About to FSBO with owner finance our current home...

17 Replies

After 10 years in our current home we have simply outgrown it and are moving up.  This is a perfect opportunity to "obtain" our first investment property and as such we intend to sell our current home with owner financing.  I think I have a pretty good grasp of the basics involved and we are looking to use a 3rd party loan servicing outfit to keep things simple for ourselves.

Any general suggestions/advice as to what to be on the lookout for?  Recommendations on marketing our property?  We are hoping to sell it for $200k with 15% down and about 7% interest.  Our current principal balance is about $165k at 4.125% with a P&I of $842/mo.  Assuming we can find a buyer with the cash down payment this would work out to about a $290/mo cashflow on the property prior to the loan servicing fee.  This sounds to me like a great deal, so am I missing something?

Thanks in advance for any feedback.

So @Scott Nipp you want to finance the sale of your house but you have a mortgage on it now? 

Your first deal and you want to make it a Sub-To transaction with a loan servicer? I suggest you just sell it and loan the money out at 10%, look at transactional funding as well.

Have you considered the due on sale issues with your mortgage?

Can you pay it off and protect that buyer you sold it to?

Is the buyer qualified to obtain another loan or the deal you're thinking of making?

You are exempt from Dodd-Frank selling your own residence, but not from predatory lending matters, financing does not add value to a property so you can't bump the price way up and offer financing. So what is your motivation, 7% interest on your money?

Netting interest on an underlying mortgage can get tricky, read the FORUM POSTS about a podcast #70 by Grant Kemp and see how you can get in trouble.

For your first deal, I think you'll be better off just selling on a clean deal and just buy another place, try renting before lending. Flipping before lending, even with a servicer. :) 

I have considered the DOS clause and I'm actually rather paranoid about it. However, my thought on this is to discount the interest rate to the buyer enough to offset the property tax homestead exemption and maintain this in my name. Similarly, we would keep the insurance in our names and simply add the buyer as an interested/authorized party on the insurance. I believe this should completely protect us from the DOS since absolutely nothing at this point would change to indicate a "sale" of the property to the underlying mortgage lender.

The motivation for this type of deal is to maximize our return.  We are not trying to be greedy here but it makes the most sense to me to get a nice payday up front, the down payment from the buyer of roughly $30k plus earning about 3% interest on the bank's $170k rather than just 7 -10% on our $30k proceeds from a straight sale.  Besides, we have much of that profit marked for some other expenses related to moving into the new house so only a fraction of that money would be available for that kind of investment anyway.

I do appreciate you raising these issues. I honestly hadn't really considered this as a Sub-to deal since we are the underlying mortgage holder, but I see that this really is a Sub-to. I think structuring the deal in this manner though will protect us from the DOS risk although my understanding is that this is an incredibly unlikely risk anyway.

As to predatory lending and bumping the price WAY up...  We are not looking to inflate the price significantly at all.  The house next door to us sold about a year ago for $187k and the market has continued to improve since that time.  We have put in high efficiency windows, replaced the A/C unit last summer, upgraded the flooring and installed an extended patio.  Additionally, we are leaving a nice, hand built storage shed in the back.  We are simply asking $200k for the house so I don't think this is an unreasonable price for the neighborhood.  We MAY be asking for a couple percent above market for the house but even on a straight sale I don't think that would be unreasonable.

Quick calculation looks like you refi'd about $174k, 2.5 to 3 years ago, so you shouldn't have any big differences in "principle pay down" worth celebrating. But, as Bill said, there are risks of a DOS, and the ability to refi, disclosure to buyer (if the bank calls my loan, and you the buyer can't go refi and pay me off, you may lose your down payment), etc.

I'm curious if the bank has any recourse to call the loan if the taxes and insurance remain in my name and the payments continue to be made from my account... This would provide complete protection from the DOS issue would it not? I understand there could potentially be other risks such as the bank not receiving payment and foreclosing. Obviously there are risks involved and this is true for ALL forms of investing.

It just seems that if the DOS risk is minimal at best that this is not an excellent investment option. We should be able to pocket close to $30k up front on the closing plus another roughly $3k per year in the interest difference for the life of the loan. However I don't want to have tunnel vision on this deal and put ourselves or our buyer in a bad situation.

