Any upside to owner carry?

[hesperus]

We have decided to sell one of our properties, a 10 acre horse property with a custom built cabin located in the foothills of the san juan mountains of colorado. It has a lot going for it, views, ponds, water rights, and location. For me, the work involved in maintaining this sort of hobby farm has become too much. Irrigation (we have great water rights) is a real chore every year to maintain the pasture, and maintenance of the place has made every visit full of work and things that need to get done. If anyone here has ever ditch irrigated for several days of a water call, you know what I mean! There was a time I enjoyed this type of work, but it's pretty demanding, and this combined with a desire to spend this time doing something else has motivated us to sell.

Anyway, we've listed it, and even though it's quite early, we had a potential buyer approach the realtor the other day with a desire to purchase. The issue is they asked if I was willing to carry the purchase for them. The offer is a full price offer.
I think the risks and pitfalls are obvious: Perhaps the buyer can't secure a loan because of bad credit, which is a red flag from the start; the possibility that they default and I get the property back in poor shape; or the fact that I assume pretty much all the risks of securing payments.

What, if any, are the potential upsides of owner carry for the seller? Has anyone done this, and what was your experience? I doubt I'll go this route, but it raised the question of how anyone can have a good experience with this?

 

[Clone]

The upside would be that you create an income stream that is higher than what you might get from a cash sale invested in CDs. You also get the choice to take the capital gains spread over time (with each payment) or as a one-time event.


The down side is that if the value of the property goes down, the buyer can walk away from the deal. You need to make sure that the buyer does not do anything that might damage the value of the property, and this must all be handled in the contract.


I am party to a sale of some hunting ground. We wrote the contract at an 8% interest rate. This encourages the buyer to pay it off early, and in the meantime it is a favorable return for us (the sellers). We know the purchaser.

 

[Sunset]

Never have done it.
Heard that you can spread the capital gain over years which would be good IF it's a taxable event to you (investment property).
IF the buyer put down a large amount (even if they borrowed the money to do this from someone else), and later you foreclose on them, you get to keep the big downpayment

Big risk, while they are in foreclosure process, they strip the property (it is their property at that point) so after foreclosure, you have a huge expensive mess and great cost.

IF a bank won't lend them the money, what does the bank know that you don't, and why would you touch it when a bank won't.

 

[MRG]

My late FIL did this all the time with great results. He wasn't an investor and he did very well owner financing properties for individuals. He paid close attention to their stories and got a premium on interest.

I recall on home he financed for a young couple, both teachers who were just getting started in life and had no real credit. While he never had issues, certainly you could get the folks from hell.

He was in a different market, SW FL., that was rapidly growing.

 

[OldShooter]

Back in the high-interest rate days of the 80s our state's usury law limited mortgages to a very-below-market 8%. The resuilt was that most properties sold with the former owner carrying a contract for deed, then selling it at a discount to an investor. I bought many of these and made quite a bit if money, so I would probably be comfortable considering the arrangement you're asking about.

All the obvious stuff has been said, but I will add this: What percentage of your assets would this note be? If under 10% I would say it is probably an acceptable risk. If over 50% I would suggest that you not even consider it.

In our state, a contract for deed is highly favorable to the seller. There is no foreclosures. A payment beyond 30 days late automatically terminates the agreement and a fairly quick unlawful detainer action gets the buyer out if they won't go willingly. In contrast, foreclosing on an mortgage can take months and involve lots of legal expense. If what you'll end up holding is a mortgage, your risk is much higher.

I would consult an experienced real estate attorney to find out any interest rate limits (usury laws), any opportunity to ask for an origination fee (at least to pay your legal costs), and whether your state has a mechanism like a contract for deed that is less risky than an actual mortgage. This is not a game for amateurs or for reliance on advice from SGOTI.

 

[pb4uski]

I would get a large enough down payment that it would be painful for the buyer to walk away.... at least the reduction in value of the property if it were neglected or 1/3, whichever is greater.

 

[97guns]

I would get a large enough down payment that it would be painful for the buyer to walk away.... at least the reduction in value of the property if it were neglected or 1/3, whichever is greater.

The large down payment puts the buyers skin in the game and scenario of thrashing it is less likely

 

[OldShooter]

The large down payment puts the buyers skin in the game and scenario of thrashing it is less likely

BTDT. If they need owner financing it is unlikely that they have a huge down payment. If they did, a bank would take the deal.

 

[pb4uski]

Perhaps, but it is situational.... they might have enough for a large down payment but bad credit from past stupidity... or if they married someone with bad credit then they might not qualify for a loan, etc.

