Got offered an owner financing deal for rental property - advice?

Question

Hello BP friends! We have been offered an owner financed deal to finance a property for a rental that has a concrete block home and a mobile home. Although they are on the same lot, they do have separate addresses. The couple is older and just looking to get out of it. These are in  a rural area and cheap so getting bank financing was impossible (not to mention they won't loan when there is a mobile home involved.)

Any advice you can offer about things to look out for, be aware of, take into consideration when it comes to being the on the buyer end of owner financing so we can make an informed decision? We haven't done this before and definitely don't want to get screwed. Thanks for any feedback!!

Ben Leybovich · Answer

@Zoe Mercier - @Paul McCormick Jr seems to be the one with some insight in this thread :)

I don't know whether this is a good deal or not, though I am guessing since the owner is compelled to attach financing to it, the deal must not be so easy to exit. But, what I do know is that you didn't think through the exit.

Zoe - if you don't have an exit, you've got nothing :)

Pancham G. · Answer

@Zoe Mercier do you have the details on numbers? Without numbers, its very difficult to say whether its a good deal or a bad deal. Not all owner financed deals are good.

Paul McCormick Jr · Answer

@Zoe Mercier  Just trying to be devil's advocate here, but what would your exit strategy be? If some potential buyers of the property can't get financing how would you get out of the property if need be? What would the process be for dividing the properties or changing the zoning?

I am also curious as to how this seller financing would work as well. I thought that usually you could negotiate more with seller financing as to the terms, down payment, interest rate, etc. Because they are having problems selling to "normal buyers" I would say you might be able to work something out beneficial to both parties if you wanted to get creative.

I  also thought that the insurance, taxes, as well as the current leases can be figured out during the buying process/due diligence and that something can be put in the purchase contract regarding what to do with those items going forward.

-Paul

Zoe Mercier · Answer

@Paul McCormick Jr, I thought the same thing as to the flexibility of the owner financing. I am anticipating putting $5,000 down but didn't know what to expect for the interest, does it usually follow the industry, for example so I have a general idea of what to expect or try and get.

Good question about the exit strategy. I will need to really think about it, thanks!

Jeffrey H. · Answer

What are the terms of the owner financing?  That will let you know your monthly payment and renting these out will cover your debt service.  Typically something like $70K purchase price, $10K down, 6% interest rate, 20 year ammortization, 10 year balloon.

Under these terms this 60K loan would have a monthly payment of $430 per month and you would make a little money on the deal each month.  You need to see if that margin meets your investment goals and can give you enough contingency for a major repair if and when it happens.

Zoe Mercier · Answer

Also, I'm curious about how these deals usually work. Do you expect to pay a similar interest rate to what the mortgage industry is? Who is responsible for the insurance, taxes, etc. Or if the tenant has some major issue or gets litigious. When you assume a property with tenants, do you update the lease then with your own or do you need to wait until the lease with the current owner runs out? Any advice for developing the contract? Thanks!

Zoe Mercier · Answer

Yes,sorry and thanks @Ben Leybovich and @Pancham Gupta!

65 or 70 for the property. The house can bring in about $700, maybe $750 in rent and the mobile home around $500. We are thinking that if the monthly payments are around $700-$800 then the mobile home will be the cash flow until we decide to maybe do something else with it like build a duplex or something or sell if we can divide the properties at some point. We'll need to do something if we ever want to sell because we may run into the same issue these owners are with financing a property with a mobile home-as buyers we couldn't get financing so they were limited in who they could sell to.

Ben Leybovich · Answer

So is it a good deal?

Got offered an owner financing deal for rental property - advice?

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