Owner Financing

     On owner financing, there are many ways to go. The most important thing is how much is down, followed by your (correct) evaluation of them as someone who will  1) take good care of the property, and 2) will keep you paid. This is what really matters. Anything else is like counting how many angels can dance on the point of a pin.

          Now, for those angels…..
       Since I am lucky enough to not need money from one of those sales, I usually ask for 10% down. You want enough down that it is meaningful and that figure has to be $5000 or more. (A foreclosure will eat up most of $5000.) Someone else might need more; he has to pay a commission, for example. Maybe he has to pay off a mortgage or get money to move or to buy something else. The more down, the surer you are that it is a good investment for you and, conversely, the harder it is to find someone with that much money.
      Here’s a strategy that I have used, one that has been suggested to me by more than one attorney. I use it in cases where I am willing to take a chance on someone, but am less sure the people will be as good as I hope. Or maybe their down-payment is not as much as I would want.  I sell them an Option to buy it at a specific price at a specific time. I can then rent it to them at a fair figure (or not, as the parties agree). They have the option of finding financing later on, which works for some folks. It buys them time to clear up credit problems, to sell something, or to wait for some expected money to come in. And if they are renting, in the meantime, they have full use of the place. I tell them in no uncertain terms that the option price is non-refundable, and that they will get it back only if the sale goes through (by reducing the sales price by same amount – it does not have to be that way, but that’s how I do it).
       I don’t always do this. It all depends upon the buyer, my evaluation of them, and the amount they can put down. For someone especially good, we make it a direct sale. I think this is better for them and it is less complicated for both of us. A contract incorporating a lease and an option as well as the sale is a long document and takes me a lot of time to write. One clause I like to employ gives me the right to take action if they allow the property to run down or to violate local laws. A buyer can be on time with his payments by allowing things to deteriorate or by carrying on an illegal activity. I don’t want to have to take it back and find the place trashed or a big violation against it.
       With the option scenario, if the buyer fails to keep up his end of the agreement, you have an Eviction to deal with, not a Foreclosure. The difference is that evictions are far faster and substantially cheaper. I have, in the past, taken lesser amounts down, rented them the place at an inflated price, and then used part of that price to subtract monthly from the eventual sales price, giving them the title when the combination of the down-payment and the month extra contributions total a figure we have agreed upon. All that is very nice, but as it gives the buyer an equity position in the property, if things turn sour, to get them out, basically you will have to carry out an eviction. Not all lawyers agree on this.
       Another thing that they may not all agree on is a Deed in Lieu of Foreclosure. With this device, at the closing, a deed is signed by them giving me back the property. Only I don’t get this document. My attorney does. He holds it, unfiled. If there is a problem in the future, he can then file it, bypassing the eviction process. A buyer once gave me one after his marriage failed. It was simple: the property immediately came back to me and I could then resell it. And he did not have the stain of a foreclosure upon his financial record. Yes, he lost what he had paid already, but he’d lose that anyhow if there was an foreclosure.
       If a buyer comes seeking owner terms, that is a red flag. If may be just someone who knows his position, which is OK. It may be someone who erroneously does not think a bank will touch him, or someone who wants a quicker closing – which are perfectly good reasons too. Or it may be a fly-by-night looking for a place to light for a while. In a case like this, run away!
       As an agent, I have sold many places with owner terms. I love them and cannot understand why other agents don’t as well. I have wondered if perhaps they get cuts from banks for bringing them business. If so, no one talks about it as it is probably illegal. The banks I deal with do not ever mention such things, nor do I ask. But I rarely deal with mortgage brokers, some of whom might be more inclined to such practices. Speaking from a selfish viewpoint as an agent, having a sale with owner terms is SO much easier to put through. The owner checks out the buyer and if he likes him, it is a done deal. Simple. Quick. And I usually don’t have to deal with inspections or appraisals, both of which frequently bring down deals or make them harder and slower to do. So, it is less work for me and faster. Both the buyer and seller like it faster and they both like the surety of it. It can lower the seller’s taxes on his profit, which is a win for everyone.
       I tell sellers that if they are serving as the bank, to act a bit like the bank. Get references and check them out fully. Spend some time on the phone with them and, once they are comfortable with you, ask them who else knows the buyer and then call those people. Ask around. Make a surprise visit to the buyer’s home and you will then see how they keep their place.  And you will also then have a better idea how true their stories ring. Check their credit scores and learn what they means and how it might affect you. I don’t automatically reject someone with a low score; it depends upon what lowered it. If they can produce a co-signor, I will go further out on the limb for them. The more names on the paperwork, the better recourse I have. And don’t be afraid to say “no’”.
       Right now, I charge 7% interest. I have been as high as 8.5%. You have to respond to the market to some degree, but I do stay above it and do not seem to have problems getting it once a person is interested. If I were to go lower, it might make things easier on me. It certainly would on the buyer!  I tell them that, yes, it sounds high but consider: it is a straight amortization, not a variable rate. I charge no points. There are no mortgage broker’s fees, no origination fees. You do not have to pay for appraisals or inspections (unless you want them). Lawyers will tell the buyers that by the time these things are factored in, the net cost is similar to the lower rates that banks advertise. And so far, folks have generally understood this.
       Because of my age, I usually employ a balloon clause, whereby the entire unpaid principal balance becomes due and payable at a set time in the future. I don’t want my heirs dealing with mortgages. Buyers understand this and figure that by the time this rolls around they will be in a much better equity position and will be able to go through a bank. For one thing, they will be able to take advantage of any real estate appreciation that has taken place: it becomes part of their equity.
       Why do I do this? First, it makes more and faster sales. Also, I had help from my parents when I first got started and it’s a way of passing on the advantage that I enjoyed. Further, it lowers my capital gains tax, gives me income (which I need more than capital), and it pays better than most investments. I understand it, which I cannot say about the stock market.
       What costs come with it? Obviously, there is a chance of having to evict or foreclose on someone and these are not pretty things to witness. For years, I never had the slightest problem with a single buyer, but since 2008, I can no longer say that. Uncanny how that worked. I also have to be very good in keeping records and I don’t like that part. Folks will make partial payments, will make an extra payments, or will get behind. One fellow wants his taxes escrowed. I keep 2 sets of books, one by hand, and the other on the computer – and wish I had the kind of sophisticated computer programs that banks have. I have thought of paying a bank or an accountant to administer the payments, but so far have not done so.