owner financing

[kindchen]

We have the opportunity to buy a great house, and the owner is interested in doing owner financing. She would give us a ridiculously low interest rate, and we would avoid all kinds of bank closing costs. We would have a real estate attorney draw up all the documents and just pay the title company ourselves to transfer the title.

Has anyone done anything like this before? Is there some reason that this kind of thing is a bad idea in general? It doesn't seem like a great deal for the owner, from what I can tell. She would get a much lower rate of return than if she just took the whole chunk of money and invested it in something conservative. But maybe she would get some kind of tax benefit from spreading her gains on the house over the term of the loan.

We would pay tens of thousands of dollars less in interest over the life of the loan than if we financed through a bank, so I'm seriously considering this. We have good credit and are pre-approved for a mortgage at a good rate, so it isn't like we *need* owner financing.

[Caneel]

In a prior career, I had a number of clients that made a business out of owner financing houses.

Originally Posted by kindchen

Is there some reason that this kind of thing is a bad idea in general?

It can be a bad idea but you can work an potential pitfalls out with enough research. Two bad elements I would see over and over again were 1.) the house was grossly over-priced for the market 2.) the seller was preying on people who couldn't get traditional financing.

1.) Selling price

Evaluate the selling price in relation to what you describe as a ridiculously low rate.

Until recent times, housing prices rose as interest rates fell. Since people generally purchase a house based on how the monthly payment fits their budget, they didn't much care if the house was $100,000 versus $125,000 as long as the payment was around $700 a month. The lower the rate, the more house they could afford.

Just make sure the price of the house isn't inflated over market value.

In conjunction with sale price, make sure the house is sound and in good condition, hire a reputable contractor or inspector to check it out. The "professionals" I would see owner-financing houses were masters at making houses look great with quick rehabs and fresh paint but at the core, the houses weren't in great shape.

How long has the seller owned the house? If she has lived there a long-time, I doubt it is a flipping scenario.

I am seeing rates below 4% for 15 year mortgages right now. If she is willing to expect a rate that is too good to be true for you, it is a bit of a red flag. But on the other hand, maybe she is just looking for a conservative investment.

2.) Predatory lending - Being that you already qualify for conventional financing, I don't think you need to worry about being a target.

Having a good attorney review the documents mitigates risk.

Also, pay attention to the seller's disclosure. In my state, sellers are required to complete a seller's disclosure, which will outline information on mechanical systems, knowledge (or not) of any environment hazards, age of roof and so on. Related to #1, hiding less than desirable features would be a reason for someone to avoid using a realtor.

[SleeplessMommy]

The "professionals" I would see owner-financing houses were masters at making houses look great with quick rehabs and fresh paint but at the core, the houses weren't in great shape.

Exactly. Fresh coats of paint can hide foundation settling, water damage, fire damage, leaky basement, cracks which will reopen in a few months, etc. The more recently painted the basement walls are, the scarier !

A competent home inspector, combined with suspicion for the "flipper" (if it is a flip situation) are the the best ways to reduce your risk.

[Hedgehog Mtn]

We owner financed our house in 2002 we did a 15 year mortgage and at 30 years old I am more than halfway through!!!!

We had a lawyer work with us. We settled on a very strict grace period (15 days late andhe can call the mortgage) we feel good about it because he is somewhat protected in that. From what I recall there is a lot of risk on his part because even though he can call the loan it would cost him lawyers fees, court fees and it's not an overnight process.

The biggest benefit for us was this house is on a class iv road and we would only qualify for a land mortgage which at the time was 14% or something. We wanted a house that was off grid, out on the middle of nowhere......we got our dream home

Our money and the interest funds the BUILDER of our home in his retirement. He was a builder by trade and did an awesome job on our home. I love that nobody but him makes extra money off this sale.

For us owner financing is a dream come true.

Talk to some experts and a good lawyer for the pitfalls but know that it can work very well in the right circumstances.

[kindchen]

Originally Posted by Caneel

In a prior career, I had a number of clients that made a business out of owner financing houses.



It can be a bad idea but you can work an potential pitfalls out with enough research. Two bad elements I would see over and over again were 1.) the house was grossly over-priced for the market 2.) the seller was preying on people who couldn't get traditional financing.

