Pensacola, FL · Member since 2014 · 5 posts · 0 votes
Hi. I am new to here and new to the real estate market. I have a question about owner financing. I am in Pensacola, FL. My husband and I have found a house we like and upon calling the owner found that he only wants $20,000 for it. We actually at this time don't have the credit for traditional financing so I asked the owner about lease option or rent to own which he said no to. He said he is uncomfortable with that as he believes he would have to carry the insurance. Upon further investigation I have found articles on owner financing and contract to deed. We would like to put $3000 down and have payments around $600, what is the best way to approach this elderly gentleman with that offer? Thanks for any help.
We are also willing to pay for the insurance and taxes on the property.
From the insurance side of things, I would explain that his role as the "bank" in this transaction would be to ensure that insurance is carried, which he can do by being listed as the lienholder, mortgagee, or additional interest (all the same thing) on the policy. This way he can ask for a copy of coverage, and would be notified of changes that were made to the policy. That way he can ensure his interests are protected.
From the insurance side of things, I would explain that his role as the "bank" in this transaction would be to ensure that insurance is carried, which he can do by being listed as the lienholder, mortgagee, or additional interest (all the same thing) on the policy. This way he can ask for a copy of coverage, and would be notified of changes that were made to the policy. That way he can ensure his interests are protected.
Most private owners are not going to want to take the risk of financing because the foreclosure process is oftentimes more complex and longer than the eviction process and most do not even want to deal with being a landlord which is why they are selling.
That being said, some people are naive enough to take whatever offer comes to them if they have been waiting around long enough and the person making the offer attempts to document why they would make a great person to finance to.
I would probably also offer to pay interest (5-10% fixed) and show documentation of work history, rental history, taxes, a handwritten personal letter of interest and motivation for wanting to purchase the house and anything else.
I usually ask sellers what they plan to do with the cash once they receive it. It they say that they're going to put it in the bank. I'll then ask them how much interest they make. When they tell me <1%, I'll ask if they'd be interested in making 4% on their money. If they say yes, I'll go into more detail but not too much as to make it sound complicated. I hope that helps.
Sometimes sellers will not look at offers if there is not a real estate company's name attached to the offer. An agent will usually charge a fee 3-6% of the sale price and then help you set things up with the title company. You could talk to a few title companies directly to work out contract details instead of going through an agent.
Do you need a real estate agent/broker/Realtor? That wholly depends on the transaction and your comfort level with the situation/seller. My advise would be to work through either a Real Estate attorney or try a title company. An attorney will be well versed in the legal constraints whereas the title company may only have basic documents available... Most agents are commission driven, and it will be hard to convince a seller to pay commission on an amount of money yet-to-be collected (in a traditional transaction there is no strings attached, commission typically comes out of equity proceeds from closing).
That said... I am a licensed Broker, I own and service several properties, some of which I have sold on contract to owner-occupants. From a selling perspective, I look for a qualified buyer who has a sizeable down payment, decent debt to income and who show a motivation to refinance quickly. I escrow taxes, insurance, and water estimates in the buyer's monthly payment. However, buyer's are inevitably responsible for any overages. The taxes and insurance (homeowner's policy) are in the buyer's name, paid for by me (additionally insured) as part of their monthly payments.
If the property needs work, or upcoming repairs (new roof, windows, etc) I include these improvements within the contract with a penalty cost if not performed by agreed date.
As to an alluring offer of payment: I am earning interest on the principal balance between 8% and 16% ranging between 5% and 20% down payments. Depending on your taxes and insurance for the property: $600 may be a great offer, just be sure you spell out what you are covering with that payment so there are no misunderstandings.
It is important to note that not everyone owns their properties free and clear (including investors). Most mortgages, have a "due on sale" clause which would put a kink in any owner-financed plans. The original lending institution, at their sole discretion, can waive that clause.
Also, keep in mind most states still require a standard closing process (title / abstract update to date of close) and recording of the contract agreement. This can get costly for both sides, so be sure to consider this when making the offer... who will cover costs, are they shared?
Also be warned... owner financing DOES NOT always follow the same foreclosure laws that large banks do. In Iowa for example, if the buyer defaults on payments the contract is voidable and they become a "tenant at will." Of course there are some legal steps that have to be performed precisely (or the process can take awhile).
There is nothing that makes me happier then the shine in someones eye when you agree to finance the property when the banks would not... but at the end of the day, it has to make financial sense for the both of us.
Thank you for your response Derek. So it would be like on my automobile insurance where I listed the bank as the lienholder on the insurance?
Short Answer is yes.
In both cases; car and house, the bank has an "insurable interest" which means they care just as much as you do (or maybe more) about the asset being protected as they have something to lose if something were to happen. Consequently, they want and can be listed so that they can be made aware of any changes in the policy (including cancellation or non renewal).
Check if FL will do a land contract, much easier for the owner to Foreclose if it comes to that.
You could offer them 20k with 3k down, financing 17k at 9% for :
Months Payment
48 423
36 540
30 634
If he is concerned about taxes or insurance he can have the loan serviced for $75 setup fee and $18.50 a month and that can include escrow for taxes and insurance. Feel free to PM me if you would like different loan scenarios.
Justin Silverio If the house is listed on the MLS with a listing agent, do you still contact the homeowner directly to educate them on seller financing?
$20,000? Is this a site-built house? I see cars and motorcycles going for more than this. is $20k below FMV in your opinion @Tonya Hall?
I've done at least a dozen seller-financed deals, but it's not for every seller. ALL of mine have been from tired landlords. Jack or Jill homeowner does not want to deal with it, no matter the rate or method in most cases.
As investors, we have to ask ourselves "how can we afford this". Framing the question that way changes everything. If the value is there - can you use vehicles as collateral for a credit union loan? Friends, family, whatever. Get him his $20k if it's as good a deal as it sounds!
@Account Closed There are times when my marketing goes to homeowners who have since put their house on the market. Once I'm made aware that the house is listed, I'll generally go through the listing agent to discuss details.