Shall we pull the trigger? - Owner financed deal in middle GA

Question

Good morning Bigger Pockets!

My family and I are moving to GA in January (I’m active duty USAF) and we are looking for a home.  I stumbled across a property listed FSBO on a well-known military "yard sale" type site.  I contacted the owner and he seems very interested in working with me on an owner financed deal. Here's the specs:

http://www.zillow.com/homedetails/101-Hickory-Bend-Dr-Warner-Robins-GA-31088/49861034_zpid/

1,840 sq ft., 3/2, New roof, new HVAC, It's appraised at $139k and he's wanting $136k. Property currently rents @ $1,200/mo.  I'm currently waiting on him to reply with terms, but I've explained our situation a bit to him so he knows what I'm looking at.  I believe he owns the  property free & clear.

Our plan would be to owner occupy for approx. 12 months (he's agreed to owner finance up to 24 months) and then refinance him out and rent the property.

Note: This will be our first Real Estate purchase and although I feel pretty confident with the following steps if we come to terms we can both agree upon, I'd love to hear some thoughts on this deal! Thanks in advance BP.

Phil

Account Closed · Answer

Phillip,

My quick thought would be to "stress test" your re-fi numbers at higher interest rates (5%-5.5%) because there's a significant chance that 4.5% rates will be long gone 12 months out.

Good luck,

Adam

Joel Owens · Answer

Phillip you might go through another mortgage broker. Any good mortgage broker will tell you steps to complete to get where you need to be.

I know VA you are going for 100% loan. You could go FHA with 3.5% down but high mortgage insurance will make the payment high.

You can land conventional at more money down 10% or so. You can do 5% in some cases and mortgage insurance tends to be much less than FHA  but you need to have higher scores for less down. FHA is more forgiving of credit issues. There might be some other types of specialty loan programs for rural areas if that's where you will be living. If you get a home loan you will be signing and affidavit stating you intend to occupy the property. Do not falsify anything in hopes of getting less down or a lower rate. People have tried that before and you get into very deep trouble.

The reason is lenders know if it's a rental you will not fight for the property as much to keep it versus where you live and sleep every night. So they price in higher rates typically and more money down to increase skin in the game and lessen chances of you walking away from that equity and defaulting when times get tough.

3% is easier to walk away from than 10% or 20% down. Now markets can crash and then 20% down you only have 10% but lenders are willing to accept that risk usually averaging out their other factors on lending. Lenders that have to sell the paper off and are just originating it fall into vey tight guidelines so you might want to call around and find a local bank that keeps loans in house and services them. They can make exceptions where ones selling the loans off can't because of buy back provisions on Wall Street.

Also just so you understanding a DIVORCE DECREE does not absolve you of your responsibility to that creditor. Many people get this point messed up all the time. So if you have a joint account for instance in both names or your name and the judge says your ex-wife is to pay and resolve the debt as part of the decree and they do not the credit company will come after you for payment and start reporting negatively to the credit bureaus. They will tell you your agreement precedes the divorce and you are held still responsible for payment of the debt. Hopefully you tried to get yourself removed off of any accounts prior to the divorce. No matter what the decree says you can count on the other former spouse not fulfilling their obligations because they are unable too or they want to stick it to you. Either way lenders do not care and creditors will report your credit.

At this point you need to file a dispute online is the fastest way with all 3 agencies. Technically you can just dispute the whole account and if they do not respond in about 30 days the credit agencies are required to remove it from the report. Just get the 10 dollar order from each one to start the process. If you haven't used in 12 months federal law gives you one free one a year and some states give you 2 free a year.

From federalreserve.gov website

Q: How can I get a free copy of my credit report?

A: You can get one free credit report every twelve months from each of the nationwide credit bureaus--Equifax, Experian, and TransUnion--by

• visiting www.annualcreditreport.com  or
• calling (877) 322-8228.

You will need to provide certain information to access your report, such as your name, address, Social Security number, and date of birth.

You can order one, two, or all three reports at the same time, or you can request these reports at various times throughout the year. The option you choose will depend on the goal of your review. A report generated by one of the three major credit bureaus may not contain all of the information pertaining to your credit history. Therefore, if you want a complete view of your credit record at a particular moment, you should examine your report from each bureau at the same time. However, if you wish to detect any errors and monitor changes in your credit profile over time, you may wish to review a single credit report every four months.

___________________________________________________________

I wouldn't make a hasty decision. See if you can get negative off the credit report. If the underwriter doesn't see it on your credit then they do not know it exists for loan purposes. Whether it is yours or not doesn't matter. They go by what's on the report.

No legal advice.

Matt Devincenzo · Answer

Phillip on a side note/tangent to your original post, you say that the financing issue is due to a collection and that after calling they can't find record of the collection. I would call all three credit bureaus and go through the dispute process. That will do 2 things, first if the collection agency doesn't respond to your dispute within the set timeframe then you can have negative entry removed form your credit report. Second if they do respond to the dispute you will now have good contact info to work on getting this resolved and off your credit.

Either way that would be my focus for now, so that next PCS you can get qualified and buy something.

Phillip Trujillo · Answer

Appeal is that I recently was turned down for a VA loan and the associate helping me made it sound like it was pointless applying for other loans.

My initial desire was to purchase a HUD home, REO, or Pre-REO that's being marketed, but w/o pre-approval I can't even get anyone to talk to me, so I had to become a bit more creative.

Rentals in the area are $1000-$1200 for the same home.  With some cash down and owner financing I'm probably looking at an $850-$900 payment a month for the first 12 months (less than typical rent).

At the 12 month mark, the plan is to refinance. With the numbers I've ran ($120k, 30yr, 4.5%,) we're looking at about a $750/mo. payment and a property that will rent for $1200. Taking $3k/yr into account for repairs, we'll be putting $250/mo into the separate account and cash flowing $200.  I realize at a $120k purchase price it is only 1%.

