Owner financing Question

8 Replies

Hello Everyone! I'm new to RE investing and I came a cross this deal. 4 bed, 2.5 bath. The property should lease between $1800 - $2000 monthly and the asking price is $174k. Based on comps, it should sell for $161k - $168k. The market value is listed at $146k. They have proposed the following...
"Seller only looking for owner financing terms as follows = $24,900 Down
30 year amortization Can refi after 24 months to avoid early payment
penalties of $9500 8.9% for 4 year balloon 9% for 5 year balloon 9.5%
for 10 year balloon ESCROW REQUIRED Closing cost 50/50 Split except agent commission"

Is this a good deal? At first glance, there is cosmetic work I'd want to do, but nothing crazy, just painting interior and exterior and some yard work. Its been on the marked over a month. I'd like to offer $150k so I have some equity to start with. How can I make the deal better?

I don't understand this at all. So they're asking more than what you think it's worth, but with a lower down payment than the normal 20% (which would be 35k). Refi after 24 months (with whom?) to avoid prepayment penalties?

The 8.9% is the interest rate? That seems high, but I guess if it's someone who can't qualify, then they're willing to pay. And how much of a balloon is due at 4/5/10 years? Very confusing.

Hello Anna!  Thank you so much for the response!
They are asking for the down payment and then want to collect payments for a minimum of 2 years at the 8.9% interest rate.  After that time, I could do a traditional loan and do a balloon payment to pay off the seller...(can you take out a bank loan for a property that you have a mortgage on thru owner financing?) They are giving different periods of when the balloon payment could be with the stipulations of each period of time.  From what I understand, 8% is about normal for owner financing terms(is it normal for the % to increase for longer periods of time before the balloon payment?)

What I'd like help with is, if the seller is offering owner financing, is it a good idea to take the deal for above market value or should it still be negotiated to get as much equity as possible?  And, are these good terms or should they be different?

@Patrick Stuckwish A couple of questions....

I assume you can not qualify for a traditional loan right now, otherwise you'd never consider this crazy interest rate And laying above market value.

When, and why, do you think you’d qualify for a traditional loan in the future?

No, this not a good deal.

Hi Wayne and James!  Thank you for the advice. 

I can qualify for a conventional loan, this offer is just listed ONLY for owner financing.  I don't know a lot about the owner financing deals, but this one did look odd...

@Patrick Stuckwish

Expanding on what Wayne said... This does not appear to be a good deal for a buyer who has the ability to qualify for conventional loan terms.

The seller has structured a deal that allows them to net more money through a combo of factors, including the price, the above-market rate, and the loan terms. They are also mitigating their risk of a weak buyer (who has limited down payment and likely limited reserves) by setting up a balloon. If buyer is unable to pay off or refi when the balloon comes due, seller gets the house back and starts the process over with the next sucker, I mean buyer.

From the buyer perspective, the teaser is the lower down payment. The corresponding weakness that a weak or inexperienced buyer might underestimate is that less down means a higher loan balance. Higher loan balance + higher rate = crippled cash flow. If buyer is under-reserved or dependent on the cash flow to remain afloat, this could be a real problem.

Hope this helps.

Thank you Bill and Rich.  I will definitely not be doing this deal.  If I were to counter with an offer, what would your suggestions be?  Maybe something like...?

- $5000 - $10,000 down

- 5% - 7% interest on 30 year note

- no balloon payments

or do you think this is just a wash?