Is owner financing good?

Question

I see owner financing homes listed on Zillow selling fast in an area of a class C property I own in Ft. Worth. I own it outright and would love to get rid of it vs renting to lower income people. It seems like owner financed properties sell for about 10% more in price. Is that true they usually sell a little higher? What are the downsides to doing this? I assume I have to claim my monthly payments as income? Do I have to pay capital gains on the sale? I will probably make around 50k profit on this if I sell it. I just don’t know what the advantages of doing owner financing deals are. I see a lot of homes listed like this and they seem to sell quick. I don’t need the money right away. I would be happy to get paid each month over 15 or 30 years.

Nathan Gesner · Answer

Owner financing typically sells for a higher price because they are selling to home buyers (not investors) that can't qualify through a traditional lender.

Owner financing is great as an investor! If the deal is good, I may consider paying full price in exchange for the benefit of owner financing. But so far, I've only picked up properties below market value with a lower down-payment than a lender would require. I bought them 10-15% below market value, 10% down.

Justin Robert · Answer

@John Morgan Yes, they can fetch a premium. If you decide to do one the cost of a note service is well worth the cost in my opinion. Specifically, August REI in Garland does it for $35 a month per loan that includes online account access, escrow, payment collections / disbursements and tax documents.

Steve Vaughan · Answer

I sell quite a few little rental houses with SF to owner-occs,  but not more than 3 per year like John mentions.

The tax part is helpful, kind of.  Earning interest is like earning ordinary income.   The down payment and monthly payments received will each be part interest, part cap gain and part basis.  Get tax help to figure the ratio properly.

I like the ease of selling and the closing costs savings. I don't have to pay realtors, title insurance, escrow and closing agent fees, etc but I've done it a dozen times.  Avg savings on a $150k house for me is $12k vs the retail lister down the street. 2 months of napping when I feel like it at my nap vs having to clock in somewhere rate of $8k per month before taxes.

Closing costs in my area are 2% with excise transfer taxes.  Don't forget closing costs when asking for how much down.  A 7-family I'm selling with SF now will cost me $8k in conveyance fees.  Asking for $10k down will only net me $2k.  Know closing costs in your county.

When buying, my avg is similar to @Nathan G.  Buy for about 90% of FMV with 10% down.  Good luck!

John Underwood · Answer

Yes it is a solid way to sell a property for top dollar. Screen your applicant to make sure they can pay. If you do more than I think 3 you need to adhere to Frank Dodd rules.

Make sure to get a 5k or better downpayment so that if they stop paying you have the money upfront to pay an attorney to do a foreclosure.

You might want to escrow insurance and property taxes so that you can ensure these are being paid. You could also have them list  you as a loss payee on their insurance instead of paying it yourself. You will get notified if they get behind on insurance and you would get paid if there was an insurance claim.

Justin Robert · Answer

Yes I have done a few, by no means a pro but the servicing has been well worth it.

John Morgan · Answer

Thank you @Justin Robert. I just reached out to them. Have you done any of these?

Is owner financing good?

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