In the summer of 2015, I bought a property in Apache Junction, Arizona for 100k. It was on the market for a little while at 130k but then dropped to 115k so I offered 100k quick close. The house was a 3/2 and I knew that it could rent for over $1000 plus it had a mobile home in the back that I thought could work well as a guest house for a multigenerational family. When I purchased it I had to put in about 10k in suring up the floor and doing some fixes. I knew that the margin was tight and it may not have been a great purchase but I had already closed.
I decided to sell it seller finance in order to make money on the spread of what I had to pay at 5.5% for my 70k loan and charging about 9% for their loan. I got a buyer who put down 20k and I financed a loan 110k loan for them at just over 9%. This covered all my expenses plus my debt on the other 40k that I used to buy and rehab the property. In the end I cash flowed about $250 for the house.
I sold the house in November of 2016. They paid the monthly mortgage payment for the first 6 months and then there was a month that they missed. Since this was my first seller finance deal, I didn’t know exactly what to do, but then the buyer paid a double payment the next month. These payments were going through a servicing company so it took me a while to find out that they missed the payment in the first place. Then the following month they missed a payment again but I thought that they would just pay a double payment like they had done the prior month. The second month came without payment again. Then I called the buyer and she said that she was sorry and that she didn’t know that the payment hadn’t come out of her account and that she was going to make 3 payments altogether the next month. No payments came. When I contacted the servicing company I found out that the double payment check bounced (I know, not a very “on top of things” service company or maybe just a learning curve for me).
So now it had been 5 months and no payments. I was forced to grow up or mature a little bit as an investor and learn about the foreclosure process. I started the process at the end of September 2017 and it took until the middle of January 2018 for the forclosure and eviction to finalize and then take them to court to get a forcible judgement against them to get them out of the house.
Here are some before and after pictures. I know in these forums you usually have the after pictures looking nicer than the before pictures, but in this post it is the opposite.
My only saving grace in this situation is that the market has gone up considerably. So our plan is to rehab it. The rehab came in at 35k but that includes adding on the storage area in the back as part of the kitchen and putting in a new kitchen and bathroom and making the moble home in the back livable again.
After I get it rehabbed I will refinance at 75% of the ARV and will be able to get my rehab money back out and then I will do a lease option with it and sell it for 160k. Thank goodness the market has gone up. Otherwise I would be taking a big loss.
That's quite an insane chain of events. I have looked at seller financing as an awesome tool, but never realized how south that set up can go. Thank you for the eye-opener.
I am glad it worked out for you in the end!
@Cody Noblin Well it hasn’t worked out for me yet. However, the fact that I got a $20,000 down payment upfront helps ease the pain a little.
@Shiloh Lundahl Of course. I guess I was referring to the decent appreciation to help cover your losses. I could have seen that whole situation being a lot worse!
Thanks for sharing, @Shiloh Lundahl , I'm very interested in owner finance as a strategy. I'm glad you were able to work it out in the end, and hopefully the new buyers work out much better.
What is your overall strategy for this property or other owner finance properties?
I admit I worry about the 'due on sale clause' if I owner finance a property that I'm financing. How concerned are you about that with your investment?
@Cody Noblin Yes. It could have been a lot worse. If the market had gone down a little or just stayed the same, I would be taking a loss.
Well at least you got a great lesson, eviction process and holding tenants accountable, and you may still come out on top. I wouldn't let this scare you off. I know some guys who have made serious profits in the seller financed world. People who are willing to pay 9% in today's world are going to be a risk. No way around it. So take your money upfront, stay on them to make their payments and then quickly move them out so you can get it ready to do it again if they fail to live up to their end of the bargain.
@Kiel Lindsey I wasn't concerned with doing a wrap mortgage on this property because I have a good relationship with the bank that I have the loan with and they knew that I was doing the wrap mortgage and that I would be on the hook if it didn't work out. So during the time that I wasn't getting mortgage payments on the loan they had with me, I was still making mortgage payments to the loan that I had with the bank. So I was negative cash flowing for a while on this property but the bank never felt anything.
With this property I am going to switch my strategy to selling it on a 4-year lease option. I have learned it is much easier to evict someone than foreclose on someone. And I think the lease option has better overall numbers.
