to comment on the numbers or whether or not the deal itself makes sense.  But, don't try to understand everything there is to the new requirements.  If you have a financial model that works for you and gives you what you think you need, just reach out to a solid RMLO and let them help you figure out what your cash flow might look like.

If you like the numbers, then they can fully vet the buyer and ensure all the requirements around verifying their ability to repay are met and that the loan is structured in such as way as to not violate the new rules.

Good luck.

Michael Jones · Answer

@Rodney Getsy Yes - I did not metion an attorney that you will need. Agreed @Brian Gibbons

Account Closed · Answer

I notice a lot of sellers of REOs are seller financing with 40% to 50% down here in Dallas, and all are fix  uppers.

Joe Gore

Michael Jones · Answer

@Ricardo G.

I did a lot of research on wrap around mortages as a business plan from listening to a pod cast. Unfortuantely this is not a good plan with so many moving parts and insurance being the a serious issue along with the "due on sale clause". However, owner financing appears to be good plan especially in an a non-judicial state (Texas). If you don't need to get all of your equity out of the house I would get 20 - 30% down and then finance the balance from your purchase price at whatever terms to mirror yours loan with at least 2% on top of that. Or see what would start to pay down your equity better in terms of time and increase the buyers payments to meet your needs. Financing by owner is always more than a conventional loan and definitely due your due diligence on a credit check! If the buyer defaults you may be stuck with mortgage payments for 2 - 3 months in this state but you are back where you started from with a sizeble downpayment and some additional payments made on your mortgage. The risk is foreclosure may upset them to the point of where they damage your residence - character is the best judge of that, but not a safeguard. I would also set up some type of safeguard as to whom the payments go to - I would choose "yourself" to send the check to the bank. That way you will always be the first to know of any default - and make sure you have a penalty clause for any late payments! I am sure more seasoned BP members can give you advice more accurately than I can - but this is my take on it.

Rodney Getsy · Answer

Ricardo:

I've been approached several times to do the same.  When you calculate your current payments and  insurance (you will need to keep coverage) the deal doesn't make financial sense.  If that is the route you want to take, I would pay off the existing mortgage and do a true owner finance.

These types of deals are not uncommon in the San Antonio and south Texas areas as it serves the need of those without credit but have cash, very common with the folks from across the boarder.

I have recently spoken with another investor that owner finances as their game plan with a different twist and their percentage of defaults is too high for me since I'm out of state.  But they aren't doing middle class homes.

IMO, You will need to do a good background investigation (work history) of the buyer.  Let us know what you end up doing.

I do have one last rental to dispose of and as I already stated I've been toying with the idea myself.

How to structure a owner finance house contract

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