Long story short: Not having to rent/ be temporarily homeless, $200/mo cashflow, "foot in the door."

Phillip Trujillo · Answer

Thank you so very much to everyone that's replied!

After doing more research here on BP and hearing what y'all have to say, I think I am going to walk away on this one.  Seller and I aren't seeing eye to eye on numbers and as stated above, it's really not a deal. It's more me trying to get get my family into a property.

I"ll continue my search and perhaps come across something a bit more distressed/lower priced or with a little more motivation from the seller. Either way, I'll keep all of you in the loop! Thanks again everyone. I learn something here every single day.

Anthony Hornbeck · Answer

I'm no expert, but you want to re-assess your expenses. Do a forum search on the "50% rule."

Some expenses to think about:

Who will manage your property after you leave? This can be costly and often costs 1 month rent to place a tenant and then a percentage of income (~10%) per month.

Take into account vacancy. I see 1 month (~8%) used often.

Does the $750/month take into account property taxes and insurance?

Not trying to be a negative Nancy, I just purchased my first property a bit on the high end and didn't fully think about expenses and exit strategies in the long run.

Happy Hunting!

Rick Baggenstoss · Answer

I personally don't think you've found a great deal.  If your credit were a bigger issue, then this deal would look better (than nothing).

However, with some work and a little time, you could repair your credit and get a better house for the money.  Just as importantly, your time frame in Warner Robins is short.  It's not a great market and it sounds like you haven't spent enough time there, if any, to get to know it.

In a year, you'd be moving away, still on this lease contract hoping interest rates are not 5% or 5.5%.  If they are, then this became a bad investment.

I'd get a deal on a rental, save some money, focus on the getting your financial house in order, continue to learn as much as you can about investing, and look for a better income producing property you can finance.

Getting your finances, including your credit in good shape, is really the best *first* thing to do while you read/learn.  If this were a great deal or a very good deal, then you would hear more encouragement to find a way to get it done.

In a town like WR, there will be plenty of distressed sellers/properties.  You'll be an insider. Get ready for a great deal.

Rick

Bill Gulley · Answer

The Act will also apply to a land contract. Another issue is that these old time contracts use a quit claim deed in the event of default which is held in escrow, it's worthless as it is seen as circumventing foreclosure laws. Most other issues apply due to underlying mortgages, not the case here. Insurance can be an issue, you may need a contents policy in addition to paying premiums in the contract, but again, without a mortgage, you could insure it. Taxes can be a problem for interest deduction (shouldn't be but some mess it up) but again, that's a mortgage related issue. You can have maintenance problems if a contractor needs the owner of record to do work. City may not look to you as an owner for permits.

In this case a good CFD could be devised, but not by using the common CFD as it would need to be a different installment agreement allowing for a non-judicial process. Doing that, you might as well avoid the other issues and use a note and deed of trust.

Search here for "Dodd-Frank" and "SAFE Act". In your case there is no way around it which is why I suggested the lease-option, but this is a straight option, no guru option stuff!

I suggest you get a mortgage originator and comply with the law or go the option route and qualify later. That charge off can become irrelevant in 2 years with reestablished credit, 3 is more like it. :)

Phillip Trujillo · Answer

Bill-  Thank you for the reply!

We would be purchasing this property to move in. The plan would be to rent it 12 months later (due to some future plans, we'll most likely only be in GA for a year)

VA loan was denied due to a deliquent account being reported. It's a $5,500 vehicle loan amount from my previous divorce. The company it was charged off to "has no record of my loan." When I call the number on my credit report that they're reporting it's a bogus number! We have ZERO debt (other than that deliquent account) and $70k W-2 income.

As stated above, we are super new to all of this so the SAFE act stuff is like another language to me.  I shall do some studying.

Can you explain a bit why the land contract is a no-go for the buyer? I listened to the BP podcast episode outlining LC's, but can't recall the buyer negatives. Thanks.

Bill Gulley · Answer

@Phillip  Trujillo , not real clear, are you buying this as a rental or are you moving in the home? If you're moving in, rents in the area are rather irrelevant at this time, other than an indication of value.

If it's rented, it's not owner occupied and if you'll be living in it, that is going down the path for the SAFE Act issues. If these issues are ignored you may have problems when seeking financing later on as a lender may not apply equities or honor the contract. In  2014 that contract needs to be with a loan servicer as well, the seller can't collect the payment directly. A servicer is a good idea for both of you anyway.

GA has strict laws on mortgage origination as I recall, so you need to see a registered mortgage originator. Debt to income will need to be at 41% or better and if that was the issue with the VA loan, you may not get a mortgage originator to approve the seller financed deal. So, what were the issues with the VA? And you won't have a balloon in 2 years either, even if you could that might not be enough time to cure your qualification problems.

If these matters apply, sounds like they do, consider a lease for 3 years or more.

I say, in this case more because it's non-owner occupied and the seller has no exemption on the sale (but he will have more depreciation to reclaim) and there is no mortgage with due on sale issues. Then do a separate Option to buy contract and you can pay an option price up front that applies toward an agreed price. You can not make payments toward the purchase price in rents or finance the option price without SAFE Act issues again.

Then, instead of making any purchase payment, set funds into a savings account in your name saving for the purchase to meet the equity required to purchase in three + years.

Check with your JAG office in GA for legal advice on any arrangements.

If you won't be living in the property in 3 years, you could form an LLC and purchase as a commercial transaction avoiding the SAFE Act at that time, subject to changes and current laws then, again, ask JAG.

Thanks for serving! :)

Shall we pull the trigger? - Owner financed deal in middle GA

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