Pitfalls of buying a home on owner finance terms
Investor · Clarksville, IN · Member since 2012 · 226 posts · 96 votes
I found a house that is being sold on owner finance. The numbers work, with about $300 a month cash flow using the 50% rule and 2% rule.
Question is, what are the pitfalls of buying on owner financing? What must I make sure is in place to protect me and the property from dastardly deeds of the seller at any point?
Installment sales, by any method of seller financing can have several issues that can be a problem for a buyer.
If any method is used where title is not transferred the seller may encumber the property, creating liens under several instances. The seller can sell or pledge or lose their interest. For example, I have purchased properties sold on contract for deeds subject to the contract at a lower price.
Depending on how the transaction is accomplished you can have insurance and tax complications. If lease-options are not done properly the equity established may not be recognized by lenders causing sufficient equity not to be available for a refinance.
Contracts and notes that are not specific as to the application of payments can cause accounting issues.
Sellers who serviced their own contracts could pull shady stunts. Take a check and toss it in the trash and claim it was never received, invoke late fees or worse call the obligation in default, if at the time the borrower discovers the non-payment if they were not in a position to make the payment they could end up losing the property under the contract. If they can't bring a payment up to date they usually don't have funds to get to an attorney to fight in court either.
There can be other issues as well, unique to the type of contract, but these risks and matters can be managed or even eliminated by a well written agreement or note. "We written" that may be hard to come by with all the old boilerplate forms used. I suggest you have your attorney take a look at as well as a finance type familiar with underwriting and servicing aspects. :)
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If by owner financing, you mean a sale and deed transfer with you giving a mortgage/deed of trust-whatever it is there- not much other than foreclose. If a contract for deed or lease purchase, the seller retains title and any judgments would attach, he could remortgage (maybe), etc.
Installment sales, by any method of seller financing can have several issues that can be a problem for a buyer.
If any method is used where title is not transferred the seller may encumber the property, creating liens under several instances. The seller can sell or pledge or lose their interest. For example, I have purchased properties sold on contract for deeds subject to the contract at a lower price.
Depending on how the transaction is accomplished you can have insurance and tax complications. If lease-options are not done properly the equity established may not be recognized by lenders causing sufficient equity not to be available for a refinance.
Contracts and notes that are not specific as to the application of payments can cause accounting issues.
Sellers who serviced their own contracts could pull shady stunts. Take a check and toss it in the trash and claim it was never received, invoke late fees or worse call the obligation in default, if at the time the borrower discovers the non-payment if they were not in a position to make the payment they could end up losing the property under the contract. If they can't bring a payment up to date they usually don't have funds to get to an attorney to fight in court either.
There can be other issues as well, unique to the type of contract, but these risks and matters can be managed or even eliminated by a well written agreement or note. "We written" that may be hard to come by with all the old boilerplate forms used. I suggest you have your attorney take a look at as well as a finance type familiar with underwriting and servicing aspects. :)
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If any method is used where title is not transferred the seller may encumber the property, creating liens under several instances. The seller can sell or pledge or lose their interest. For example, I have purchased properties sold on contract for deeds subject to the contract at a lower price.
Depending on how the transaction is accomplished you can have insurance and tax complications. If lease-options are not done properly the equity established may not be recognized by lenders causing sufficient equity not to be available for a refinance.
Contracts and notes that are not specific as to the application of payments can cause accounting issues.
Sellers who serviced their own contracts could pull shady stunts. Take a check and toss it in the trash and claim it was never received, invoke late fees or worse call the obligation in default, if at the time the borrower discovers the non-payment if they were not in a position to make the payment they could end up losing the property under the contract. If they can't bring a payment up to date they usually don't have funds to get to an attorney to fight in court either.
There can be other issues as well, unique to the type of contract, but these risks and matters can be managed or even eliminated by a well written agreement or note. "We written" that may be hard to come by with all the old boilerplate forms used. I suggest you have your attorney take a look at as well as a finance type familiar with underwriting and servicing aspects. :)
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These are exactly the issues that I am concerned about. Nothing about the seller gives me cause to be alarmed, except that he is a human, and humans sometimes are unethical.
Current owner holds deed, so there is no current financing on the property. I will be all in at about $12k with repairs, so I am really not interested in loosing the money if he decides he wants the repaired property back and wants to start playing games.
Could I not place a $12k mechanics lien on the property after repairs which would prevent him from encumbering the property? This is not a high dollar property and I will have it paid for in 5 years. I could release the lien at transfer of deed.
Now you're losing me, if he sells, he deeds it to you and has a deed of trust, in that case the insurance and tax issues go away, installments can be different. If you put a servicer in that collects payments the other issues go away. If he doesn't have a mortgage, that clears the way for a note and deed of trust, the best way to buy it.
What are the details? What were you thinking of doing?
The seller has the deed of trust filed to secure his note.
:)
if he doesn't have any current financing then you should get the deed, and he'll get a mortgage/deed of trust. You'll own the property just like if you got a mortgage from a bank... Bill what did I say that was confusing?