buying a house on contract? UPDATE in #17

[Casha'sMommy]

We're currently renting a house that was on the market for a little more than 2 years. It's an 1930-ish Sears home with an addition. The house is on a lovely double lot but was never going to see at $209k as was originally listed. They dropped it down to $189k and it still didn't sell. That's when we moved in. We've been here less than a year and the owner showed up with a realtor the other day saying he was going to re-list the house. We're interested in buying but here's the thing, dh has been at his current job for a little over a year after several years of unreliable employment. With that came a few dings on our credit and I don't think a conventional mortgage is an option at this time. We're considering asking the owner if they'd sell on contract. Does anyone know anything about this?

I'm beginning my research on this topic and would love any insight you might have.

We know the owner is never going to sell this house for $200k when one could buy a newer house with less "wrong" with it and less to fix up for under $200k so we feel optimistic. Just don't know how to go about doing this. We really don't want to move again but we're fairly certain they won't renew our lease.

Thanks!

Cate

Edited by Casha'sMommy - 5/4/12 at 6:19pm

[zebra15]

Well I have a different perspective to offer.  Are you wanting to buy because you don't want to move or are you wanting to buy because you want to stay at this house for a very long time?  Do you know what this house is 'worth'?  If the house has been on/off the market for 2 years that raises some red flags for me.  There is more than just price going on - probably.  

I would start with pulling your credit, seeing what actually is there.  Going to your bank, seeing what a mortgage actually would look like and so forth.  Possibly getting your own house inspection to see what type of building you are dealing with.  (owning and renting are 2 very different things)

A few other things to research, what does the owner owe on the property?  What are taxes, utilites, HOA etc per month in addition to your possible mtg payment?  Is this house big enough for your potential family?  What if your or DH take a job transfer or new job, how would the commute be?  What is the school system like/ or will you homeschool/private school?

[Casha'sMommy]

Great questions and thanks for the input!

First of all, I absolutely love this house! Would I do something different if all the planets were perfectly aligned? YES! If that were the case, I'd buy a farm but that is so not in our budget.

We have had a impromptu inspection, so to speak, through a friend who came over for a party. His words were, "very sound foundation and construction." The basement is dry, with the exception of a leak where the dorothy doors meet the stairs that lead down to the basement. DH is confident he can fix that easily.

Some more significant "problems" with the house:

no hvac in the addition and only one window a/c unit that costs a small fortune to run. We've discussed this with a contractor friend who is willing to assist us in purchasing the necessary duct work and assist with the work.

There is an addition that has settled some but nothing too terrible and didn't raise any red flags with the inspector friend I mentioned above.

A fireplace in the family room (part of the addition) would be changed if we can manage it. It's just old and ugly. lol

Garage is not attached.

Basement is only partially finished and would need an overhaul to make it my dream basement but there's nothing really wrong with what's down there, just not as pretty as I'd like it to be.

Back to your questions, owner has no mortgage on this house as far as I know. Taxes are relatively reasonable considering our Chicagoland location, no HOA. This house is definitely large enough although it'd be even better with some updates and a few easy-ish projects but that's shooting for perfection again. School system is awful but we homeschool so we're not very concerned about that.

As for a job change, that would likely lead to our needing to sell as dh's job is not easily replaced.

fwiw, I fell in love with this house before I discovered the owner was willing to rent. It's on about 1/2 acre with amazing potential.

OH! The research I've done thus far indicates the house is currently worth about $175k which would cut our monthly payment in half making paying taxes very much within our grasp.
 

[kerc]

Originally Posted by Casha'sMommy 

OH! The research I've done thus far indicates the house is currently worth about $175k which would cut our monthly payment in half making paying taxes very much within our grasp.

Are you sure you don't qualify for a loan?  (i.e. did you apply already)?

Do you have 20% down + an emergency fund?  ---> good chance you can get a loan then.

One of the things with home ownership is that when those "oh shoot" things happen (water in the basement, tree on the garage, broken window, etc.) .... its no longer a quick call to the landlord. Emergency fund become so very important.

[Casha'sMommy]

kerc- The emergency fund is not nearly as much as it needs to be. This is partly why I'm nervous. After the past few years our savings are nill and I cannot fathom our finding 20% down, certainly not in 4 months when our lease is up.

If we move to another rental, the average price for something large enough for our family, not having anywhere near the same lot size, is $300 to $500 a month more than we pay here now.

