Owner Financing - Ethics Question

54 Replies

I have an ethical question related to making an owner financing offer.  Here is the offer I am considering making with theoretical numbers to get everyone's feedback on:

The owner would like to sell the property for $115,000.  I am considering making an owner financing offer of $90,000 with a 10% interest rate, amortized over 10 years.  I would be agreeing to this higher interest rate in order to make the lower purchase price appear appealing.  I would then refinance to a lower interest rate in the next 6-12 months. **The owner financing agreement would not include any penalties for early payoff**.

The question: Is it unethical to make the seller accept a lower offer price, by offering a high interest rate, only to refinance quickly, unethical?

Please let me know if my question requires further explanation!

Updated 29 days ago

**CONCLUSION**: It would be unethical to mislead the seller of the property. Full transparency is the way to go in this situation.

Updated 30 days ago

UPDATE: Are all ethical issues removed if you were to add in the contract language similar to this?: "Buyer has the right to refinance or pay off the mortgage at any time, penalty free, for any reason."

What part about the transaction makes you feel it's unethical? 

The whole point of creative financing is helping sellers find a solution to a problem by creating a win-win situation for everyone involved. 

I'm assuming there is a reason you see an opportunity for owner-financing--the sellers are in a situation that requires them to dispose of the property quickly, the house has an issue that prevents it from selling traditionally on the market, the sellers are under water on the house, etc. Otherwise, you'd have no reason to think the sellers would even consider owner-financing. 

You are solving their problem while acquiring the property at a discount. Win-win.

I can't remember which episode it was, but one podcast quote that's stuck with me is, "I don't want to buy from anyone that isn't excited to sell to me." That's become a part of my moral compass when seeking discounted properties. 

The seller is open to owner financing due to not having to pay all of the capital gains tax at once, but rather pay it over the life of the loan to me.

I would essentially be leading him to believe that he would be able to pay the taxes over a period of 10 years, and then turn around and force him to pay the taxes in full 6-12 months later when I refinance.

I think it's always wise to state your intentions. I would let the owner know that you plan to refinance the property when you have the ability. What goes around comes around in this business. 

This post has been removed.

Originally posted by @Chase Gibson :

The seller is open to owner financing due to not having to pay all of the capital gains tax at once, but rather pay it over the life of the loan to me.

I would essentially be leading him to believe that he would be able to pay the taxes over a period of 10 years, and then turn around and force him to pay the taxes in full 6-12 months later when I refinance.

 To be honest, I think you already know the answer. You're just looking to ease a guilty conscience! :D

There's nothing illegal about what you are proposing. I would say that purposely misleading the seller would be unethical. If the question hasn't come up one way or the other, then it's quite possible the owner doesn't care, either, and I don't see how that would be unethical. 

If the owner was hell-bent on not selling it outright, but holding the note over 10 years, there's ways to do that, too. So I would say you should refer back to your contracts and what your conversations are/were with the seller. If you told the seller you were willing to do 10 years at a cheaper price just to get them to sell, with the intention of wiping that in short order, I would consider that unethical. If you didn't tell the seller anything - just made your offer and they accepted - then I don't see anything wrong with what you are proposing. 

assume you are the seller and the buyer did that to you.  Would  you think you were dealt with in an ethical manner?

@Chase Gibson Well your definitely misleading the man into selling for less with the idea he will have that note for 10 years. Part of the reason people are willing to owner finance is because it has a benefit to them, there would be no benefit to this seller to go into the deal with you if they knew your true exit strategy. Just feels dirty to me but as others are saying nothing illegal about it in your state? I guess you just need to decide what kind of business you want to run.

Remind me not to do business with you.

Originally posted by @Chase Gibson :

The seller is open to owner financing due to not having to pay all of the capital gains tax at once, but rather pay it over the life of the loan to me.

I would essentially be leading him to believe that he would be able to pay the taxes over a period of 10 years, and then turn around and force him to pay the taxes in full 6-12 months later when I refinance.

Just based on this information here, personally I would say that yes - it is unethical because of exactly what you state in your last sentence.

Just to clarify, so that I do not get crucified any further (@Dan Kistler ): I HAVE NOT MADE THIS OFFER!

I am bringing it up for discussion because I know negotiation wise it is a great strategy, but I had strong hesitations due to the obvious ethical dilemma.  I believe you never hurt yourself by over communicating, so I know how I will move forward with this negotiation.

I guess the true question is: When is it acceptable to use your greater knowledge in a subject to your advantage?  For example: If a house flipper wanted to be completely transparent with the person they are buying the house from, they would teach the seller how to flip the house themselves.  By not disclosing to the seller how to flip the house themselves, they are withholding valuable information from the seller.  Does this happen? No, because the house flipper has a greater knowledge in the subject and uses that to his advantage.

In my original question, my greater knowledge is in contracts and financing property, so is it acceptable to use that knowledge to my advantage?  I think for me I want to operate a transparent business and therefore honesty is very important, but I thought this was an interesting discussion to have.

@Chase Gibson simply put, its unethical to lead someone to believe something, knowing fully well that you plan to do something elee.
Originally posted by @Jason DiClemente :
@Chase Gibson simply put, its unethical to lead someone to believe something, knowing fully well that you plan to do something elee.

 Great, and simple truth right here. Thanks for your input!

"Forgive me Father, for I have sinned."

You obviously know that your proposed actions are wrong.  Either tell the truth, or find another solution that will work for all involved, (with honesty, ethics and financing).

