Seller financing a small potatoes SFH?

Question

Hi all,

I've nearly finished rehabbing a SFR that I intend to rent. The numbers, rent comps, etc work well on it.

However, just for kicks and giggles, I'm playing around with the idea of selling with seller-financing (this after my realtor urged me to just stick a sign out front after I'm done and see what happens.) Conventional financing would be difficult, as FMV would be around $34K - although there might be some local banks and CUs that would take it on.

My intent isn't to find a sucker and dump the property onto them. While it's obviously a cheap house, the immediate neighborhood is quiet and mostly O/O and attracts lower-income but stable folks.

My initial guess is that the fixed costs involved in order to achieve compliance (licensed mortgage originator/servicer, etc) would be fairly significant compared to the money in the deal?

Bill Gulley · Answer

The reason for loan minimums is cost of servicing and the number of loans involved, there is a flat cost to each loan your service. .125%/.25% or about is  a general servicing fee in portfolio, toss a flat cost in there and you may not be making anything, at some point you're losing money each month.

Nothing to do with affordable housing or borrower risks so much as the profits.

Habitat for Humanity and other affordable housing programs make a dent in some areas. We had a subdivision here or HfH homes. There are private operators who deal with the non-profits as well in keeping a decent supply in inventory here. I helped start much of that in the 90s. There is a thread on here, "profit from non-profits" I believe, a long thread but goes through several tactics for operator/investors.

I'd rather sell and finance and not fix toilets as a second job, but, whatever, it's all good if you like it. :)

Bill Gulley · Answer

No Ben, the LO fees can be paid by anyone, if they are paid by a borrower the fees are worked into the formula in classifying the loan as being high risk or qualified as to the originator in what they do, nothing to do with you.

Loan fees can be paid by the seller, split or the buyer can pay them.

An appraisal may be required by the originator. The buyer puts money down and needs a small reserve, if there is money on the table you can take that and pay costs to make it work. Done all the time.

BTW, I really wasn't that worried about you as you said you were using a mortgage originator.

It would be a good way for you to go, being compliant, fully amortized as moving out to a balloon would have a loan balance below loan minimums that wouldn't likely be obtainable.

Holding long term, renting and then selling will make you more money, but so will selling with financing and having another job.  :)

Ben Skove · Answer

@Sabrina C. I can see how it would appear that way - definitely not my intent!

@Bill Gulley I figured as much. Giggles from you tell me pretty much all I need to know. :)

Ben Skove · Answer

It makes sense that they would work through non-profits, rather than sending the voucher holders out to the wolves.

My guess is that sequestration has probably eliminated most of this particular program, though I may give a call over to the PHA and what is available and what their process is for becoming part of the program.

Bill Gulley · Answer

I've not been involved lately with Sec 8 vouchers, HUD has had programs in the past and my past involvement was with the housing authority.

The vouchers were available through non-profits providing affordable housing mainly, not sure the regulations require the arrangement but the reality is politics more than someone receiving benefits and trying to cut a deal, never saw that happen. My guess too is that now, it could be rare.

Note that doing a lease-option or any installment seller financing deal outside the HUD program using Sec 8 payments is illegal, you can get into fraud issues with the use of funds and accepting funds allocated as rent subsidies.

You can contact your regional HUD office as to vouchers and development or redevelopment of affordable housing. Search their web site as well, but I'd caution making any plans based on a HUD site as regional areas may or may not be involved with just anything that is possible at the federal level. :)

Ben Skove · Answer

Has anyone had experience with the Homeownership Voucher Program? Evidently it's for Section 8 participants, except designed for meeting mortgage and homeownership expenses. It doesn't look like many are given out, but it varies by PHA.

HUD homeownership vouchers

Dawn, the Milwaukee office appears to give out 10 to 20 of these a year, if I'm reading the spreadsheet of vouchers correctly.

Dawn Anastasi · Answer

At one time I looked into government grants and such for getting people into homes, but they wouldn't give grants for rentals, only if I sold the homes to buyers with particular income ranges.

I've been thinking about the same thing.  There are a ton of properties around here that sometimes investors (especially out of state) would not want simply because the rehab is > $10k.  But if you can buy for $10k and put $20k into it, then sell it to someone for $60k amortized over 10 years, they would be paying approximately $625 at 6.5% with $5k down payment.  For a 3 or 4 bedroom that would normally rent for $850 - $1000, that might be a pretty good deal for them.

But then you're basically the bank and might have to deal with a foreclosure if they wind up not being able to pay.

Ben Skove · Answer

I'm reviewing that thread now, Bill - it's good food to digest. Given that I've had a fair amount of experience in non-profits (volunteer rescue squad), it does line up with some of my thinking. Thanks for the pointer to that.

Ben Skove · Answer

It seems like there ought to be a way to get people into low-priced homes in a non-predatory way. Habitat and community reinvestment organizations do it on a nonprofit basis; however, the number of houses they can do is very limited. 
	
	I see local investors putting people into horrible houses that need complete rehabs on a financed or L/O basis, and require the purchasers to make the needed repairs. This feels like the equivalent of payday lenders or rent-a-paycheck organizations. It's just wrong.
	
	At any rate, Bill, I appreciate your wisdom and apologize for wasting time on things that you've rehashed a billion times. From what I've read, there seems to be two main answers to why lenders don't want to lend under 50K: first, the profits are too small, and second, the costs involved reach the cap of predatory lending. Either, both, neither?

But you're right, I will probably stay with holding long-term. Stick with what you know. :)

Ben Skove · Answer

@Bill Gulley Even after spending some time reading past posts to try to get a feel for the subject, clearly I've no idea! My thought (obviously not expressed coherently) was about if it were possible to assume the costs of originating the mortgage as the seller somehow? Or is it the flip side of predatory dealing - stupid lending? :)

Seller financing a small potatoes SFH?

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