Owner financing...pros/cons, caveats?

[KFC911]

I've just begun kicking this idea around after a tenant has expressed interest in purchasing a SFH I own outright. Of course I have to perform due dilligence, but want to see what the PPOT braintrust has to say. As in all of my dealings, I'm not looking to take advantage of anyone, desire to protect "my" interests, and continue the "income stream" while coming up with a "win-win" for both parties. I've only talked briefly with my tenant (a LEO) before the holidays, and his wife is an attorney (DANGER ). Have any of you guys/gals done this, and what have you "learned" in the process...all suggestions and ideas are welcome...TIA!!!

ps: I do NOT want to be in the LL business indefinitely...it's provided a nice hedge, but man does it suck at times!

[genrex]

Why can't they get financing through a regular lender?

[KFC911]

They probably could (if not right now, then eventually if they do not have a down payment at this moment). He expressed his "interest in buying eventually", which took me by surprise, and I've just now begun to consider my options.

[recycled sixtie]

Well KC911 I understand what u r trying to do. Maintain control by financing the house yourself. Why not rent to own and that way you maintain title and control?
If you finance yourself what would happen if the "new owner" defaulted and how do you get your house back? As the above poster says, what is wrong with them going to the bank? Tenants are tenants for a reason. Watch out on this one. Rent to own(properly drawn up with a lawyer) or bank financing would be my choices

[WIL84911]

Originally Posted by recycled sixtie

Well KC911 I understand what u r trying to do. Maintain control by financing the house yourself. Why not rent to own and that way you maintain title and control?
If you finance yourself what would happen if the "new owner" defaulted and how do you get your house back? As the above poster says, what is wrong with them going to the bank? Tenants are tenants for a reason. Watch out on this one. Rent to own(properly drawn up with a lawyer) or bank financing would be my choices

They probably do not qualify at the moment.

[Rick Lee]

There are a lot of BS junk fees lenders charge that owners who finance would not. Of course, you run the buyer's credit and he pays for an appraisal and flood cert., title work, etc. But there are so many junk fees with lenders that can rack up into the thousands - doc. prep, underwriting, loan origination, tax service and plenty more. I'd look at owner financing just to avoid all that BS, if possible.

[Rot 911]

Owner financing is a win-win for the seller. Not so much for the buyer. You have to make sure that you have a priority lien on the property and that your lien is recorded. This is a secured credit loan with the credit being the house. They fail to make payments, you have them evicted and you start over. Only downside is the same as that with a renter, takes a while to get them out and they may destroy the property in the meantime.

[WIL84911]

Originally Posted by Rot 911

..... Only downside is the same as that with a renter, takes a while to get them out and they may destroy the property in the meantime.

Good point. You can factor that cost into the initial down payment as an added protection.

[wdfifteen]

Originally Posted by Rot 911

You have to make sure that you have a priority lien on the property and that your lien is recorded. This is a secured credit loan with the credit being the house.

This is a very important step. Of course, you'll hire a lawyer to write up this contract and he'll certainly to do this step - right?

[wdfifteen]

Originally Posted by Rot 911

Owner financing is a win-win for the seller. Not so much for the buyer.

Under some circumstances it can be win for the buyer. Many small businesses structure their expenses to minimize reported income and taxes. The cash flow of a successful business can look abysmal on paper and banks won't touch them. A seller finance can be away around that, but the seller has to be very careful to make sure he understands the buyer's true financial situation.

[Z-man]

Years ago, my dad bought a fixer-upper in the Poconos and over the course of a year or so, turned it into a new little starter home. When he sold it, he went the owner financing route. The money he got from the new owner was what he used to help put my sister and I through college. (We also had some grants and scholarships as well, of course)

If you have a decent buyer who checks out, and just wants to save some $$, owner financing is a viable option, and gives you, the seller a significantly more amount of $$ in your pocket, if you don't mind waiting the 15-30 years to realize this income. And if the buyer defaults on the loan, it is on you to evict him.

In your case, it sounds like the owner is decent, you have a history with him. If your place is kept up nicely for now, I suspect they wouldn;t vandalize the property, and will likely buy your house with little or no issues.

Just my $0.42,
-Z

[dienstuhr]

Originally Posted by Rot 911

Owner financing is a win-win for the seller. Not so much for the buyer. You have to make sure that you have a priority lien on the property and that your lien is recorded. This is a secured credit loan with the credit being the house. They fail to make payments, you have them evicted and you start over. Only downside is the same as that with a renter, takes a while to get them out and they may destroy the property in the meantime.

You think that foreclosure happens instantly? I would never advise a seller to take back a mortgage, ever. Let the bank take a credit risk. There are too many variables.

Even with a recourse mortgage the risk for the lender is most often too high for comfort. It's one thing if you're a financial institution with a large book of mortgages, where the good stuff balances out the bad (IN THEORY), but if this mortgage is your entire "book"... can you afford to lose this asset? All it takes is the buyer not bothering to pay his insurance premium, house burns down... you're done.

Tread carefully!

Cheers

d.

[LakeCleElum]

I'm in the same boat, have great tennants and told them I could carry the contract when they have 10% down. They indicate that could be this coming summer.

Last year we talked about a "Lease to own". I did some research and the rules have really changed on those since the bank restructuring, so check that out if it's a consideration.

My tennant had his credit go bad when he financed his son's $45,000 drug rehab on credit cards.....He's been in the house 2 yrs, pays $1,550/mo rent and never been a day late.

I have just 2 concerns: 1) I'd probably be selling about close to the lowest of the market price, and 2) I don't want to lock myself in low interest rates (3.7 to 4.0) for 30 yrs, so would need language to address that.

