Offering owner financing. Yay or Nay?

Question

8 months ago I purchased a cottage for my daughter to live in with her pitbull (sweety) while she started a new job three hours away- no apartments would take a pitty. The expectation was she’d live in it for two years and transfer back.  She fell in love with the area and just bought a great house. So- now I want to sell. Too new to want to long distance landlord.

I paid 20k for the place and it cost about 2k to close. My daughter and I spent about 4K on cosmetic improvements- it’s really cute and cozy inside now.

However, the place will need a roof within a year or so, it needs all (7) windows replaced (will have to be reframed as the windows are all wonky) and the foundation is sagging.

I listed it for 28,900 and just got an email offering 7k down and monthly payments “until it’s paid off”.

I was already considering doing a lease option if the place didn’t sell by the fall. But owner financing is a complete unknown to me.

I know Dodd-Frank is a deterrent but I don’t quite understand that law.

Any advice- pros and cons, how to structure, experience anyone has would be greatly appreciated!!

Thomas S. · Answer

If you don't need the cash owner financing is a good way to increase your profits. Keep the term short, maybe a couple of years. I charge 10% interest on owner financing. In a situation of owner financing the plus is you do not need to waver on your sale price, they take it or leave it, no negotiations.

You will need a lawyer to draw up the contract and the buyer is responsible for the legal fee.

Account Closed · Answer

Dodd-Frank allows you to sell 3 properties a year with no problems. In the worst scenario with Dodd-Frank, you simply have to collect enough paperwork from them to prove they can afford the payment. Dodd-Frank is probably going away.

Seller financing or a Lease Option is a good solution for this. Seller financing and Lease Options are very different though, so know which one you want to use before you sign any paperwork.

Kale Stephens · Answer

@Eileen Murray The times that I have had sellers do owner finance was on residential lots.  Typically land requires 20% down.  So the sellers could sell with less than 20% from buyers, when they are ready to build a home they refinance the lot into a construction loan and pay off the seller.  I have only done this a couple of times and the seller did due diligence on buyer (credit check, required income verifications, etc...) No foreclosures yet! The main thing is to ask why they need owner finance, there are plenty of legit reasons, just make sure it makes sense to you!

I also purchased a house on a 3 year interest only balloon. The current tenant was on a fixed income with rent at half of the market value. This allowed me to honor the tenants contract w/o costing me monthly and still buy the house (w/ 0% down) at a good price for the seller. I will still owe $150k on the house at the end of the term, but the Austin area market is crazy and I project the house be valued at closer to $200k when the lease is up. This is just an example on why interest only may be attractive to your buyer.

Brent Coombs · Answer

@Eileen Murray, your idea of Lease with option can be less messy if they stop paying. (ie. Which would you prefer: Evicting a non-paying tenant, or, Foreclosing a delinquent mortgage?)

Make sure that if you do go the "until it's paid off" route, that it follows a normal amortization schedule. (eg. Check: usmortgagecalculator.com). [You can choose the Interest Rate!]

If you're still unsure of the different options, please ask for clarification. All the best...

Eileen Murray · Answer

@Brent Coombs- foreclosure sounds like a complicated bit of business. Thanks for putting that in perspective. Maybe worth it for a more expensive property, but I can certainly see legal fees killing a deposit profit if I had to foreclose.

Account Closed- what happens at the end of the term? Balloon payment? I like the idea of the buyer paying the legal fees.

Thank you all for the adviCe

Kale Stephens · Answer

I would ask why they need an owner finance?  If it's an issues where they need a year or two of employment before they can get traditional financing you could look at doing a balloon note for a couple of years with interest only payment or amortized over a certain number of year, but paid off sooner.  I am a Realtor in Austin and have had sellers do this. It has worked out really well.

Offering owner financing. Yay or Nay?

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