Sell FSBO to current tenants

15 Replies

My name's Shawn. I'm new to this forum. I've been reading these for a while, but I've never posted on here. WE have a couple rental houses around Mobile, Al. WE have had current tenants in on rental for over 2 yrs. They are now wanting to buy the house "for sale by owner". What are the pros and cons to this? What's the normal interest rate, down payment %, sale price relative to market price, etc.? I would appreciate any feedback. House is paid off. We paid 24k for house. We rent it for 600/mo. We were thinking about selling the house for 38k if buyers use bank and 48k if "for sale by owner" with a 10% downpayment. How does this sound?

I'm assuming that you paid 28k cash?
Do you not like being a landlord?

First I'm not a mortgage broker.

From what I've heard 50k is the lowest conventional mortgage someone can obtain. So if they were going to get a loan for 38K it would be hard money @ 10-15% interest w/ 10% down and possibly points.

If you were going to do FSBO
What are your terms besides 10% down?
Interest rate? Length of loan? balloon payment?
Are you ready to foreclose if they don't pay?

If I was going to finance it myself I would probably go with a 10% interest rate with a minimum of 10% down. Amortized over 10 years. The payment is what close to the current rental rate & your out in 10 years.

Thanks for the quick response Rusty! I now live a little futher away from the house. I like the idea of them taking care of any maintenance issues especially with my current busy schedule and longer drive to the house. I will have to research the current types of financing. I'm definatly not ready to foreclose. I need to do more research, and I was planning on getting with a real estate attorney before finalizing anything. Is foreclosure a lot more difficult than an eviction? I was planning on doing a conventional 30 year fixed interest rate loan. It sounds like I definately need to re-think this.

I have a house that I bought 6 months ago and rehabbed all in for 24K. My tenants, too, would like to buy the house OF.

After paying taxes on the DP, closing costs and recuurring fees to an attorney to keep the escrow on the books, its really tough to justify owner fincancing. Especially since these renters will likely be forclosed in the future and when that happens; who knows what condition the property will be in? I'd rather just sell cash to another investor when I'm tired of earning the rent check.

I know there are folks who would take care of the escrow themselves, but its not worth my time to figure out and then perform all the stuff you need to do to ensure the home stays insured and that interest gets properly reported at the end of the year, blah, blah, blah..

You could consider setting it up, letting it mature and then selling the note to a note buyer.

Since you live far away and it sounds like the property has some maintenance issues, maybe it is worth considering despite the disadvantages.

Thanks for your input Brian. Would you not consider selling fsbo even if the tenants were going to pay you 2 x's the price you paid for it? I don't feel like I would get that much from an investor. I know it's more trouble, but you're getting paid for your extra efforts. I guess it comes down to personal preference. Wouldn't I just pay the taxes and insurance? I already do that now.

My mortgage contacts tell me 40k is lowest a national lender will go on a mortgage currently. That is the amount AFTER their downpayment is subtracted. So, assuming a 3.5% downpayment, you'd need to sell the house for approximately 42k.

For houses I do seller financing on, I get an appraisal, credit bureau, pay stubs, W2's, etc just like it was a mortgage deal. This way, once the note is "seasoned", if I so choose, I can sell it off to a note buyer for 85-90% of face value. Better study up on note buyers and laws in your state to be sure the i's are dotted and t's are all crossed.

Typically the mortgage holder would pay there own insurance & taxes. Paying it yourself... especially over 30years would cost you a lot of money. But a ten year note might be doable if you want that extra security.

I agree with Brian Hoyt, Owner financing is my last exit strategy, if all else fails.

See if there are any local investors who will "take it off you hands" for the 38K asking price. Might find a couple.

Shawn, if you financed it over 30 years you would pretty much have to sell it for double your acquisition cost to maintain similar monthly cash flow as if you rented it. Your mortgage payment on 48,000 - 10% down would be a whopping 370 a month (at 10% interest). Now subtract taxes andyou're back to where you started as far as cash flow goes. Plus you're still baby sitting this thing in a sort of way for 30 years and then you can't sell it at that time because you don't own it. Consider after taxes your monthly cleared amount would be about 300/month. I won't include legal fees because I don't really know what they would be.