I have the following questions in my head:

a) do we buy for the sake of the investment?

b) Will the homes value increase at some point?

c) Will we be able to sell this house if they weren't able to sell it for two years?

d) Will my family be happy here for at least 5-10years?

e) What will our total and final cost be just to make the purchase? Are we prepared for that?

Some additional info, we have a dc heading to college, locally, who will be staying home for another two or three years.

I just invested hundreds into the garden. Small change when you're considering the purchase of a home but it's still a factor in my heart. I've worked hard to get the garden going.

Also, upon researching further last night, I discovered homes 40 and 50 years younger just blocks away that are on similar sized lots, the homes are of similar size and they're estimated values/last sale prices are similar or below what this house is valued at, certainly less than the $209k this house was originally listed at a couple of years ago.

I also learned that our house is the largest and has the largest estimated value in the neighborhood. Some of the neighborhood homes estimated values are 100k less than this house.
 

[kerc]

Originally Posted by Casha'sMommy 
Also, upon researching further last night, I discovered homes 40 and 50 years younger just blocks away that are on similar sized lots, the homes are of similar size and they're estimated values/last sale prices are similar or below what this house is valued at, certainly less than the $209k this house was originally listed at a couple of years ago.

I also learned that our house is the largest and has the largest estimated value in the neighborhood. Some of the neighborhood homes estimated values are 100k less than this house.

So ... yes, the 209 seems high. You could take a gamble and offer $160 to buy on contract. And you can sometimes buy on contract -- with the contact being you will refi in ___ years. 

One issue would be if the guy has stable renters, then he likely wants the cash. If he's selling to you on contract, then he won't have the cash. So he might not say yes....
 

[Casha'sMommy]

My understanding of the guy is he was just looking for the cash flow to pay the taxes on the house. He's getting 3 times that from our rent payment. We're his first and only renters and I know they'd much prefer to sell the house than rent it. They own this house and their current house outright so they don't have that expense, with the exception of taxes.

I realize there's always the chance he'll say no to the contract sale. I think I'm hoping that, should we decide this is the right move for us, that the guy will take the offer and not have the house on the market for another two years.

How would a payment on contract be any different than his receiving a rental payment now? Or are you suggesting he may just want the full purchase amount right now?

And, for the record, NO! I really do not want to have to move again. We had hoped to request a long term lease come renewal time but the owner sprung this on us last minute last week. And, to be honest, we can't afford to rent something similar.

[Caneel]

Originally Posted by Casha'sMommy 

How would a payment on contract be any different than his receiving a rental payment now? Or are you suggesting he may just want the full purchase amount right now?

The amount of a contract/loan would depend on the purchase price, terms, interest rate and amortization.  And maybe he does want/need the money sooner rather than later.

I used to deal with a lot of owner-financing properties as well as rent/lease-to-own (do not recommend) at a former job.

The first thing I would do is figure out how much the property is worth with solid support to back up any offer you might make. Ideally, find an reputable, indepent appraiser. The cost will depend on how much documentation you want them to provide.  Starting your evaluation with the asking price of similar properties is all well and good but you need actual sale prices of comparable properties.  This can be tricky to get if you don't have access to the information.

Once you come up with a price, compare loan payments versus rent payments. Can you swing the loan payments and reserves for taxes, insurance and maintenance?  Sounds like you can from one of your posts.  Are rental rates in your area that high that paying a mortgage is that much of a savings?  If so, great.

I have seen some pretty bad stuff go on with owner-financing (mainly sellers preying on people who can't get conventional financing but want to own a house) but when it serves both parties, it can be a great solution.

[Casha'sMommy]

I've been researching the current rental market and, for a home with 4 bedrooms and at least 2 baths and with a little yard is from $300 to $500 a month more than we pay here. fwiw, we're in the NW burbs of Chicago. We entertained the notion of renting closer to dh's work but the prices sky rocket there.

From the little bit of research I've done so far, the estimated payment and estimated taxes would be a little less than we currently pay in rent now. We haven't priced homeowners insurance but I'm certain that would be within our means.

This situation is by no means a owner preying on buyer situation. We're going to offer contract as a possible solution for us both.

DH plans to meet with the owner next Tuesday to suggest the contract and nothing more. They won't discuss money or anything specific, just their willingness to consider the contract.

[Caneel]

We just re-did our homeowner's insurance policy and I think it was less than $800.

Kerc's post about maybe having the contract written that you will refinance and pay him off in X years may be enticing to the seller if he doesn't want to hold it long term, could give everyone what they want. 

Good luck!

[mnnice]

I agree it can often be a good deal for both parties.  It is still a very common practice when people buy ag land.  We considered it when selling a home we own now.  In the deals I have heard about most people/sellers that would be willing to sell on contract are going to want pretty big down payment.  Is that something you can swing?