An advantage for both of us is to avoid a lot of fees.

I know a guy that did this, went thru a de-fault/eviction and had to put some money in the house to get it ready to sell again. He came out OK in the end, but it took awhile. G'luck

[Rick Lee]

Originally Posted by dienstuhr

You think that foreclosure happens instantly? I would never advise a seller to take back a mortgage, ever. Let the bank take a credit risk. There are too many variables.

It only takes so long because banks have so many on their books. KC would have only one and would be able to start foreclosure actions the first day he deemed necessary. Still might take a while, but not the 18 mos. you can expect to live in a house for free before the sheriff comes to evict you.

[KFC911]

Originally Posted by recycled sixtie

... Maintain control by financing the house yourself. Why not rent to own and that way you maintain title and control?
...

I've got two SFH rentals (both paid off) and I don't want to be a LL forever...

Originally Posted by Rot 911

Owner financing is a win-win for the seller. Not so much for the buyer. You have to make sure that you have a priority lien on the property and that your lien is recorded. This is a secured credit loan with the credit being the house. They fail to make payments, you have them evicted and you start over. Only downside is the same as that with a renter, takes a while to get them out and they may destroy the property in the meantime.

I've had a couple of "bad renters" already...points are noted...

Originally Posted by wdfifteen

This is a very important step. Of course, you'll hire a lawyer to write up this contract and he'll certainly to do this step - right?

Absolutely, If I go this route...

Originally Posted by Z-man

...If you have a decent buyer who checks out, and just wants to save some $$, owner financing is a viable option, and gives you, the seller a significantly more amount of $$ in your pocket, if you don't mind waiting the 15-30 years to realize this income. And if the buyer defaults on the loan, it is on you to evict him.

In your case, it sounds like the owner is decent, you have a history with him. If your place is kept up nicely for now, I suspect they wouldn;t vandalize the property, and will likely buy your house with little or no issues.

This. He actually takes pride in the place and does lots of things (with my permission)...I'm very lenient in that regard. They have a couple of things that they've brought up, that I'm willing to do to improve the place, but I'm thinking... "why not let them"

Originally Posted by dienstuhr

...but if this mortgage is your entire "book"... can you afford to lose this asset? All it takes is the buyer not bothering to pay his insurance premium, house burns down... you're done.
.

That hadn't entered my though process...thanks! Have a 1M umbrella policy coverage...am I still "good"? I certainly don't want to lose an asset, but nothing I couldn't absorb in a worst case scenario.

Originally Posted by Rick Lee

... KC would have only one and would be able to start foreclosure actions the first day he deemed necessary....

I'd consider doing this with both, but your point is still valid.

Thank you all who have responded, even if I didn't quote you above. I'm just kicking around my options. I'd also consider selling both and generating an income stream through other means, maybe a "bond ladder" (it can be very modest, and I'm still OK), but I like the idea of having "some" control over the properties for reasons I won't go into here. Is an option to "buy back" enforcable? Once again, thanks, and keep the ideas & suggestions coming...

[KFC911]

Originally Posted by LakeCleElum

I have just 2 concerns: 1) I'd probably be selling about close to the lowest of the market price, and 2) I don't want to lock myself in low interest rates (3.7 to 4.0) for 30 yrs, so would need language to address that.

Your's got lost in the multi-quote...#1 applies to one (but not huge), #2, is valid for both. What to do?
Maybe just keep renting for a few years? Hmmm....

[john70t]

The worst case senario:
Foreclosures may take years in some areas. State laws and local conditions vary. They get a waiver from a judge and make minimal payments irregularly while delaying court dates. This game goes on for a long time. In the meanwhile, they live there for free and with the utilities and taxes in your name(against the law to shut off).
You eventually end up with a stack of bills, and a building trashed and missing all the appliances.

The best case senario:
You make the interest instead of the bank.

[KFC911]

Originally Posted by john70t

The worst case senario:
Foreclosures may take years in some areas. State laws and local conditions vary. They get a waiver from a judge and make minimal payments irregularly while delaying court dates. This game goes on for a long time. In the meanwhile, they live there for free and with the utilities and taxes in your name(against the law to shut off).....

Taxes are one thng I would hope to pass on to the "buyer", utilities are in "the renters" names already, no change there I would assume. I'm very much in the "debt free is good" camp, and have been that way for a long time. Much better to be on the receiving end of interest payments too .

[wdfifteen]

Originally Posted by john70t

The worst case senario:
Foreclosures may take years in some areas. State laws and local conditions vary. They get a waiver from a judge and make minimal payments irregularly while delaying court dates. This game goes on for a long time. In the meanwhile, they live there for free and with the utilities and taxes in your name(against the law to shut off).
You eventually end up with a stack of bills, and a building trashed and missing all the appliances.

Are taxes are the responsibility of the mortgagor in the case of default? I know utility bills aren't - not in my state. This scenario is a good argument for a substantial down payment.

[john70t]

The above "worst case" is an example of what happened in my Michigan condo building.

The owner had some gutter people renting the place for a while, then sold it in an owner-financing(which eventually defaulted), then went back to renting to more gutter people.
Meanwhile, he stopped paying association dues for years.
A judgement against him was finally made with wages garnished, but the payments were periodic and only enought to stay out of court. The legal bills just got added to his debt, even though and it was a loosing game.

I think it's illegal now to turn off water(humanitarian issue), and definitely heat in Michigan(an elderly veteran died from this because of a limited balance).

I'm not sure about taxes, but the city will take the property. Period.
Whatever the rules on liability of utility balances, I can guarentee you that whoever ends up with the property will be left with the outstanding bills.