Your thoughts on this deal...owner financing

12 Replies

Hello, I have an opportunity to buy a house one house down from a property I own. It is in a college town and generates 1000-1200 a month. I am currently in physician assistant school and graduate in July 2018. I cannot get a traditional mortgage right now because I’m full time student. I have someone I trust to co-sign if I wanted to get a traditional mortgage. The seller wants 10,000 more on asking price if he does owner financing and 7% interest with 10,000 down. I have cash I have saved in a mattress somewhere, not in a bank account. My questions: 1)Is it better to do owner financing so when I graduate in July and get a job I can get a traditional mortgage assuming the banks can’t see this owner financing agreement? 2)is it better that I do owner financing because my cash is not in a bank account and I won’t have to explain where I got it (years of saving)? 3) is it true the banks can’t see this agreement and I would be better off trying to get a traditional loan in the future? If not, should I buy and refinance when I get a job? 4) should I offer more cash down to get a better interest rate? I appreciate any insight on this, any thoughts. Thank you!

I wouldn’t do the deal. Sounds like seller is looking for a sucker. You haven’t mentioned any cash flow you might receive.

I think you need to do more work to even determine if it is a good deal before considering the finance aspect.  Just because it gets $1,000/mo doesn't mean it would even be a profitable rental.

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credit rpt, his track record. Why can't you focus on your studies until you can get a mortgage? Asking price, downpayment and cash flow... Think it through as I am sure there are other opportunities......

@Jason Vannoy I'm feeling feisty today so this is going to come across a little chippy...

1.) So far we don't know the purchase price of this mystery home.  For all I know it's a $50K property and $10K "more on asking price" represents a 20% increase.  Or it's a $500K property and it's only a tiny adjustment.  

2.) You have someone you trust that can co-sign for a traditional mortgage.  Yet you're asking if you should pay $10K more than is needed and have a 7% interest rate versus (just guessing) 5%.  Why...on earth...would you want to pay more money and have a higher mortgage payment?

3.) I'm also not entirely sure what the rush would be to do this *now*.  I'd be talking to a lender and figuring out how long you'll need to be employed for a traditional mortgage to be a viable option.  You can then divide $10,000 over the number of months and see how much *per month* you're overpaying to get to buy now as opposed to later.

4.) Why are you keeping your money in a (metaphorical or physical) mattress?  Why do you have a potentially weird aversion to a bank?  Sure, the bank gives you 1% interest on a savings account but that's (literally) infinitely better than it sitting in a mattress earning nothing. many questions :-)

Can you provide more details such as after repair value of the house, purchase price, estimated rent, property taxes, insurance, and any rehab needed.

Also what would be the minimum amount per month the seller would be willing to take? The fact that he will do owner financing is a good start. You could try strategies to lower the monthly payment? Would he take interest only and a balloon later? would he be willing to amortize over 50 years with a balloon at 20?

You could also try to increase the value of the house by doing a creative exit.

What if you could buy the house from the seller and then do a lease option exit? You could see if you could get 10K as an option consideration and then also charge a higher rent. If you could find a tenant buyer willing to plop down 10K you could enter the deal with little cash

Thank you all for the responses. This is my first post, I apologize for lack of details. He is asking 125,000 without owner financing and 135000 with owner financing, 7% interest for 30 yrs. tax value is 125,000. I was going to negotiate better terms. I wasn’t sure what options to attempt. I appreciate your thoughts on the creative structuring.
The main reason I was considering the owner financing was because I heard it helps to use owner financing if possible because the traditional bank mortgages are not affected. So when I do graduate, I can buy another house with ease. I have a mortgage and med school loans so I saw this as an opportunity.
The house I own beside it takes in 1200 in rent and it’s exact same blueprint. Property is 2 mins from university. No renovations needed to the property. Seller painted, new carpet, 1yr old HVAC and unit. Annual takes on the property are 1100 a year.

In my opinion it all depends if you are looking at this as an investment or not.  Based on the $125K or even worse $135K then if you are considering this an investment you are already negative cash flow as your mortgage is probably going to be in the range of $1000-$1200 when/if you refi down the road.  

@Jason Vannoy I won't belabor the great points made by @Andrew Johnson

Tax value doesn't have as much bearing as comps in the area.

The value of the home doesn't change with the method of financing.  If you did this deal (and not condoning that at all) and he held the note, why does the price go up by 8%? 

Looking at it another way, would you pay 8 points to get a 100% LTV loan? I have little to no experience in HML, but that seems high to me.

Don't outsmart yourself. Figure out if this is a good investment first. Is the $1100 a year Gross Rents, NOI...?

 If you'd buy it for cash then worry about finding the best financing.

Thank you all very much for your expertise and thoughts. I am going to attempt to negotiate better terms and see the response. I will keep you posted.

I feel like I'm jumping here a bit late. But I feel like there have been a lot of unanswered questions that could help you make a decision on this. Just look at the expenses associated with this and determine if the cash flow makes sense. Also take into account how long some of your capital will be tied up if you were to go through on this deal. While you might have some stashed away it also might hinder you getting into other investments down the line. 

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