Bank financing of sale contracts

2 Replies

I was wondering if anyone has experience selling a home on a contract and getting financing from a bank on the sale contract to get money back out of it?

For example, I currently own a rental property free and clear that is worth around $200k.  If I sold it to a buyer for $200k with $15% down, I would have a contract for $170k on the property.  Does anyone have experience going to a lender to get a loan on the contract?  I couldn't specifically find it when searching.

If so, what would lenders generally have for terms on a contract loan (LTV, rate, amort...)?

I do not have experience with this, but I'm assuming a lender would probably only consider lending around 75% ($127,500) of the contract price.  I  could probably make some money on the interest rate as well.  If I were to get 7.5% on the contract and get a rate of 5.5% or so on my loan, their $170k loan at 7.5% would be substantially more than the loan I would carry if I were to get a loan at 5% for the lesser dollar amount.  In this example, the payment to me on the contract would be $1,188 and my payment would be around $724 assuming both would have a 30 year amortization.  There would be incentive for the buyer to refinance if they are able to, but that wouldn't necessarily be the end of the world either. 

I've kicked around the idea on a rent to own before but have always just sided with renting from the standpoint that loan payments are generally cheaper than what I would get for rent in the area.  I have always figured it is better to own the home than collect the payments as interest as opposed to sell it on a contract and collect lower payments for someone else to own.

James, 

What you are talking about is using the bank as the equivalent of the secondary market. For lots of technical reasons, they won't generally do this. You might be able to get a factor to look at it.

You have a couple of options. You could whole loan sale, and just take the cash and run. You could sell a partial, and retain either a tail or split the cash flow. Another option is to find a warehouse line for performing mortgages and place the loan on the line. Good luck finding one, as they are difficult to get, and expensive. I had a hard money lender that had a warehouse line, and I had a bit of it. Their interest rate was 12% and they were charging me 18%. They only had a certain small percentage that they could lend on loans and their own defaults. I've seen hundreds of warehouse lines, and the reporting requirements cost a small fortune.

The trouble with all of the above is that as you go down the chain, everyone needs to make more money, because they are further away for the origin, and have more risk. More risk requires more return. If you are comfortable with 8%, anyone buying your mortgage will want 18%. Unless you have hundreds of millions of dollars of mortgages that are all identical and meet certain requirements, you aren't getting good pricing.

Again, this all depends on what you want to do. Do you need all your cash now for the next deal? Do you need some cash now, and want cash flow later? Do you want to arbitrage the loan payments vs. a line (private or individual)?

Once you know what you want to do, then it's setting it up and knocking it down. Lots of homework to do when it comes to notes. On the surface they look all nice and easy, but it's a tough, details oriented business that demands all your attention.

Good Luck,

Jim

Thanks for the response.  I didn't realize it could be that complicated and would have thought a bank would lend $127,500 for a contract of $170k for a place valued at $200k.  I would have though their risk in lending such a low amount would be mitigated. 

I'm assuming the contract rate of 7.5% must be a bit below what others would consider market?  Any idea what market would generally be on a contract to a private party for a single family home?

As I sit now, I just deal with real estate part time and have 3 single family rentals and rent a few rooms in my home.  I have a good income so it isn't a viable option to look at it full time at this point but I would like to grow my portfolio.  I make a good return renting these based on my investment in them as I bought them right, but these are in high demand areas and values of each have risen considerably the last few years.  If I look at a cash on cash return based on the market value, my return isn't all that great which is why I am considering other options somewhat. 

The problem I am running into is that if I would sell them for market value, there are not too many good deals around at the time so it would take time to reinvest.  I'm kicking the tires with just leveraging a bit to decrease my investment and increase my return more but was wondering about the possible sale contract option if I could get a loan to cover me and get me a bit of the cash out. 

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