Remember, just because you know how to do something, and it technically is 'legal', does not make it right.  Karma, man.  It will git cha.

@Chase Gibson I’m not sure what the issue is here. If you held a gun to the sellers head and said take my offer then yes but the seller is a competent grown adult , yes? Creative financing is all about finding the best way to maximize profit and using debt leverage (ie: refinancing to lower rate) to your advantage. That’s business. It’s not a question of ethics but rather a question of strategy. Move forward with this assuming everything else about this deal is solid.
@Mike G. So you think telling the guy you'll run out a 10 year amo period and then refinancing 6 months into it, when you knew you were going to refi all long, is ethical? If you told him your true intentions he would never take the deal. They say real estate is a clean business with dirty people in it lol.

If I ambushed my first seller carry I would have missed out on an awesome 15yr relationship with someone that sold me more good properties, became my best private lender and more importantly a friend and mentor of sorts I view deals with and bounce ideas off of.  He's my favorite 'uncle'.

If I ambushed my 2nd seller carry like this I wouldn't have an 11 year relationship with another cool old dude that later sold me more property....

Most of these guys have more than 1 property.  They also go to diners in the morning and talk to others like them.  Short-sighted IMO for a lousy 25k.

Originally posted by @Matt P. :
@Mike G. So you think telling the guy you'll run out a 10 year amo period and then refinancing 6 months into it, when you knew you were going to refi all long, is ethical? If you told him your true intentions he would never take the deal. They say real estate is a clean business with dirty people in it lol.

 For sake of argument how is this any different from telling a bank or private lender you'll run out a 30 year amortization on a home and then you decide to refinance or sell?

Originally posted by @Steve Vaughan :

If I ambushed my first seller carry I would have missed out on an awesome 15yr relationship with someone that sold me more good properties, became my best private lender and more importantly a friend and mentor of sorts I view deals with and bounce ideas off of.  He's my favorite 'uncle'.

If I ambushed my 2nd seller carry like this I wouldn't have an 11 year relationship with another cool old dude that later sold me more property....

Most of these guys have more than 1 property.  They also go to diners in the morning and talk to others like them.  Short-sighted IMO for a lousy 25k.

Steve, I totally agree.  Real estate is more of a relationship business than it is a property business.  Thanks for the insight.

Not only is it unethical, it very well might be illegal. You have a few overlapping issues a states attorney may have issue with, or a judge/jury might in a civil action. (Equity stripping, predatory lending). Remember in civil court the bar is pretty low, so most of a jury (not unanimous) would need to find that you were likely trying defraud (as opposed to beyond a reasonable doubt). 

Originally posted by @Chase Gibson :

The seller is open to owner financing due to not having to pay all of the capital gains tax at once, but rather pay it over the life of the loan to me.

I would essentially be leading him to believe that he would be able to pay the taxes over a period of 10 years, and then turn around and force him to pay the taxes in full 6-12 months later when I refinance.

well in that context then yes your just lying to them and let your moral compass guide you.  some would have no problem others would be up front. your call 

@Chase Gibson The difference is your getting a deeply discounted property under the guise of running out a 10 yr amo in order to help the seller. Banks aren't giving you a discount on the property to take a 30 year amo period. This is nowhere near the same thing.

Are all ethical issues removed if you were to add in the contract language similar to this?:

"Buyer has the right to refinance or pay off the mortgage at any time, penalty free, for any reason.

Originally posted by @Chase Gibson :
Originally posted by @Matt P.:
@Mike G. So you think telling the guy you'll run out a 10 year amo period and then refinancing 6 months into it, when you knew you were going to refi all long, is ethical? If you told him your true intentions he would never take the deal. They say real estate is a clean business with dirty people in it lol.

 For sake of argument how is this any different from telling a bank or private lender you'll run out a 30 year amortization on a home and then you decide to refinance or sell?

 1. The bank has already accounted for that possibility in part by charging you points and other up-front fees.

2. There's no financial downside for the bank in this scenario. You pay off early, you free up more money for the bank to lend by clearing the loan from their books (assuming they haven't already cleared it). You pay all of the costs associated with writing the note, so they're out nothing there. 

Also, on your other post, you asked how it was different from a guy taking a house below market and flipping it vs. teaching the seller how to flip it. Those scenarios are nowhere near the same. In the flipping scenario, the flipper is likely adding value by cleaning up, rehabbing, and marketing the property, and simultaneously is relieving the seller of his/her problem (the need to sell the house). In your case, you have a seller that wants/needs (I assume, this isn't clear) to sell under owner financing because of tax consideration, is willing to sell at a discount to achieve that goal, and your intention (it sounds like) is to let the owner believe they will carry the note for 10 years, when in reality your intention is to gain the discount on the house and then claw back your obligation by refinancing the guy out of the house. I would call that unethical. It doesn't mean it's necessarily illegal.

I teach ethics at the graduate level at state university. There's a difference between what you can do and what you should do, and ethics is that bridge. 

Originally posted by @Chase Gibson :

Are all ethical issues removed if you were to add in the contract language similar to this?:

"Buyer has the right to refinance or pay off the mortgage at any time, penalty free, for any reason.

 I would say that you've covered your bases there, at least legally. I still think it would be pretty distasteful to pretend one position and then take another, but the seller certainly has the ability to read (and have his/her lawyer read) the contract before signing. 

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