Qualifying a buyer for owner financing

[Jeff G.]

Hi all. 2 partners and I are trying to sell a SFR via owner financing, and we could use some guidance on what we should / can / can't do regarding qualifying a buyer. Credit check? Current employment? Employment history?

I've done some searching on this site, and still am while awaiting replies, but we're in a bit of a hurry so I thought I'd also post the question.

Thank you.

[Steve Vaughan]

A lot depends on whether you are selling to an owner-occ or investor.  Seller financing to owner-occupants needs to comply with the Sage Act and Dodd-Frank.  I would ask an RMLO to qualify them.  

[Brian Fouts]

Definitely RMLO if owner occupied is your buyer "type."  If you are originating a loan, then you must abide by Dodd Frank.  We use an attorney to draft the loan docs.  If investor, then it would be their track record, bank statement for proof of cash, etc.  Lots of ways.

If Owner Occupied, then background check, employment history, credit report, etc.  You are trying to identify their willingness to pay and their ability to pay.

Also, have they owned a home before, do they currently own, why can't they finance traditionally.  I also want to know where they currently reside and see the condition of that property.  Are they maintaining it or is it trashed because that is how they will treat your property.  

[Kevin C.]

I work with a couple lenders who will run the buyer through their system and see how they would qualify for traditional financing. This provides a great picture into the buyer. I would also run a background check to make sure that they are not currently involved in any litigation that may jeopardize the asset. 

If your terms have a balloon payment, this will help you see if they are able to make the payoff requirement in the time allocated in the contract. If their credit score is sub 500 and they have a short-sale or foreclosure, they most likely won't be able to refi and pay you off in 2-4 years. 

On the other hand, if you are looking to make money on the interest for a prolonged period, you may include a prepayment penalty. Figure that they have to carry the note for at least 5 years or pay the difference in lost prorated interest if they pay off the note prematurely.

[Curt Smith]

I have a free ebook I wrote from m own seller financing steps following dodd frank.  Connect with me so I can get it to you.

Never seller fianance a property you haven't rented for a few months.  IRS regs on installment sale tax treatment is:   tax on the gain of the house is due in the year of sale for inventory (buy, fix , sell),  which will kill you.  

Rent the home for a few months so it's investment property.  Then you can take installment sale tax treatment.

[Brian Fouts]

Buyer questions to help qualify them...

What is your price range?

What is  your budget for monthly payments?

Have you owned a home before?

Do you need to sell a home in order to buy a home? 

What is  your time frame, when are you looking to move?  This tells you if they are a motivated buyer.

Do you have a lease currently?  If so, when does it end?

How many are in your family?  Do you have school age children?

Do you rent or own your current home?  Rent amount?

How much can you comfortably afford to put down on a home purchase?

Is there a particular area or location you prefer?

Do many beds, baths, sf do you need?

Is there anyone else that will be part of making a home buying decision?

Are you employed?  If so, where and how long?  Same for the spouse.

How do you communicate best?  Email, phone, etc.

Last, try to understand their main human need.  Certain, uncertainty (variety), significance, or love/connection.  Usually, the best home buyer is a person with certainty and love/connection as their main human needs.  This means security, a viewable future, etc.  People that are uncertainty/variety driven don't like the "tied down" aspect of owning a home, more likely to default or be short term.  Significance driven people make it all about them, buying a home needs to make them feel important.  This all is just my opinion, but knowing how best to communicate with someone as well as know their focus is a good thing.

Last, you need to know your local laws and guidelines as some of the above questions can put you in hot water with local codes or Dodd Frank, etc.  The above questions are examples of ones I, or my partners, have asked depending on our situation.  Being a licensed agent versus lender versus investor can have an impact as to how you ask certain questions.  

[Curt Smith]

@Brian Fouts

Nice list Brian, but you dipped into Federal Fair Housing protection issues you can't ask about:

- How many are in your family? Do you have school age children?

You can't ask about number of children, ages etc.

https://www.google.com/search?sourceid=chrome-psya...

Start with typical landlord renter screening, credit / eviction / pays debt on time check, verifies employment and income.

Since you are heading into financing, you need to follow Dodd Frank (which just makes sense BTW) you need to doc debt payments, income and calc a DTI debt to income ratio. Best to be under 50%, ideally 43% as is recommended by Dodd Frank.

My tactic as a landlord who does 12 months rent to own, taking 1/2 the down payment up front as the option fee, then the other half before closing after 12 months.  Which gets you into Long term cap gains, installment sale tax treatment.  I have as a apart of my landlord screening I take a 1003 app (standard FANNIE loan app).   Google;  1003 loan app.  

[Steve Babiak]

Originally posted by @Steve Vaughan:

A lot depends on whether you are selling to an owner-occ or investor.  Seller financing to owner-occupants needs to comply with the Sage Act and Dodd-Frank.  I would ask an RMLO to qualify them.  

If only that Act was sagacious ... :)

Instead of "Sage Act" that typo should be changed to "Safe Act".

[Brian Fouts]

Correct @Curt Smith, there are some "questions" that you have to know if you can and cannot ask directly.  Some you will find out in the course of a conversation.  Can't discriminate either, etc.  

One time, we had a guy looking at a rental home.  During the walk through, we had a good conversation going and he mentioned that his wife and their 5 kids would be moving in.  It was a two bedroom house.  Interesting...

[Curt Smith]

My rental application asks for all the occupant info, who, names, ages, jobs, income, debt how much, savings, SSN, drivers license, date of birth and a signature that gives me permission to run a credit check.  I use MrLandlord.com.  A pain to setup but you get the real credit report.

Your situation of 7 folks in a 2 bedroom, in my experience in variably falls out in the credit check step or past evictions OR the calling past landlords.

Have a written qualifications list that includes:

- no evictions

- no charge offs of past debt (I see utility charge offs all the time.  I think the utilities ding poor people's credit report for some racket they do, so I no longer view a $1500 charged off cell bill to be a consideration.  First of all it's impossible to run up a $1500 bill before being cut off, so something is up re these companies)

- all past landlords must be called and satisfactory rental history.

(etc)

This is all reasonable. But even good folks have a spotty history that upon personal interview and other things passing, you wave.  Folks that aren't a good fit fail one or more of the above reasonable filters.

[Jeff G.]

Originally posted by @Curt Smith:

I have a free ebook I wrote from m own seller financing steps following dodd frank.  Connect with me so I can get it to you.

Never seller fianance a property you haven't rented for a few months.  IRS regs on installment sale tax treatment is:   tax on the gain of the house is due in the year of sale for inventory (buy, fix , sell),  which will kill you.  

Rent the home for a few months so it's investment property.  Then you can take installment sale tax treatment.

Curt - I've owned the place since last December, so 10 months. It's been rehabbed over that time & hasn't been rented. Will the tax on the gain as you mention still apply? i.e. does that 10-month ownership equate to the same as having rented it out?

[Curt Smith]

Jeff, your house is still inventory.  Sorry!  You have to rent it first.  To be safe it'll be better to rent for 12 months to show that the rental was not a sham.  Better you find out now at least!!  :)

Or just drop the price and dump it to a financed buyer.  Use craigslist.org / postlets.com to push sale ads to all the usual places for free.  Save the 6%, but sell for cash via a financed offer.