@Shiloh Lundahl thanks for sharing this event with and our best wishes to you and like new investor what lesson we take from this so you and us never end on this situation like what process are you doing now on to avoid it and how it could be safer if you would do it again
Sorry about your luck. It pays to be very proactive early on. It would have been well worth it to offer your buyers cash for keys as soon as you both knew the deal wasn't working out.
@Marc Faulkner I was going to go that route but the last time I talked with her she mentioned that she was going to declare bankruptcy. At that point it sounded like she wasn’t open to the cash for keys and I had to hurry as quick as possible to move forward with the foreclosure before she declared bankruptcy and stayed in the house six more months without paying.
@Amauris Lora thanks for your comment. Looking back at this situation I don’t think I would get this property again. One of the reasons why I got it was as soon as I got it under contract another offer came in at 115k and I was just going to close on it and then sell it for 115k and make about 7k in quick profit minusing the closing costs. But right after I closed on the property, the other buyer dropped out so I was kind of stuck with it. Moving forward I wouldn’t have risked it for only 7k profit.
But all in all, I have learned a great deal from this experience and I’m a better investor now for it.
Tough lesson to learn, those are the ones that you grow the most from. I've had a few tough lessons in my investing career and the scars to prove it. You just have to take the hits and keep moving forward. <insert cutscene from Rocky 6 where he's telling his son to take the hits and move forward>
Thanks for sharing this. I am sorry things worked out poorly and hope you still make money. I appreciate this story though because too often on here, this site is littered with incomplete stories of success, which paints a picture that everything is rosy and easy in the land of REI.
Sounds like this was your first seller finance deal. What did your screening process look like when lining up your buyer? Did you do the standard Criminal Background Check, Credit Check, Eviction Report for all 50 states along with monthly salary 3x PITI?
Curious if proper screening could have avoided this one or if screening was done, but this happened to be that small percent chance where the stars lined up and disaster struck.
Having this happen, have you since implemented any new screening measures from red flags you saw after the fact that may prevent this from occurring again?
Or a more generic question is do you have any lessons learned from this that may help going forward?
One lesson that I see is that a larger down payment is required for a seller finance deal if you are on the seller end due to the extra expense of foreclosure. Lower down payment is a better candidate for Lease Options.
That being said... Typically you want to do longer lease options if your the buyer and shorter 1 yr lease options if your the seller. You mentioned doing a 4 yr lease Option... Curious why a 4 yr on the exit?
I was thinking... lets say you need 20% down for a seller finance deal but your buyer isn't there yet. You could take 5% Option Consideration down and then have them renew annually with an additional 1-5% until they have the 20% required. Then they execute their option to buy using the Option consideration as their down payment and you seller finance the remainder.
This gives you multiple years up front of rental income, proof of their ability to pay, easier to come up with down payment, increases your spread from the underlying loan and makes the deal more solid and profitable over the long run.
Just an idea, interested in hearing your thoughts on it.
@Jeff V. we actually worked with a lender friend of ours who is a mortgage broker who qualified the buyer. So I’m sure he went through is regular process of qualifying as he does with other buyers. These buyers had the down payment and made a sufficient amount of income so they qualified. However, they did not have a home owner mentality of taking care of the home and they trashed the place and stopped paying which lead to the foreclosure and eviction. That was a lengthy process so now we are now just primarily doing lease options which has a much shorter time frame to evict if a tenant stops paying compared to seller finance.
So after the foreclosure and eviction we had to rehab the house which cost about 40k. I did what we usually do with our deals and I had a private money lender come in with the rehab money to learn the process and make 10% APR on his money during the deal.
The rehab started in March we finished it in May or June. Here are some pics.
We found a tenant buyer to come in with a $3900 option fee at $1250 a month to buy the property at $160k. We just refied the property and I was able to pay off the private money lender along with his interest and we paid off the first loan and I was able to get about 25k back after the refi and the property still cash flows around $200 a month.
What didn’t start off well, and then got worse, has become great little cash producing property.
@Jeremy M. With the option the tenant can exercise the option at any time between now and within the next 4 years at the price of 160k.
@Shiloh Lundahl looks great!!
Man, oh man! It ended up working out. A lesson learned with upside. That's great. Anxious to see more! Of course, hopefully ones with tremendous upside!
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