Edited by mnnice - 4/19/12 at 9:01am

[Casha'sMommy]

The down payment is what's making us nervous. We're just now getting our heads back above water after years of unreliable employment and special needs kids bills. We have very little in the way of savings. Honestly, if it weren't so difficult to find a rental house at a price we can afford we wouldn't even consider buying this house. We're not in a financial position to buy right now but what are the alternatives? Attempt to buy this place on contract or spend anywhere from $1500 to $3000 per month on a house.

[zebra15]

Originally Posted by Casha'sMommy 

The down payment is what's making us nervous. We're just now getting our heads back above water after years of unreliable employment and special needs kids bills. We have very little in the way of savings. Honestly, if it weren't so difficult to find a rental house at a price we can afford we wouldn't even consider buying this house. We're not in a financial position to buy right now but what are the alternatives? Attempt to buy this place on contract or spend anywhere from $1500 to $3000 per month on a house.

IDK how many kids you have but do you 'need' a house.  Can you rent an apartment or townhouse?  Surely there are other rentals in the Chicago area for less than $1500 a month.  

Yes, most folks would love a yard, would love something similar to what they have, but be honest, what do you 'need'.  I would love a condo with 2 beds/2 bathrooms and a study area, but I'm making do with a 2br/1bth apt.   A garage would be awesome but now I'm just dreaming again.

You homeschool so it really doesn't matter 'where' you live.  The schools are not important, schools are usually the deal breaker/maker for most families.

As someone who owned a home, I can tell you when disaster strikes, disaster does not equal $50 repairs.  For me disaster meant the backyard sprinklers were broken and would not shut off, the problem was a broken water line.  $750 later the flooding stopped.    

In Arizona you can not live with out air conditioning, similar to needing heat in Chicago, better have 5-8k for a new unit and a place to stay until the unit is installed.  This happened to a close friend of mine, she had to wait 3 days with temps in the 115's.  (No one's A/C breaks in the winter here)

I would say if you don't have substantial savings for home repairs as well as the downpayment then don't make an offer.  Start looking for a rental in your price range.  Moving is a PITA but moving on your terms is much better than an eviction or foreclosure.  Also ask the landlord what his intentions are, maybe he will go month to month until you find something or the place sells.  You really don't know until you ask.

[Casha'sMommy]

We do "need" a house with 4 children, one about to enter college, one has special needs and a 100+lb service dog. Additionally, I grow A LOT of our food and need the garden space for that. I am willing to build raised beds and such just still need some space for that.

DH and I have been talking more and more about this house and the lack of down payment and lack of savings. I've been looking for rentals in the area that we might be able to afford. There really aren't any houses or townhouses in our budget. When we found this place we knew we couldn't afford to live near dh's work but I thought yesterday that I'd just give it a shot and see what's out there. Nothing is really in our budget BUT we may be able to break even on a house that's say $2000 per month but very close to dh's work. He's interested in and willing to ride his bike to work if we can get him close enough so the savings in gas might make a house that expensive a little more do-able. This would also put college bound dd closer to school so her commute would be less as well.

DH is meeting with the owner of this house next Tuesday to discuss things as you suggested; going month to month, letting us out of our lease, possibly extending our lease through the Spring, etc.

Meanwhile, dh's going by the $2000 house today (it's 5 miles from work!) to see what he thinks. We've only seen the pics online. We're going to contact the realtor to determine what the situation is, rental or rent until it sells, and this will help us determine what we're going to do about the meeting on Tuesday.

[mar123]

When we moved "home" to a place we hadn't lived in a while, we decided to rent. We knew what we could afford, etc. We found the perfect place, but the rent was a little high (about $250 a month out of our price range). So we made an offer and the owner took it. So if you like this house for 2K, it can't hurt to offer a little less. The worst thing is the owner says no.

[Casha'sMommy]

mar123-Yes, this is on our minds as well. We did that with the place we're in now. They originally wanted $1500 and we said we were looking for something in the $1000 range so they offered $1200 and we took it and ran.

[Casha'sMommy]

We've decided to look for a rental house closer to dh's job and closer to the college dd will be attending in the fall.

After looking at our finances we've decided this house needs too much work and, even though we've been able to find the down payment (gift), we're not interested in working so hard for/on a house that isn't just right enough, if that makes sense. lol

If only I hadn't just spent $200 on plants for the veggie garden. grrrrrr

Back to house hunting! Wish us luck!