Need Advice On Owner Financing As Seller
I am selling my house FSBO for $150,000.
Someone made an offer but with owner financing for $200,000, 3 year ballon, $20,000 down and $1000 epr month for the 3 years.
Now, I really really prefer a conventional mortgage, but ASSUMING those figures above meet my financial needs, does anyone know any pitfalls or hidden disadvantages in financing it yourself?
I am afraid of shifty people somehow getting me in a loophole like filing bankruptcy, etc. I"ve also heard a long time ago that if you need to forclose, you don't keep all the money even if the contract says you do (judges magically throw that out).
I am just looking for advice on doing something like this in the context of pitfalls/scams as the seller.
thanks you in advance!
Ome thing I see is if it 200k your paying that extra capital gain tax. I would suggest you speak to a lawyer and your accountant about this deal to cover yourself.
well, if he is selling his primary residence (2yrs living in)....he isn't going to pay any capital gains taxes...
I have never done seller financing. So these are just some observations and random thoughts.
$1000 a month on $180,000 principle is a loan with an interest rate of 5.3% amortized over 30 years. That is quite a rate for owner financing. True they are giving you $50k above your asking price so you must factor that in the equation.
Do you want to run a credit check on your buyer? No business would lend $180,000 without running their credit. Also, will they be able to refi after three years? Hard to say without seeing their credit. Might also want to call any former landlords.
Some people would prefer to do a land contract (also called contract for deed), instead of a straight sell. Contract for deed means you keep the title until they pay off the loan. Puts you in a stronger position. Believe the tax consequences of contract for deed and a straight sell are the same.
Some people would prefer to do a lease option for one year, followed by an installment sell. The lease option still allows you to get the $20k up front, non refundable, but allows you to do an evication instead of a foreclosure if they turn out to be dead beats.
Do you have an underlying loan? Will $1000 cover your mortgage payment? Make sure that they pay you, and you make the mortgage payment.
Brenda
You should definatly consult with an attorney to discuss this in detail.
In analyzing the numbers that you have provided the higher selling price is good, 10% down is excellent, 3 year balloon is standard, but the $1000 month is very low.
That $1000/mo is 6.67% interest only payments. That is VERY GOOD as a buyer. Does this cover your existing mortgage payments?
A transaction that I would recommend would be everything the same except I would amortize the payments over 30-40 years. The longer the years the lower the payment but the more interest you earn!
For example: $180k financed @ 8% amortized over 30 years is $1320.78/mo and over 40 years is $1251.56.
You will also need to carry a landlord policy and I would require that the tenants to carry personal property insurance. I would escrow both insurance policies and also the property taxes each month and have the contract make that the buyers responsibility.
It seems pretty obvious to me that the sellers want a low monthly payment and want to live in a house that is likely beyond their means. I would work to qualify the buyer until you feel comfortable with them occupying your house.
GOOD LUCK
Thanks for a few replies.
Actually, I have no mortgage on it.
The person actually said I can give him any proposition I thought would meet my needs, so if the $1000/mo. is too low, I could suggest a higher one.
Does anyone out there think that that deal is BETTER than a conv. mtg (stight sell)? Because after posting my first mssg, I have had 2 other ppl with conventional mtg's all but tell me they want it.
...so now it seem I have a choice.
THanks again!
Ask yourself, if the property is worth $150,000, how likely is you buyer going to be able to refinance it 3 years from now at $170,000? If he can't get financing, what happens next?
Yeah, Notebuyer is on the right track
So you're only asking $150,000 which I am going to assume is somewhat close to the market. So Joe Buyer comes along and offers to pay you a 30% premium to market for these terms with a three year balloon. How does Joe make any money? By assuming that your house is going to appreciate at 15% for each of those three years. That is, as they say, a very long shot. Which means Joe Buyer is either really smart and knows something about the value you don't know or he is some newbie who believes that real estate always appreciates at 15% a year. My money is on the latter option.
So, if you want to do seller financing stick pretty close to your $150,000. Make Joe Buyer get a new first for the bulk of that. Carry a second and take your chances but get most of the money upfront.
Seller financing can make a good deal great or, at least, a good deal possible. In most residential owner-occupied transactions, your downpayment can be as little as 5%. In a non owner-occupied investment purchase, the required downpayment can be 20%, 25% and sometimes even 30%. Hopefully, as an investor, you can lower this downpayment requirement with some financial assistance from the seller, a purchase money mortgage. When a seller gives you, the buyer, a second mortgage, it is called a purchase money mortgage. The more commonly used term is simply a second. While most first mortgages are written for a term of 15-30 years, many seconds are written for 1-10 years.
If the average property you intend to purchase is $200,000 and you need a 25% downpayment, you need $50,000. However, if the seller will lend you 15% or $30,000, then you only need $20,000. Most investment property real estate sales involve some form of seller participation in the financing, so ask. If you can borrow 90% of the purchase price through first and second mortgages and if there is still a positive cash flow, then you probably have a very good deal. If your financial burden is so heavy that the cash flow is negative and you have to keep putting more money into the property each month, then, even though there is appreciation, amortization and tax benefits, owning investment real estate can get very old very quickly.
To ensure a positive cash flow, seconds are often written with payments figured on a longer-term schedule than the actual term of the second. In other words, the actual term of the second may be 3 years, but figured as if the term were 30 years. With such a loan structure, a large balloon payment would be due after three years. If a loan is completely paid at the end of a term, it is called a self-liquidating loan. If monies are due at the end of the loan, it is called a balloon loan.
When you purchase a property using a short-term second with a balloon payment, your acquisition planning will include the steps you will take to retire this loan as soon as possible. Is the property worth more than you are paying for it? Normally, before you buy, you cannot borrow based on your estimate of value, but only on your negotiated purchase price. However, after you own the property, you are now the owner and you can go back to your lender or another lender and borrow again based on your estimate of the property's value. In other words, you may pay $250,000 for a property that you feel is worth $300,000. To buy this property, you can only borrow based on the $250,000 acquisition price. However, after you own the property, you are free to say that the value of the property is $300,000 and get a new mortgage based on this amount, presuming that the property appraises at this amount. You might ask if the property is worth $300,000 and you are paying $250,000 why wouldn't the initial appraisal come back at $300,000. This could happen, but rarely does. Usually the appraisal comes back at or near the purchase price.
Another presumption is that as a new owner you will be doing things that will enhance the value of the property. You may add new kitchen and baths. You may convert the heating systems. You may just raise the rents. In any event, value increases and presents an opportunity to refinance and retire the second mortgage.
Tony, another owner financing strategy would be very simple, and help you to avoid carrying ANY liens at all, thereby eliminating your risk after the deal leaves the closing table.
As someone mentioned, with as little as 5% down of the appraised value of the property, you can then sell via owner financing, thereby creating a 95% 1st lien. You are only doing so temporarily, because at the closing table, you will know the predetermined purchase price of that new note, and what will be paid to have it assigned to the note buyer at close, thereby giving you cash proceeds from the sale of the note PLUS the down payment. Since you owe nothing, all money cleared is in your pocket, very clean transaction.
Your buyer pays rates more along the lines of what subprime lenders charge for the privilege of you financing them, and not a bank. They save on junk fees, points, etc. Now for this particular buyer, maybe they would need to sell on a lease option vs. straight rental, but that is now their responsibility, as you are completely out of the deal, and you walk away with your money before the deal ever closes.
Hope this helps, Dave
Oh, and I forgot to mention, you have MUCH more control over the transaction then a buyer going off to their own lender. You are in the loop from start to finish, and there are "stated" type programs available using this strategy