1.) Selling price

Evaluate the selling price in relation to what you describe as a ridiculously low rate.

Until recent times, housing prices rose as interest rates fell. Since people generally purchase a house based on how the monthly payment fits their budget, they didn't much care if the house was $100,000 versus $125,000 as long as the payment was around $700 a month. The lower the rate, the more house they could afford.

Just make sure the price of the house isn't inflated over market value.

In conjunction with sale price, make sure the house is sound and in good condition, hire a reputable contractor or inspector to check it out. The "professionals" I would see owner-financing houses were masters at making houses look great with quick rehabs and fresh paint but at the core, the houses weren't in great shape.

How long has the seller owned the house? If she has lived there a long-time, I doubt it is a flipping scenario.

I am seeing rates below 4% for 15 year mortgages right now. If she is willing to expect a rate that is too good to be true for you, it is a bit of a red flag. But on the other hand, maybe she is just looking for a conservative investment.

2.) Predatory lending - Being that you already qualify for conventional financing, I don't think you need to worry about being a target.

Having a good attorney review the documents mitigates risk.

Also, pay attention to the seller's disclosure. In my state, sellers are required to complete a seller's disclosure, which will outline information on mechanical systems, knowledge (or not) of any environment hazards, age of roof and so on. Related to #1, hiding less than desirable features would be a reason for someone to avoid using a realtor.

Thank you so much for this input! Those are exactly the kinds of things I was wondering about. The selling price is the biggest issue for me. She doesn't know what a fair price would be, so we need to get an appraisal.

Her family has owned the house for years and years, although they have rented it out and the renters have done some significant cosmetic damage over the years. The house doesn't look great, which kind of eases my mind, because it really does not seem like they are trying to hide anything. I think they were not wanting to sell their family home, but years of bad renters have made them just want to get rid of the hassle of being landlords. This way, they would get the mortgage payment every month without being landlords.

I think this could be an amazing deal for us, if the selling price is right and the inspection goes well. I think the house will appraise far under what it would be worth with some minor renovations. This is a beautiful old house in a neighborhood of beautiful old houses. It has the original hardwood floors, built-ins, etc. If the inspection shows that it has "good bones" I would be excited about doing the renovations as we can afford them, in our own style.

[kindchen]

Originally Posted by Hedgehog Mtn

We owner financed our house in 2002 we did a 15 year mortgage and at 30 years old I am more than halfway through!!!!

We had a lawyer work with us. We settled on a very strict grace period (15 days late andhe can call the mortgage) we feel good about it because he is somewhat protected in that. From what I recall there is a lot of risk on his part because even though he can call the loan it would cost him lawyers fees, court fees and it's not an overnight process.

The biggest benefit for us was this house is on a class iv road and we would only qualify for a land mortgage which at the time was 14% or something. We wanted a house that was off grid, out on the middle of nowhere......we got our dream home

Our money and the interest funds the BUILDER of our home in his retirement. He was a builder by trade and did an awesome job on our home. I love that nobody but him makes extra money off this sale.

For us owner financing is a dream come true.

Talk to some experts and a good lawyer for the pitfalls but know that it can work very well in the right circumstances.

I'm so glad you have had such a good experience! I also want to make sure the woman selling this to us is protected, as well as protecting ourselves. It does seem to me like she would be taking on a lot of risk.

[Caneel]

Originally Posted by kindchen

Thank you so much for this input! Those are exactly the kinds of things I was wondering about. The selling price is the biggest issue for me. She doesn't know what a fair price would be, so we need to get an appraisal.

Her family has owned the house for years and years, although they have rented it out and the renters have done some significant cosmetic damage over the years. The house doesn't look great, which kind of eases my mind, because it really does not seem like they are trying to hide anything. I think they were not wanting to sell their family home, but years of bad renters have made them just want to get rid of the hassle of being landlords. This way, they would get the mortgage payment every month without being landlords.

I think this could be an amazing deal for us, if the selling price is right and the inspection goes well. I think the house will appraise far under what it would be worth with some minor renovations. This is a beautiful old house in a neighborhood of beautiful old houses. It has the original hardwood floors, built-ins, etc. If the inspection shows that it has "good bones" I would be excited about doing the renovations as we can afford them, in our own style.

It does sound like it could be a good transaction for both parties. Best of luck!