Owner financing to sell a house? Is it a good or bad move?

Question

How exactly does owner financing work? Lets say I have a $200,000 house that im paying $1400 (mortgage + expenses) per month on...I find a buyer who is willing to pay me $1700 a month to finance the house thru me...would this be a good move for me? If he did not pay wouldn't I get the house back PLUS all the money he paid in the past anyway? It seems like a win win situation, does anyone have any idea of the downfalls or just any commentary at all on "owner financing"?

Answer 1

Owner financing carries risks. You don't know how well the new owner will take care of the property which is all you have to secure the loan. And no, you don't get the house back and all the money the person paid. You get what is owed and the new owner would keep the equity after expenses, assuming he has amassed any equity during ownership. My advice is leave financing to the banks. It's too risky unless you can afford the loss.

Answer 2

2

Answer 3

As stated, the only buyer who will want to do an owner finance is a buyer who can not get financed. Either due to bad credit or not enough income. Sometimes you get lucky and they make the payments, most times not.

Friends of mine tried to sell with owner financing a few years ago. The buyers failed to fix a leaking roof, and it eventually collapsed. The buyers booked state and left the house, never calling my friends. The house sat there with a huge hole in the roof. It is now full of black mold. The roof, drywall, carpet, cabinetry, all need to be replaced.

I personally would never assume that kind of risk. I could not afford to fix a problem like that.

Answer 4

Neither. but owner financing is a huge headache which seldom proves profitable. If your house happens to be in an area where single family rentals are hard to get you can probably break even but this kind of arrangement is never an investment. You don't want the kind of people who need owner financing owing you money. There are good reasons why they cannot get a conventional mortgage and the first three are usually debt and money management.

Answer 5

While seller financing does carry risks, it may also mean the difference between you selling your house or not selling it.

Many buyers are turned down for financing due to bad credit, not enough money for a down payment or both.

You may want to consider financing only a portion of the purchase price. For example, most people can qualify for a mortgage for at least 80% of the purchase price. If you finance the other 20%, you will get the 80% at closing and payments on the 20% monthly or as a balloon payment in a few years. (depending on the agreement you reach with your buyers)

Visit Circle Lending for more information. I believe they even offer a free info booklet about seller financing. For more info visit: http://commoncentsadvice.blogspot.com

Answer 6

How badly do you need to sell?

The big issue is that if they don't pay, you've got to go through the whole foreclosure mess. You then end up with the property. Can you afford to make the payments if this happens? Suppose you're the second and they don't pay the new first. Can you show up at auction with enough cash to defend your interests?

It can work, and work very well, as a source of additional income. But most buyers that want or need it have putrid credit. There is a large chance that you will end up needing a lot of cash to defent your position. If you don't have that cash at that time, there's a real possibility you'll lose everything. So like I said: How badly do you need to sell?

Answer 7

Another factor you want to consider, as the housing market slump, if that individual default the loan, you probably will end up with a house doesn't worth $200K anymore.

Technically, buyer bares the risk, but that only apples if he or she cares about his or her own credit. The catch is, if the buyer has good credit, that individual can get a loan elsewhere. $200K loan would be $1400 a month at 7% apr.

Answer 8

Actually it could work well for you, just as you stated, let him pay 2 or 3 years and take the house back on the first default, keep doing it. I know a guy, sold the same property 6 times, did it on purpose.

Answer 9

For one thing, if the buyer tears the place up and walks away, you're stuck with the cost of repair. One thing to do is to require a significant down payment. Depending on the contract, yes, you'd get the house back but might have to go through eviction. There will be others on here with more information and guides.

