Considering owner financing, how is it structured?

Question

I bought a house to rehab about a year ago.  Its been on the market since early summer, and I got caught in the falling market here in Ca.

I bought it and fixed it up for about $163k, and I have been dropping the price, hoping for a buyer.  The price is now at 159k, and Ive had a few calls and offers.  I spoke to one lady today that was not represented by an agent (yes!) and I asked if she was going to get financing.  (The house is in a 55+ area).  It came up that I might consider owner financing.  Ive read elsewhere that this can be a good tool to sell a home, save some tax and pull in a bit of profit.  I own the house outright, no loan.

My question is, how does one structure something like this?  Down payment, term, n?

I am just a bit in the dark on this one, never done this before, and the search tool didnt help me out that much...

TIA

Account Closed · Answer

Matt,

To elaborate a bit.

You want the maximum cash in your pocket so you can move on to other deals and lower your exposure to this deal.

That could mean proceeds from a loan or a down payment.

The down payment is all about the buyer having skin in the game. Something that they will lose if they fail to keep up with the payment. Something that causes them to work harder when things are tough compared to just walking away with no personal loss.

If they can get a new 1st and you take a second then you will likely have more cash at closing. If they put up a down payment, take out a new 1st and you carry only a small 2nd then you are the least exposed. Your lien is behind the 1st so more at risk but you have less cash on the table.

Even if they pay as agreed you are only earning the interest. If you could have done a good deal on another investment every 12 months rather than just earning interest the opportunity costs could be high over X years.

John Corey

Matt Nelson · Answer

Hi John

Thanks for the reply.  So my objective should be to try to get her to make as large of a down payment as possible....Not sure of anything else about her (and her husband) but if she calls me again Ill know where to go.  She did claim that they have been renters all of their lives, so that should give me something to work with as far as credit history goes.

Thanks again, Ill advise as we progress

Matt

Account Closed · Answer

The topic is both complex and very simple.

Complex because everything is negotiable. Complex because it is not what most people do so one or both sides might get confused.

Simple because all you really are doing is being both the seller and the lender.  You make a loan and get a trust deed back to secure the loan (in CA that would be the 'normal' structure). The documents are more or less the same documents any lender would use.

Risk is the issue.

If you finance the place then be prepared to take it back. Maybe very unlikely to happen but always expect it could.

The best situation is when the buyer can bring cash or get a loan but they just do not have enough. Then you only need to fund the gap. If you are funding the full purchase price then you are not that much better off than just being a landlord. You have almost all the financial risk when you provide all the financing to the buyer.

If you want specific advice we need to know more about the deal. What the bueyr can do in terms of a down payment, possible financing they qualify for and other variables (credit history for one). We also need to understand what you can afford to do. If you are making a loan to the lady you are tying up your capital. Not bad but still the cash is locked up so not available for use somewhere else.

There are variations. You can do a land sale contract or a lease/option. Control, ability to foreclose vs. evict and other details come into play.

John Corey