So, you sell for 48K. DP = 4800-taxes, say 3800.
Monthly income is 300/month.

So to recoup your 28K of cash it would take:

(28,000-3800)/300/12 = 6.7 years.

It just seams like a long time to get your initial investment back if you aren't holding the equity. What will that 300/month matter you in year 20 when you still have 10 years to go and you're 50 years old? See, even if you don't have to forclose, it could just be better to sell to an investor comparably to how you bought it and use that money to buy something similar that is closer to you or to use as a down payment to leverage a nicer property that is more worthwhile.

Don't get me wrong about "worth while". My 24K property is completely worth my while to rent it. Thats why I bought it. But it wouldn't be worth my while to OF it to someone.

IF I did OF it, I would lean toward a shorter finance term. Say 10 years or MAYBE 15.The problem with that is finding someone willing to live in such a property who could actually afford to swing the payment. There are some that can and will (mostly immigrants), but most cannot. PLUS, I would require a DP of like 10K or 15K AND make them pay the closing costs. There are some low income savers out there that can do it, but I wouldn't hold my breath looking for that special buyer.

Originally posted by Shawn Stinson:
... WE have had current tenants in on rental for over 2 yrs. They are now wanting to buy the house "for sale by owner". What are the pros and cons to this? What's the normal interest rate, down payment %, sale price relative to market price, etc.? I would appreciate any feedback. House is paid off. We paid 24k for house. We rent it for 600/mo. We were thinking about selling the house for 38k if buyers use bank and 48k if "for sale by owner" with a 10% downpayment. How does this sound?

It sounds as if you are getting confused by terminology.

"For Sale By Owner" (aka FSBO) means just that - the owner is selling the house without anyagents being involved. As opposed to selling by listing on the MLS, where you would be employing the services of an agent.

Now, there is stuff that comes later in your post where you are using things that come under "seller financing" or "owner financing". "Owner financing" can be offered with a FSBO or with a property listed on the MLS.

There are many "flavors" of owner financing, and most of them have already been discussed frequently in the forums ...

Keep in mind that the lower the downpayment percentage that you accept, the less protection you will have in the event the buyer defaults - they aren't paying you any longer, and you will incur expenses with foreclosing (and then getting them out once you get ownership back). Banks often end up lucky to break even when they get 20% down and have to foreclose. Now, compare that to having a renter paying you rent, and they default. You just go through the less costly process of an eviction.

As to who pays for taxes and insurance - that is the owner's responsibility; once you sell to a new owner, that new owner has those payments to make. When you owner finance, you will want some assurance that your collateral is being protected from fire and other catastrophes; and you'll want to see that the property taxes are being paid as well, so that if you get stuck foreclosing that there is less for you to have to pay off.

Originally posted by Steve Babiak:

As to who pays for taxes and insurance - that is the owner's responsibility; once you sell to a new owner, that new owner has those payments to make. When you owner finance, you will want some assurance that your collateral is being protected from fire and other catastrophes; and you'll want to see that the property taxes are being paid as well, so that if you get stuck foreclosing that there is less for you to have to pay off.

You have to be really careful about this. I spoke with my real estate attorney regarding escrow and there are some very good reasons to set up an escrow account. Say you tell the buyer, "okay, good luck, pay your taxes". Then the buyer gets in financial trouble and borrows money to pay the property taxes. I can't remember the name, but there is a specific loan you can get to pay property taxes. If they borrow money in this manner and you forclose, that junior leinholder must be satisfied before you can get full rights back to your propert (safely assuming they will default on that loan if they are facing forclosure). So, basically, you get stuck paying the back taxes after you forclose. You would have no way of knowing this loan was being procured to pay the taxes until it is too late. You could sue, but would it be worth it?

