Buying an owner financed house. What's important?

Question

My friend told me today that he is moving to my area. He is buying it from an investor owner financed @ 10% interest for $108k. The investor purchased the home for $80k and put another 10k into it "supposedly". He is due to sign the contract on at the end of the month. From my quick research it seems this investor is pretty new. What should be a priority when buying a house owner finance? He doesn't want to get an inspection which I think is totally absurd. The house was built 2005 but you never know!
Does the investor have to use a third party loan serving company? I want to make sure they do things right. He is planning on paying down his loan within a year to around $80k so he can refinance.

Account Closed · Answer

The interest rates are great, but self-employed people and those with credit issues are still pretty much shut out of bank loans.  No one has really stepped in to take on that side of "sub prime".

If the investor needs it paid off sooner rather than later, make sure the buyer gets at least a 3 year balloon.  The buyer should use that 3 years to get ready to qualify for a bank loan.  No installment sale or land contract agreements.  Make sure the seller deeds the property to the buyer and executes a note and trust deed/mortgage. And make sure they use a title/escrow company to do all the paperwork and record everything.

Ned Carey · Answer

The number one concern is "Is it a good deal?"

Your friend has little risk with owner financing.  If the Seller is escrowing for taxes and insurance absolutely require the seller to use a servicing company.  However is the Seller is not collecting taxes and insurance he is the one taking the risk.

Since your friend is not getting an inspection he may be willing to skip other formalities. Make sure your friend does the settlement at a title or escrow company and gets buyers title insurance.

Bill Gulley · Answer

The best way for a buyer to protect themselves in a SF deal is to get an appriasal. If the seller is not living in the home, it likely needs to follow the SAFE Act requirements, get a mortgage originator or an attorney (the seller's responsibility, but there could be future unforseen issues for a buyer if a future lender won't accept it as a valid lien). The next thing is to see a lender and see where they qualify, if they don't find out what needs to be done and how long it will likely take to be able to qualify. If you know how long you need to get ready, then you know how long the term has to be. The way to keep a seller from manipulating payments and starting foreclosure is to have the loan serviced. You need to make sure that by the time you need new financing that you have 10% or more (much better to have more) in equity to refinanced the loan. Have a title company issue title insurance and insure the closing. Pay as agreed. Pay taxes and insurance as required. Keep the property in good condition for the future appraisal. When you have sufficient equity and qualify, refinance it. Again, get the loan serviced! :)

Jeff S. · Answer

If he can't get financing now why will he be able to refinance?

What's important? It is important that his financing requirement to pay off the seller is something that can be done. He should put in some kind of clause getting an extension and rights to sell if he or the house can't qualify. I might even put in a clause that the seller represents the house is capable of being financed through conventional financing.

If the seller wants it paid off quickly why is he carrying a contract? Personally, I would not do a short-term contract under these conditions coming into an unknown area where problems with the property, and whether it qualifies for financing, is unknown.

Simon Campbell · Answer

Honestly, with mortgage rates at 3.5 - 4.0%, a land contract rate at 10% is pretty steep.  I would try to see if the buyer can qualify for bank financing. There are some really good programs out there for investors/first home buyers.

Second, make sure the buyer gets Title Insurance.  This will protect the interest in the property and make sure there is not problems with ownership, including other liens on the property.

Third, make sure the contract is recorded so it is part of public record.

David A. · Answer

He told me that the investor wants him to refinance as soon as he can. Thanks I will ask him tomorrow.

Ryan M. · Answer

If he is going to refi be sure there is no prepayment penalty buried in the contract.

If I was land contracting it, I would want at least 5 years of 10%.

David A. · Answer

Comps for this house are $110k so he is getting a good deal.i will find out Ned thank you for your response.

Buying an owner financed house. What's important?

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