Owner Financing Info/Advice Needed

20 Replies

So my wife and I have moved out of our old home about 3 months ago and sadly we are still the owners of that old home so needless to say I am paying 2 mortgages ( not fun ).  

I have an agent who brought me their clients who want to do owner financing. My HOA doesnt allow for normal rentals or leases so offering owner financing I think is the work around for that. I am currently asking $489,900 for the home. Value is in the $650k range.

Here is what they want to offer:  $489k price, 3% closing cost assistance, $5k non refundable down payment, 36 month lease with payments yr 1 $2,850 yr2 $2,950  yr3 $3,000.  

My major concern is the down payment.  Normally on a half million dollar home I would think to get at least $25k down.  Having actual owner financing in place, if they dont execute the terms at the end or they try to flake out and I have to evict them it will ruin their credit.  

Anyone have any additional suggestions for my situation?  I would rather sell it out right but sadly no actual offers yet.  

Thanks

Curt Davis, Real Estate Agent in TN (#00321765)
605-310-7929

Tough call. The market of buyers who are willing and able to pay 3000/mo is relatively small to begin with and nobody likes to hand over a big wad of cash if it can be avoided. 2950/mo works out to be ~6.15% APR. See what you can negotiate to do a larger downpayment or increase their payments per month (closer to 7% or more?) to compensate for the minimal downpayment.

So, they want you to pay $14,670 of their closing costs but are only putting $5,000 down?  Dang, can I get that deal?  :-)

if value is 650k like you say and you're only asking 489k, can't you just sell if to someone else?  I'd think with that deal you'd have plenty of buyers.  

704-905-6510

You are right to be concerned about the purchaser only wanting to give you a deposit of $5k. I personally think you should ask for more. There is no way they should expect to get into a house that price with so little money out of pocket. Something may be fishy, which may be the reason they want you to owner finance in the first place.

Secondly, this is really a lease option anyway, so you are taking the risk of taking your house off the market for however long they decide to stay (even though you will be getting the $3k per month). What if they do not take care of the home? You have to consider what type of repair can be made with just $5k if things go wrong. The deposit is all the real protection you have.

A few things, what you describe is a lease option, not owner financing, your HOA will probably still have a problem with it if they looked at it. True owner financing will transfer ownership.

This deal sucks for you.  You should be getting a premium for owner financing it, not taking this kind of beating.  If you are willing to owner finance it, Market it that way- put an ad in Craigslist that says something like:

Owner Finance Luxury Home

Easy Qualify owner finance this great executive home!  House has blah blah blah, in a great neighborhood with top quality schools blah blah blah.

Owner finance with only 5% down!!  NO BANKS.

You can list out the basics of your terms, but I'd hit it for full value or close to it and work from there.

There are plenty of people out there that make real money that cant get a loan because they are self employed and hide income and such.  I couldn't qualify for a mortgage right now.

A few things on what you are doing.   By discounting it that much people in that price range generally don't thing "what a deal!"  they think "whats wrong with it?"  They also may be searching $500/600k and up and missing yours entirely because they are trying to target their ego.

You have become a motivated seller.  I dont know your financial state, but I went broke paying mortgages on empty houses (a lot more than $500k worth), so I feel ya.  Still gotta look at your risk, though.   That $5k down payment disappears if they skip a payment and you have to evict, and I'm guessing painting a $500k house in Memphis would run you that- what happens if you have to replace the carpet or some cabinets?   I've done 1% lease options trying to stop the bleeding and they almost always came back to bite me in the ***.

If you can afford it, I'd say market it right and see what happens.  Its a smaller market in that price range, but I'd still think the owner finance angle will get you some interest pretty quick.

If it were me and I was considering this, I'd say I needed more down payment, but could finance it in, then bump their payment.  You also want to drive by where they are living now and see if they live clean or will trash your place.  

Are you sure of your value? If so, I wouldn't sell at these terms until you marketed it a higher price with O/F. If there's a glut of $600k houses in Memphis, that may not be your true value. Anwyay, if you make them easy to buy they will be easy to sell...

@Curt Davis

You will not be able to do "true owner financing" if you still have a mortgage. I have completed 9 such deals. That's how I was able to get into real estate. The due on sale clause will come back to bite you. Is your mortgage assumable? Maybe they can assume it and then still cut you a check every month for your profit? Other than that you could write a contract that would allow them to pay off your mortgage monthly and once it is paid you then sale the house for strictly the profit you would expect and then deed the house to them with only the profit as a "true owner financed" deal. Sounds like your HOA is really making this difficult?

@Darrell Shepherd

My closing attorney will be doing the paper work as an actual owner finance transaction.  I am describing it like a LP but it will all be done right for OF.   I also originally listed it for $649,900 as the home across the street sold fast for $695k.  I keep hearing how nice my home is but its too big ( 6,740 sqft ).  I have had several open houses, I have invested over $60k into renovations and upgrades.  I feel like I have marketed it right for our area. 

@Dewayne Gammel

Mortgage is not assumable. I have thought about the due on sale clause but think of all the people who transfer the home into their LLC right after they close with bank financing and never have a problem. I have read it only becomes an issue if you miss a payment, then the bank might look into it.