Same sort of thing with insurance. Say they default on the insurance and one week later before you find out so you can enforce the contract the house burns down. Again, you could sue, but its hard to get blood from a rock.

For the reasons above, you should have an escrow account set up with a lawyer IMO. As for who pays taxes, those monthly mortgage payments the seller receives will be subject to capital gains taxes.

@Shawn Stinson , just a question...I've seen how much you paid for the property and how much you were thinking of selling it for...but I've not seen any mention of the FMV of the property. Is it worth $48K? If not, then why would your tenants want to pay that amount?

And have you thought about selling to them on a lease option?

Thanks everyone for all the responses. This is really helping me out. @ Steve. You're right I was referring to a FSBO that would also be owner financed because I'm assuming they wouldn't get approved by any lenders. They inquired about owner financing.
@ Brian. Yes it would take a while to re-coop my money this way, but we've already got more than half of our money back on this investment.
@ Brian and Steve. We were goign to try to get a lawyer to draw up some papers where the payments they made to me would include principle, interest, insurance, and real estate taxes. That way I could very this is taken care of.
@ Bill. They want to own a home. This may not be the smart decision, but I believe they would pay more than what it's worth to be able to own the home. They are pretty much paying a fee because of the extra paper work and risk that I would be assuming.
The tax value of the home is 44k. I think comp comparison would show the house is worth closer to 38k.

Not to beat this thread to death, but Bill's proposal of a lease option might be very advantageous to you. Lease options are functionally illegal in Texas, but they are perfectly fine in many states - your lawyer could help you with that.

With a lease option, you get a lease option fee and higher rent. You can make the option such that you keep the option fee for your trouble and the increased rent above what they are used to paying would go into a savings acount for them. Then, after the predetermined timeframe has passed, (say two years), they try to qualify for a loan and use the money you have been saving for them as a DP. I am not a big fan of this practice, but I may be biased since I can't really do it where I live, but I do like that you maintain more control of the property. There a book called "By Low, Rent High, Sell High" that does a pretty good job explaining lease options and it is a very easy read. You would still want a lawyer to prep all the docs, but the book will give you a good working knowledge of the concept.

Also, you say you have made more than twice you money back so far. I don't see how that is possible. in two years you would have recieved gross rents totaling just over half your investment:

600$/month X 12months X 2years = $14,400.

Now subtract your property taxes and insurance and expenses (inclouding time spent). I would guess you are closer to 10,000 minus taxes on the income if any - still not bad, and if you get out of the property soon enough, you won't have to replace the roof or any other soon to occur major expense.

Keep us informed on how it unfolds. I hope whatever you decide to do works well for you.

Thanks Brian, I will check out the book. I said that we have received over half of our money back, which would be over 12,000. Thanks so much for the input. I will definatly look into a lease option. If we don't do that, we will probably just continue to rent it out.

Hey Shawn!
One quick thought.
Yep, 40-50k is the lowest a bank will lend. Below that just doesn't make business sense for them.
You can send your buyers to a finance company - these guys will lend lower amounts. Their rates will be higher, but slightly less stringent credit requirements than banks.
Two that you can send them to in Mobile are:
Harrison Finance and Acceptance
Good Luck!

Shawn, while getting greedy might sound good to you, it will cause problems and later, if bank financing is not obtained, you can have problems that you would rather avoid. There is the SAFE Act for one thing and it may apply to you since you don't live in the home.

You need to find the fair market value and go from there, you don't charge more more seller financing or bank financing, financing has nothing to do with the value, perhaps 2 or 3% at best.

You need to find a lender (or your tenants do) that will make a loan that small. Find a lender first. You can interview some Realtors and get them to pull comps and get an idea what they would list the house for. You have no obligation to list it, but you could.

If you try to take too much advantage of the tenants and their motivation, the property may not appraise out for a loan, or, when they fail to get financing later on with your seller financing, you may be seen as a preditory lender and face a judge, it happens. So, if you want to sell, do it properly, or keep it and continue to rake in more on rents than you would from an alternative investment on that sale.

Good luck