Best way to structure a sale with only $5k down from buyer?

Question

I have a house I'm  willing to sell for only $5,000 down (Selling price is $135k), with balance due in 3 years

Other  than offering  a lease with purchase option at the end of 3 years, is  there any way to protect myself in case the buyer defaults and I have to  foreclose?  $5k is not much of a cushion to pay for foreclosure  expenses, not to mention lost interest and the aggravation.

Would appreciate any ideas!!  Thank you

Ross Leavitt · Answer

@Ed B. did you end up moving forward on this? I am looking at a similar deal (from the buyer's perspective) and I'm curious how it turned out for you. I haven't found much info on land contracts in Oregon.

Brian Gibbons · Answer

The way things are going with lease options in the courts and with the CFPB I would just do lease purchase arrangements with buyers that have a good chance of getting a mortgage, getting market rent, and having someone that wants to buy the property, not just a chance to buy it or the choice to buy it with an option. I want something certain

If people know up front they're going to lose their earnest money and they have twelve-months to get on the job of getting financing

Have a mortgage broker prequalify the buyer before they move in increases the chances of them getting the mortgage

You can get more money by doing lease purchase as a seller without the risk of dealing with owner financing and getting an attorney to foreclose

I think if your buyers agents would work with self-employed people that have large down payments meaning more than 3% for FHA and help them build a credit rating, they would have a good portion of their business doing well; they may even be able to get the commission upfront and wait for the lease purchase to finish

As sellers we all want top price and net the most amount of money,

and It generally costs 10% to sell with real estate commissions, closing costs, and sellers' concessions

If you help somebody buy the property, you can net more money using lease purchase

Brian Gibbons · Answer

Good article from OR Attorney

http://www.brookelawoffice.com/land-sale-contract-...

@Jay Hinrichs

Ed B. · Answer

Brian, a lease purchase you described may work, but what if it takes the buyer longer than 12 months to fix their credit or raise additional down payment? 12 months goes by awfully fast. I' m also not thrilled about having to wait 12 months to receive their 3% down payment, though if that's what it takes to sell a propery, it might be worth it. I like the idea of using the word "purchase,"though; because it sort of removes any doubt in the buyer's mind what they are doing.  A sale with a delayed escrow might also be  fitting description

Ed B. · Answer

Jeff, maybe I could have been more clear, but no, I'm not under the impression have to foreclose on a lease option. I only foreclose if I've xferred the deed in a sale;  lease option avoids that necessity, at least in theory, but some buyers are reluctant  to buy under option for various reasons, some being they worry or don't trust they'll get the deed at the end,miss out on some tax deductions if they're not owner, etc.

Having a cancellation clause in a lease for the option in case of default sounds good, but by making reference to another contract in one contract,could be perceived as tying them together, negating any perceived initial benefit of having separate contracts. Unfortunately, there's a lot of misinformation floating around about lease options, and even land contracts, which sounds like a good alternative solution, but it may depend on the state. In Oregon, for example, a land contract that's been defaulted upon can't simply be "yanked" and the occupant evicted, without  properly terminating the land contract; I've been told the procedure is similar to a normal foreclosure. If so, why do a land contract in the first place?  Other states may have different rules, but consulting a lawyer is usually a good idea.

Bill Gulley · Answer

Why not just take a course on a Lease-Option to Buy and learn what you need to do?

It's too much information for a forum post, honestly, it really is.

Don't finance anything, you'll end up with a financing agreement and taxes due! :)

Brian Gibbons · Answer

You should never tie an option to a lease, or a lease to an option.

If this is your residence,

Offer a lease purchase (screen buyers)

Separate lease, 12 mo term, market rent.

Separate sale and purchase agreement, 3% earnest money, non refundable, with long term closing date, say 12 months.

Send LP tenant buyer to mortgage banker IMMEDIATELY.

Send LP tenant buyer to get assistance improving credit and FICO scores.  Look at www.UpgradeMyCredit.com

DO NOT do an option, do a lease purchase.

10% is about $13,500, so have 2 checks written by buyer, every month.

1. market rent +

2. $8,500 shortfall div by 12 = $708.33 per month, for 12 months,

payable to escrow company, for sale of "your address"

You need a high income, high probability tenant buyer.

A 10% down with decent improved FICO will go along way to getting approved for a 90% mortgage.

Caveat: You need to WAIT for your earnest money for 12 months until closing.  You get market rent for 12 months to cover your PITI.

SEE A LAWYER IN YOUR STATE.

@Bill Gulley

Jeff V. · Answer

@Ed B.

First think is, I'm no expert, but Ideas I have plenty of them :D  Take them with a grain of salt.

In your post you have an assumption that I believe is not accurate... :

Assumption: You think you have to foreclose on a Lease Option...

From what I've read...  Lease option is 2 different agreements..  A Lease and an Option to purchase.

If the Buyer misses their "Rent" payment under the lease agreement...  You would start the Eviction process, not the "Foreclosure" process.   I'm sure someone else will correct me if I'm wrong on this, but unless something is different in your state, it should be an eviction, not foreclosure.

Second thing,  I've also read that its best to have something in your lease and or option agreements that cancels the other in the event that you have to evict due to missing rent payment...   Basically when the eviction is triggered they are in breach of contract on the Option and it's cancelled....  I'd get a good attorney to draft the wording right but you get the drift.

The other ideas, would be...  some sort of seller finance deal where their payments are amortized over 30 yrs, but they have a balloon payment in 3 to 5 yrs ...  you could use a land contract or Bond for Deed...  same thing depending on what state your in.  However...  there are some issues with the whole Dodd Frank and seller financing to an end buyer stuff to take into consideration.  Again, I'm no expert in this area so I would consult a lawyer who is...  just passing on some ideas.  I think the property would need to be free and clear for this to work unless you do some sort of WRAP mortgage to be sure the previous loans get paid...

Just some ideas, each have their own caveats and due diligence that is required.

Hope this helps.

Jeff V