Thanks for all the feedback

Curt Davis, Real Estate Agent in TN (#00321765)
605-310-7929

@Curt Davis

I'm still confused. The buyer would not be assuming loan, but you would also be keeping an mortgage secured by an asset you no longer own after the sale? Is he writing up a subject-to contact? I've never seen it done where seller keeps responsibility of the original mortgage while the buyer gets a totally different owner finance note for the full value. It's like there are 2 notes for full value backed by the same asset. You can't foreclose and make both notes whole.... someone is going to be left holding the bag if someone defaults. Why would you keep a mortgage on an asset you no longer have control of? Maybe I'm missing something.

Do you mean a 36 month term? Because if it's a lease option, it will still probably violate the HOA. As far as evicting them goes, you can't be concerned about their credit. If they don't execute it, they can move out and save their credit. If they don't, well then, that's on them not you.

In the end isn't this still just a lease with an option to buy at the end of 36 months? Seems to me that would still go against the HOA rules, IF they look into it you could have issues. If it's not you will have to look at the due on sale issue as stated above by Dewayne Gammel. As for the deal itself, I would worry about a $5,000 deposit on a big home. If they do not buy the house at the end of the 36 months you would more than likely have to paint everything and do repairs well in excess of $5,000 for normal ware and tare to bring it to marketable standards and your in the same position just 3 years down the road. Who knows what will the market look like then.

Why do you think the house isn't moving? If it is priced $150K under market it should move. 

@Jeff Bridges @Andrew Syrios @Thomas B.  

I agree this does look and smell like a lease purchase.  I have never done a transaction like this so I consulted with my closing attorney and this is what he has told me we would have to do.   

To get around the HOA issue there would be a note created for 36 months with an interest only payment made to me as I will hold the note. Home will be recorded in their name just like when someone quit claims a home to their LLC. They are putting a non refundable down payment so the paper work and language along with an actual closing at my closing attorneys office makes this owner financing.

I have thought about what would happen if they defaulted.  They would either transfer the home back to me and move out or I would have to file for foreclosure on them which will destroy their credit.  

I am still unsure if I even want to do this but I am tired of bleeding the monthly payment for this home.

Curt Davis, Real Estate Agent in TN (#00321765)
605-310-7929

Still confused here: what would the total of the note be? the purchase price? how would you be able to create a note secured by the property when its already secured as collateral for the first mortgage?

If you tried to foreclose on them, your forclosure would have to be subject to existing liens, and you would be a junior lienholder to the bank that holds your original mortgage. All parties with a lien on the property would have to be made whole before a foreclosure court would allow you to take back ownership. The bank will demand the full amount due once they found out you no longer own the collateral for the loan. How would you get out of that situation? It looks bleak for you in that scenario....

All I see is fuzzy math. 2 loans for twice the appraisal value of the property= someone will get screwed.

People transfer properties into LLCs at times, but the fundamental idea is that it remains in control of the person via the LLC structure. You are losing control of the property by selling it off. Also, just because you've read about this, doesn't mean its a wise idea for everyone.

Can you get a short sale specialist and see if you can sell for less than your loan balance? Continue marketing it and don't do this owner financing deal. It looks grim based on what you presented.

I have a couple of rentals in the 400K value range and the ongoing costs on the home can be high as I am sure you know Curt. So the concern would be if they only have 5K down they really can;t afford the house so you carry all the risk of damage by a tenant and very little likelihood of a sale at the end.

I would rent it out before I would do this deal man.

(901) 264-8674

@Dean Letfus     

If my HOA would allow me to do just a normal rental I would as I love the house. I have to try and get creative and find the work-around so thus I have thought about OF or Land Trust.

Still deciding.  Wish I could just sell.

Curt Davis, Real Estate Agent in TN (#00321765)
605-310-7929

@Curt Davis  

$5K on a $500K home ... 1%?   I'd be looking for at least a 5% (25K), preferably 10% (50K) downpayment.

1(506) 471-4126

@Curt Davis  

Hey man, you could always overthrow the HOA president and then write new by-laws!! That seems like a feasible option in this case... Figured you needed a laugh!

Originally posted by @Curt Davis :

So my wife and I have moved out of our old home about 3 months ago and sadly we are still the owners of that old home so needless to say I am paying 2 mortgages ( not fun ).  

I have an agent who brought me their clients who want to do owner financing. My HOA doesnt allow for normal rentals or leases so offering owner financing I think is the work around for that. I am currently asking $489,900 for the home. Value is in the $650k range.

Here is what they want to offer:  $489k price, 3% closing cost assistance, $5k non refundable down payment, 36 month lease with payments yr 1 $2,850 yr2 $2,950  yr3 $3,000.  

My major concern is the down payment.  Normally on a half million dollar home I would think to get at least $25k down.  Having actual owner financing in place, if they dont execute the terms at the end or they try to flake out and I have to evict them it will ruin their credit.  

Anyone have any additional suggestions for my situation?  I would rather sell it out right but sadly no actual offers yet.  

Thanks

 Never SELL your home on owner finance with less than 10% down.  Esp a $500K home.  you are not renting it.  You are SELLING it.  And your recourse if they default you need to understand.  See a lawyer to CYA.

First go see the HOA president and get something in writing that it ok to sell that way. Get it in writing.

HOA's S U C K!

Like asking your mom or dad when your sixteen if you can drive to the Friday night keg party.

WDYT @Dev Horn  ?

I too think HOAs  S U C K !  Ha ha

I can understand the frustration with the 2 houses payments, but I agree with Brian that you gotta get some cash out of this deal up front - 10% down.  Then you'd have some reserves if things go sound.  As proposed, it sounds like you could be left hanging at some point in the future...

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