Seller finance or Lease Option?

Question

I rent out a townhouse and the current tenant want to buy it.  The property is worth about $185k and my current mortgage balance is around $150k @ 5.875%.  Tenant has agreed to paying $210k at 6.5% with no down payment.

Obviously, he'll be upside down on LTV but they're ok with it because they can't get traditional financing and I don't want to sell for $185 (minus RE commissions).

Any red flags with buyer being immediately upside down?
Can I seller finance when I currently have a mortgage (Utah)?
Would a Lease Option be a better solution?

I'm obviously new to this site and appreciate your ideas.  I'm only a landlord by "mistake" (rented out property because I didn't want to sell at deflated price when I moved out) so my experience is low.

Bill Gulley · Answer

Welcome to BP Rob! Both seller financing and Options have been cover fairly well in other threads so do some searching for more information.

NEVER DO SELLER FINANCING WITH NO MONEY DOWN! (Not yelling at you, just emphasizing my advice) put another way, no cash in hand no deed!

Your home is now non-owner occupied and the SAFE Act may apply to any financed deal you do. The new law requires a mortage originator to underwrite your deal, check on Utah law, better yet, see your attorney.

Yes, there are red flags. These deals require alot of hand holding to make them successful and what you said indicates that you are not familiar with real estate or underwriting deals yet. Doesn't sound like you are in a position to do any hand holding and see to it that the buyer will be able to qualify in the future.

Don't let your despiration become a motavating factor to do a deal, especially a bad deal. If your buyer has no money and no credit, I'd suggest you move on to someone who has at least one of these assets.

In situations like this an option price should first be paid in full before they have any right to purchase, that option can be financed. Always make sure that your option agreements state that any amounts paid are first applied to rents, then to any late payments or other charges and then to any option price financed.

And let's say that this buyer is the slickest con-artist tenant. They pay rents with an option and 9 months later stop paying you. You try to evict and they claim they have a purchase agreement with an option and the judge requires you to foreclose, that could take a long time without receiving any rents. So, money down is important.

If you need to keep this tenant, I'd suggest you do a lease for a year, agree that if rents are paid as agreed that an option will be done with a option price paid at that time at a sale price agreed to today. If they fail to save the down payment then you won't do the option.

There is an old saying in banking that you can't make a bad loan turn good, which is usually the case without alot of work. If you take someone with really poor credit, depending on the situation (excluding medical bills for example) what makes you think that they will improve their track record in three of four years?

If your market is limited and you need to keep these people on the hook, I'd really suggest you take these points to your attorney and talk to them. Good luck

Kenneth LaVoie · Answer

Hi
My knowledge is not extensive here but I believe the cons of seller financing are that it may take 2-4 months to foreclose whereas with a lease option, they're still tenants and tenant landlord law would apply (2 weeks to 45 days depending on how quick you foreclose) -- of course, with lease option they should have some sort of down payment. if they cannot come up with 2-4k they are probably living pc to pcheck .... the first "blip" that comes up, you might be facing late payment. I think the key here, is finding a solution or tweaking your current solution so that it is UNDESIRABLE for them to walk away. If they have no dp and their credit is already not so good, they might walk away fairly effortlessly if the situation becomes undesirable or difficult for them. If they've given you 3,500 they might think twice ...