All Forum Posts by: Ross B Adams

Whichever path you choose, be sure the buyer has skin in the game from the beginning. That can be up-front option consideration or down payment. 10% or more of the purchase price is best. 

When I buy existing seller financed loans, I underwrite as though the loan will fully amortize. Quite often the buyer's financial situation doesn't improve to make the balloon payment. Other times a tight lending environment coincides with the maturity date. You can set a 5+ year balloon, but be prepared to extend as that date approaches. You and the buyer can negotiate a fee if you extend. 

If you go the option route, 100% of each monthly payment may be allocated toward consideration rather than rent. Talk with a knowledgable advisor, but there's a slick tax strategy here. Option consideration isn't taxable until the option is exercised or expires. Therefore if the option doesn't exercise for 10 years, but you've received consideration up until that time, you haven't been required to pay cap gains or income tax for 10 years, but you have had use of the funds. Again... talk with a knowledgable advisor. 

Finally, in Michigan you may sell using a land contract. Your buyer will receive the right to live in the property following closing, but you will retain title. There are some advantages which address concerns you raised, but fewer and fewer these days. Highly state specific and more regulated every day. Consult an Attorney. 

He will still need a down payment, it will be deducted and applied to the next down payment when he does a cash out refi. I would keep him on the loan as long as possible, if you're the bank you will make a lot more money. 

@Ross B Adams

If it’s owner occupied check laws as typically balloons cannot be shorter than 5 years.

Also depending on state if you do a lease option and payments go toward home price some states will contest the borrower has equity and thus you would need to foreclose - so be careful

Hi @Ross B Adams, welcome to bigger pockets forums! :)

I am not a lawyer, nor am I not qualified to give you advice, but your post got my attention and please take it with a grain of salt.

From the question, it seems like you are trying to help him by selling the property, and that's wonderful of you. :) However, the decision is ultimately "up to your situation and what you want to do." in MHO.  This is only an assumption, but it seems the buyer has experience working as a contractor with the seller, and the seller wants to help the buyer to purchase the property.  However, I consider this a business no matter how close you are to this person.  Let me explain what I mean below:

If I attempt to answer your questions in order, the followings are my opinions (with "lots" of assumptions):

When he gets a loan in x month (whether in a month or 30 years), I assume a conventional lender provides the loan.  If this is the case, then "yes," he will probably have to give a down payment.  But the cost for him to get a loan does not stop there.  As you might already know, there will be a closing cost, title transfer fee, mortgage insurance, attorney fee, and lender fee, to name a few examples.  If a real estate agent is involved, then a fee will be paid to both seller's and buyer's agents (typically between 2-3% of the purchase price).

The next question was about a lease option.  Would it be a better choice?  I am unsure since this depends on the subject (the seller or buyer).  For example, for the buyer, the lease option might not be so great in housing market value in decreasing trend, but it will serve better for the seller.  For example, if the house is supposedly $300k now, the lease option is to purchase the home at a pre-determined price in x years.  In addition, the seller and buyer must agree on the house's worth in x years.  No one can accurately predict the value of the property in x years.  Perhaps, more accurately predictable in the next 1-2 years than in the next 9-10 years.  We don't know if the property will be worth $250k or $350k in 1-2 years or $100k or $500k in 9-10 years.

Lastly, for the seller's finance.  I am unsure if the buyer cannot afford to pay a down payment; the rule is pretty much determined by whatever works for you and the buyer.  "too complicated to transfer the deed to him..." seems to indicate "to transfer title to him..."  To clarify some of the definitions, I found the following on this page:

The first is for the seller to "take back" a mortgage on the house.  The buyer, sign both a promissory note (promising to repay the loan) and either a mortgage or a deed of trust (allowing the seller to foreclose if the buyer fails to pay).  In return, the seller signs a deed transferring title to the buyer.  Because the buyer hold the title, the buyer can sell the house or refinance.  But the buyer must keep making the agreed-upon payments to the seller.

I have a question about the buyer's statement.  What situation will change in 12-18 months to enable him to qualify for a loan...?  Is it that he is saving the money towards the down payment?  Is it that he will finish his current job and expect a chunk of money to come to his bank account? Or does he not qualify now due to bad credit or trying to pay off his debt?  What is the reason that he is not qualified now, and where is his confidence coming from that he can get a loan in 1 to 1.5 years?

Is he buying it as a first home? It seems he is not buying the property as an investment since he is paying his mortgage. If this is the case, can he apply for a loan provided by Federal Housing Administration (FHA loan example) and pay a 3.5% down payment toward the property?  Once he has a loan and decides to refinance later, he does not need to pay a down payment (assuming the loan amount is less than the market value and the interest rate is lower).  Can he house hack by purchasing a quad-plex using an FHA loan and live for free for a year?

If either the seller or the buyer is interested, reading a book might give you more options to explore.  I think  by Brandon Turner will be a great starting point.

Again, these "seller finance" terms depend on your situation and what you want from this "contract" between you and the buyer.  I hope the above makes some sense and find it somewhat helpful.  If anything is confusing, please let me know, as I am in the process of improving my writing skills.

Thanks for taking the time to read this far, and good luck to both of you (the seller and the buyer)! :)