If you retain title, then it's a contract for deed, etc.  and most "buyers" aren't going to part with $30k with title still being in your name....I know I wouldn't.  What do you think the true market value is, for a straight up sale?

Straight up sale would likely be about $195k.  That's just a guess as I don't know of any recent sale prices in our neighborhood and it's a rather unique neighborhood so comps outside of it are a bit different.

have you thought about renting it out with an option (lease-purchase)? 

We would be more likely to simply sell the property straight-up as the purchase of our new home will be depleting our savings and we would rather replenish those savings than have rental income from the property.  We do intend to have rental properties in the future but right now recouping our savings is a higher priority.  The new house will require a few new significant purchases like refrigerator, a few pieces of furniture, and a couple of minor renovation expenses (paint, flooring and windows).

Well... I think after some more research and feedback here we are probably going to just list it FSBO and sell the house. I'm hoping we can net $25-30k on the sale which would be pretty awesome but we'll see. Thanks for the feedback.

@Scott Nipp Interest rate spread is a great way to make money, it's what banks have been doing for 6,000 years.

I don't know anything about regulations in the US. But I do know something about subprime buyers and can tell you that there is a VERY small chance that you would be able to get 15% down. It happens occasionally where a buyer wants to lower their payments and has a big chunk of cash, so I'll let them pre-pay a portion of their payments. But in general if someone has 15% to put down chances are they can get a loan and don't need you to finance them.

The only exceptions would be either a buyer who was recently released from bankruptcy. Or a buyer who is newly self-employed. I'm guessing that since this is your first deal, and you're selling your baby (personal residences always have emotions attached) that you're not going to feel comfortable selling to either of those groups.

Your comments about doing this a a lease option makes it sound like you don't know much about lease options. The tenant/buyer typically has the same buyer mentality as someone buying on an instalment sale. So other than having some more responsibility toward maintenance, the difference between the instalment sale you already had in mind and a lease option would be mostly just in your mind.

I think if you did a lease option on this you would be quite pleased with the results. But if you want to just straight up sell and not use this opportunity to get started investing, I certainly can't fault you.

I'm pretty sure that Texas has some funky rules pertaining to lease option that makes that not quite so attractive.  The other issue is really needing to replenish our savings which getting into the new house is depleting rather effectively.  At this point we would rather pocket $25-30k on the sale than have the monthly income of a couple hundred for maybe a few years.

Thanks for the feedback though.

I understand your decision

As back up: I would suggest you still consider sub-2 or lease options

Maybe go through some of @John Jackson biggerpockets threads

Property taxes, insurance, and monthly payments to lender : 

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I would suggest you handle yourself or servicer company

Off topic : I have been notice here in Wisconsin a lot of home owner placing their residence under a trust llc name.  For example : Nipp trust or Nipp 7903 trust 

Owner have their residence in a trust name and additional hazard insurance going to the trust name. 

Sorry about off topic comment

Regardless good luck moving forward

Yeah. I read up on the trick of moving your property into a land trust. This is designed for estate planning purposes to avoid the probate issue but some people use it to "hide" the sale of a property to avoid the DOS clause. The idea is to sell the beneficial interest in the trust rather than the title itself. The flip side of doing this is that I think this starts getting into a possible grey area of criminal fraud but I'm not a lawyer and don't even play one on TV so what do I know.

@Scott Nipp   If you sell the house on a contract, but it's in your name you are now in a land contract, or contract for deed.  Please avoid that as if anything were to go wrong any good RE attorney is very familiar with Title 2 Ch 5 of TPC.

IMHO the DOS should not be a worry thing...

I know Grant Kemp and he works with Scott Horne so you can contact them. 

Before all of that though...a $200k house with 15% down?

Hmmm...$30k down on a $200k house may not be feasible unless you want it to sit empty for quite a while. 

What area of FW?

I tend to agree with @bill G I can never get his name to pop up...

Given the market we are in here in FW, I might do a FSBO and use the equity for an investment house or something.

Yeah. Just listed the house on FSBO last night. Hopefully this is going to show-up on Trulia, Zillow, etc tomorrow and maybe we can start getting some traffic by this weekend. We are just shooting for getting a regular buyer and pocket the equity for debt pay down and investment.

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