Answer 10

First what you are talking about is called a contract of sale. Many mortgage companies have specific clauses that prohibit this. In addition, you would not be able to transfer title to the property as long as you have a mortgage in your name.
I own several properties in 3 different states and a large part of how I rent them out depends on each states landlord tenant laws. Some states, like California are tenant states, while others, like Nevada are landlord states. Meaning, simply, laws are set to protect the tenant or the landlord, pure and simple. Under a contract of sale, your a landlord, no matter what state you live in, or where the property is located. It remains this way until you are able to transfer title, period.
Contracts of sale put you in a very delicate position. They are written to include provisions for forclosure, and in many instances, especially in 'tenant' states that can cost you hundreds if not thousands of dollars, not to mention the mortgage payments during the procedings.
I will provide you and example of what I have experienced personally.
I have 4 homes in Oregon and one piece of bare land. 3 homes are rented, 2 are paid off, and one I choose to sell on an owner contract that was still mortgaged in our names. We had our attorney handle the paperwork ensureing nothing was overlooked. It wasn't. Had I not been in a spot, I would have just rented it out, but I had to relocate quickly for another position, and my management company that handles my other properties just couldn't get what I needed per month for rent. So, I went out on a limb, and I am here to tell you, I learned very well what a MISTAKE THAT WAS.
All credit and income checks were done and proven satisfactory. I even had the clause to attach an inheritence should the payments default.
Oregon is a tenant state by the way, and I knew that going in. We and our attorney's did EVERYTHING absolutly right.
About 6 months in, they turned into the tenants from hell. They damaged my property, stopped making their payments to the title company, filed leins against the property for damages they did. As the owner of a "rental" in a tenant state, they could fix the damage and lein the property to recover their money, or they could just not pay until whatever was fixed. This meant that I had to ensure timely payments to protect my good credit, all the while expensing funds for repairs. All the while, they lived there for free, wrecking my home even more. The contract was explict; they could do no modifications, and were responsible for all repairs, afterall, they were the new, "owners'. Wrong...
Again, until you transfer title, you are "renting" the home out...
I had to go to court to sue them for what is known as specific performance. Since I had moved out of state, this meant, in addition to attorney fees, court costs, repairs costs and the mortgage, taxes and insurance payments, I had airplane tickets, rental cars, and hotel expenses. Heaven forbid, they got a continuance.
Because I had a 'contract of sale' and not a simple 'lease' I had to forclose. To forclose on real property there are two common ways;
A judical and a strict forclosure. Each type is also dependant on the state law where the property is located. A judical forclosure can take up to a year. During this time, the 'tenant' lives in the home rent free. Strict forclosure is much faster and simple by comparison. Guess which one Oregon has?
A year later, about 25k later, I got my home back. This did not include the payments, insurance or taxes I had to pay, nor did it include repairs that I had to make.
All tolled, about 65,000.00 is what it cost to fix this little screw up.
Now, on a bright note. The other homes I have in Oregon alone, have been leased and rented over the years without any real problems. In fact, one of my homes has had the same renters for almost 28 yrs. They have litterly paid my home off.
They can stay there forever as far as I am concerned. When I rented the home to them, an older couple, retired, they could only afford so much money per month, 300.00. My house payments were on 274.00 per month, so not a problem. I actually lost 12.00 per month when I figured in the property managment fees.
That's ok, it was a tax write off.
Since they came to us, they have improved the home like you wouldn't believe. They had 7 kids, so they needed a large home for when their kids and grandkids visited and the home has 4 bdrms and 3 baths on half acre. They have put in a wonderful garden, spa, and all I have done is new appliances, a roof, and carpet and paint.
The essence of this information is to warn you, and heed this carefully. Check out your states laws and they pertain to tenant rights. Check with your current mortgage company to ensure that if you choose to do this, that they won't forclose on you. If that happens you will be sued yourself by the 'buyers'. You can't give what you don't own.
As to "owner financing". It is a good deal when some conditions are met first;
1. You have title, or deed to the property. In other words, you own it outright.
2. You live in a 'landlord' state.
3. You have money in the bank for attorney's and any unexpected developments.
4. Never do a contract of sale. They require a 'foreclosure". Always do what is called a 'lease with option'. This way if they don't perform it would be a simple eviction, even in a tenant state.
5. Nothing in life will ever be a 'win-win'. There is ALWAYS a trade off. ( 1st yr economics)