I have a property I will be selling soon and I was thinking of offering owner financing, but not having ever done that before, I thought I'd ask the following questions to get a little more insight into whether this is something I really want to do:
1. What type of deal do you typically offer? I could offer up to 100% in this case, but I'm not sure that I really want someone to take this place over with absolutely no money coming to me up front. Is it better to offer 10-20% as a second mortgage, or better to be in first position with 80-90%? What is a typical interest rate that you offer, and do you do a full 15-30 years, or just amortize over that period but have a 5 year balloon (especially on larger %). If you are just holding a second, do you amortize over a smaller period, like 5 -7 years?
2. How do you set this up? I assume a lawyer is the best way (especially for someone who hasn't done this before), but what kind of lawyer -- general real estate, title attorney, or some other kind? What kind of fees are involved and how are they typically divided between the buyer and seller?
3. My ultimate goal for the money from the sale would be a 1031 exchange into a commercial deal I'm considering, but I can do the commercial deal without selling this property if need be. How does the owner financing and the fact that I'm not getting the money right away affect the exchange? Can I offer the financing through separate funds that I have, and thus do the exchange exactly the same way as if the loan were coming from a third party (bank)?
Obviously I'll get some legal advice if I ultimately decide to do this, but I'm really trying to better understand if it is something I want to pursue. I know I've asked a lot of questions, and I appreciate any insight you might have to offer.
What you would offer would depend on your strategy for doing it. For my owner financing deals I am looking for long term passive income, so I personally want them to finance as much as possible through me while balancing the buyers commitment to the house with a downpayment.
I personally wouldn't offer 100% financing. You will be dealing with lower credit individuals and the downpayment will be your only security. I'm normally looking for 5% minimum as downpayment.
I carry my notes at 12% on 30 year amortizations. We've been kicking around putting them on balloons just because it makes the note quite a bit more valuable if you ever want to sell it, but so far no balloons. The balloon also protects you if you are doing wrap around financing and your financing has a balloon. One downside to a balloon is it takes away from your buyers feeling of security. I want them to feel safe and stable with their home, and that balloon on the end just wouldn't seem to help with that.
I personally would never expect to get paid on a second lien. I would make sure that the deal was worth it to me just dependent on what I received from their first lien, and chalk up the second lien as bonus.
Laws vary state to state, but in Texas I would recommend using a standard note and deed of trust to do owner financing. A qualified attorney that specializes in real estate is your best bet to write one up. My attorney charges $250 to write one.
Closing costs are determined by agreement in the contract. I personally collect as much as I can from them initially as downpayment, and then factor that I will have to pay all the closing costs out of it. Normally the person isn't going to have much money after paying their downpayment, so I don't expect them to bring much to closing. I actually decided today that I am going to start making them bring their prorated first month's payment to closing and that's it.
Installment sales (owner financing) and 1031's don't mix. Now your idea of financing them with separate funds might actually work, but that would be the ONLY way I could see it working. I would contact a 1031 specialist to verify that for sure.
And, obviously, as you already stated, getting some qualified legal advice about the whole topic is your best bet.
Great info, Ryan, thanks. One other question. If I scrap the 1031 idea and just pay the capital gains taxes, are they due right away or do they get spread out as the money on the loan comes in?
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