Owner Finance W/O Home Being Paid Off?

13 Replies

My home in AZ and is not paid off and I'd like to know if I can do a lease purchase on it? I have it up for sale but you know how that goes. If something doesn't happen soon I will have to look into a short sale scenario. I owe $106,000 on it plus $10,000 sewere assessment. I have it for sale for $115,000 and the new owner take over sewere assessment. I have some lookers and it seems that foreclosures are running short in my city so I am somewhat hopeful that it will sell. If I lowered the price to $100,000 I feel that it would sell pretty quick, but then I would still owe the balance of the loan and the assessment. I'm trying ot avoid that so I'm wondering if I can do an owner fianance. I would be appealing to a market of foreclosed homeowners that still want to buy a home but have lost their home through foreclosure. What are your thoughts and would it be legal to do an owner fianance on a home not owned outright?

To answer your specific question, yes, you can sell a house with owner financing you don't own outright. It is, however, easy to violate the due-on-sale clause in your current note. That's not a criminal matter, though, so not strictly "illegal". Its a civil matter and gives the lender the right to call the loan.

Your big problem is that sewer lien. I don't think any of these techniques work if the sewer lien becomes the responsibility of the new buyer.

Several ways to do it. Lease/option, land contract, wrap, or subject to. Those are in order based on the amount of control your retain.

Lease option you write two separate documents. A lease giving the tenant/buyer possession of the house. A separate option giving them the right to purchase within a specific period of time. You stay on deed until they exercise their option. If you do things right, you'll only have to evict if they don't pay.

Land contract is like the way you buy a car with a loan. You keep the deed. You and the buyer make a contract that gives them possession immediately and the property after the contract terms are fufilled. Terms are certain payments for some period of time, then one big payment. Procedures for getting them out if they don't pay. Not sure what SC does for these.

With a wrap they get a deed. You create a new mortgage. They pay you on the new mortgage, they pay the older one. If they don't pay, you have to foreclose.

With a subject to the buyer takes over payments on your mortgage. It stays in your name. If they don't pay, the lender will foreclose and take the property. That will affect your credit. Your only recourse is to sue the buyer.

All of these violate the due on sale. Yes, there are techniques to HIDE it from the lender, but they don't change the fact you have violated the clause. Will the lender call? Unlikely, but possible.

The trouble is that sewer lien. Most of these techniques rely on getting a buyer with a small down payment, maybe 3%. You're wanting that plus a $10K sewer lien. That's just not going to happen. Anyone with $13K cash to put toward a house has many options, and your house is not very attractive. You say it's not selling at $115, but would sell quickly at $100. Do you have evidence - comps, current listings - to support that number? How does your property compare? To sell quickly in a competitive situation, you have to have the sharpest house at the best price. Do you have that?

Your end up needing $106K plus $10K plus costs to avoid coming out of pocket. That sounds like an effective selling price of $118K if you avoid all the commissions and some of the closing costs. You need the buyer to cough up $13K plus costs and pay an inflated price.

If you sell to someone with a foreclosure on their record, it will take them five years to get a new mortgage.

To your question, yes, you could do this. I just don't see success given the circumstances. Either do a short sale and take the hit, or come up with a way to bring some cash to the table. I'd get this sucker priced right to get a buyer, figure out some way to add that sewer lien into the purchase price, and get your current lender to accept the short sale.

The way I'm reading your note, you still have room to drop the price. I'm not seeing any realtor's commision if you are talking about carrying paper.
So offer it for $106k (full mortgage amount) and the buyer takes over the sewer assessment. $9K is a huge difference in price in that price range.

You'd walk away with nothing, but your credit intact.

Originally posted by Virginia Hilton:
Thank you. I'll see about that. If I'm doing an owner finance how much should I ask down and what kind of interest rate? Thank you for the advice.


Is the assessment HOA or City/County? Has it become a lein yet? Perhaps you can do something to keep from coming out of pocket, but I agree with Jon, the sewer assessment is commonly the responsibility of the current owner, so you will need to address this issue before employing any of the techniques.

Since I am in AZ too and depending on your location, I might be able to help you with some buyers. No, I am not an agent.

If your doing a contract for sale, rates are commonly in the 8 to 12% area but really are dependent upon amount of down payment, credit score, job duration, and location. You need also to take in account your interest rate and payment amount too when securing a buyer.

Lastly, Jon mentioned the due on sale clause, this can be an issue with lenders. I find that if you have been paying on time and you inform your lender about the transaction and take steps to make the property insurance reflects the arrangement, then they usually will not accelerate the note. Make sure you have a good title company with an experienced escrow agent.

Good Luck!

Hi Scott. Thank you for the reply. I'm in Bullhead City. There are no HOA dues and I believe the sewer assessment can be assigned to a new owner. I'm not sure and would have to check on that, but that is what I have heard from several people. I have used First American Title in the past and have had no problems.

Just saying that I take care of the sewer assessment and charge about 9% interest how much should I ask down? I don't want to be greedy but I would like to make a little something. Also, should I make it stipulated that at five years they pay off the balance? I'm not sure how these things work exactly.

Originally posted by Virginia Hilton:
Hi Scott. Thank you for the reply. I'm in Bullhead City. There are no HOA dues and I believe the sewer assessment can be assigned to a new owner. I'm not sure and would have to check on that, but that is what I have heard from several people. I have used First American Title in the past and have had no problems.

Just saying that I take care of the sewer assessment and charge about 9% interest how much should I ask down? I don't want to be greedy but I would like to make a little something. Also, should I make it stipulated that at five years they pay off the balance? I'm not sure how these things work exactly.

I agree with your statement about assigning the assessment, however, in my market, since it is a buyer's market I doubt that would fly.

In my experience, that assessment will be priced into the transaction regardless of who actually writes the check. I just would try to sell the property so that the down payment covers that assessment plus closing costs.

$106K + $10K (assessment) +$2K closing costs = $118K Sales price (Jon's Figure)

So, I would say you need to ask for at least $12K down and I would start a little higher like $20K and settle for $12K.

Based on your earlier analysis, you indicated this might be too high a price for someone to pay. People are looking for value right now and it may be difficult to get top dollar.

You could do a lease option, but you will then need to pay the assessment. I like a lease option because you can usually get top dollar because the sales price is based on a future value. The downside: It is really a lease and the option fee will not cover the assessment. The upside: You still have depreciation and interest expense as deductions.

Bottom line, with your current situation, the numbers do not work in your favor (as Jon has already pointed out). But, depending on your current situation, you might be able to minimize the hit you will take. If you want to do some projections, I will need a little more information and I invite you to PM me as I have some experience in these matters.

Scott

Originally posted by Virginia Hilton:
Is Scott going to come back? Maybe he's busy?


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