 

[calmloki]

We are owner carry on four places and have deed secured loans out on others. Mostly it has worked out just fine, and one can get used to the 7%+ interest and payments landing in the bank account with regularity. Everyone has pretty much covered all the gotchas. As hard money lenders the worst we got stung was when we lent through a company and didn't have any security. They went toes up and took our money with. We did foreclose on one property, which was drawn out and irksome and required having thousands in lawyer money on hand. We had one borrower declare bankruptcy, which resulted in a judge altering our contract and reducing our interest rate until the property sold. We had a borrower refuse to pay and insist on cash to sign a deed in lieu of foreclosure. Had to start foreclosure on a couple places. All in all though carrying paper has been just fine - DO use an escrow company to collect and disburse payments - good protection for the buyer if you were to kick off and removes you from doing collections and math arguments.

 

[Bamaman]

Some states are more protective of homeowners. In our state, someone can easily remain in homes a year before they will be evicted. Evictions cost $325 in court costs alone and the creditor will get their day in court. I bought a foreclosure that had been empty for quite sometime in a conditional sale. The debtor had one year from the date they vacated the property to redeem the foreclosure--paying off the balance plus all expenses. They could have booted me out.

A owner financed sale is to be avoided if at all possible. If you have to get into financing, it should be really, really profitable. And a real estate attorney should handle all paperwork.

 

[Sunset]

We are owner carry on four places and have deed secured loans out on others. Mostly it has worked out just fine, and one can get used to the 7%+ interest and payments landing in the bank account with regularity. Everyone has pretty much covered all the gotchas. As hard money lenders the worst we got stung was when we lent through a company and didn't have any security. They went toes up and took our money with. We did foreclose on one property, which was drawn out and irksome and required having thousands in lawyer money on hand. We had one borrower declare bankruptcy, which resulted in a judge altering our contract and reducing our interest rate until the property sold. We had a borrower refuse to pay and insist on cash to sign a deed in lieu of foreclosure. Had to start foreclosure on a couple places. All in all though carrying paper has been just fine - DO use an escrow company to collect and disburse payments - good protection for the buyer if you were to kick off and removes you from doing collections and math arguments.

I'm impressed by your relaxed attitude to all the potholes you've hit on the road to riches.

 

[hesperus]

Some excellent advice.
Something I take away from it is to get the buyer to have some $kin in the deal, something they don't want to risk losing. I agree with several here who mentioned that a large down payment may be unrealistic, given they're asking me to carry to start with. But I wonder if they put up some other type of equity or asset? I just couldn't see doing this unless they have something in the deal they don't want to part with. I certainly don''t want someone thinking they can waltz in and out of a loan without feeling the pain. I also like the idea of using an escrow company to collect and disburse? Would they be the ones to bring it to collection if they were to fail to pay?

 

[Z3Dreamer]

Any idea what a reasonable current interest rate would be? Lets say for a 90% loan (10% down payment), 5 year loan, with 30 year amortization, with prepayment penalties?

 

[calmloki]

Some excellent advice.
Something I take away from it is to get the buyer to have some $kin in the deal, something they don't want to risk losing. I agree with several here who mentioned that a large down payment may be unrealistic, given they're asking me to carry to start with. But I wonder if they put up some other type of equity or asset? I just couldn't see doing this unless they have something in the deal they don't want to part with. I certainly don''t want someone thinking they can waltz in and out of a loan without feeling the pain. I also like the idea of using an escrow company to collect and disburse? Would they be the ones to bring it to collection if they were to fail to pay?

If it gets down to it the escrow company does not take matters to court as far as I know. Maybe there are some that do, but not in my experience. We have encumbered several properties to secure a loan on one, so that is possible if the buyer has a big stake in a different property. You would be in second position on that property, which gets trickier.

 

[COcheesehead]

BTDT. If they need owner financing it is unlikely that they have a huge down payment. If they did, a bank would take the deal.

Bingo and CO real estate is on fire right now. I would be tempted to wait it out for a cleaner offer.

 

[ivinsfan]

Bingo and CO real estate is on fire right now. I would be tempted to wait it out for a cleaner offer.

Sounds like you want to simplify your life and a cleaner offer is the way to do it.

Apparently they asked if you would owner finance without even discussing the down payment they would bring to the table? You know that old saying you don't get if you don't ask? Ask them for 25% down and see what happens

 

[ivinsfan]

Perhaps, but it is situational.... they might have enough for a large down payment but bad credit from past stupidity... or if they married someone with bad credit then they might not qualify for a loan, etc.

In my mind those two things you mentioned are still red flags. I know second home financing can be a little more stringent and there is a good reason for it.

 

[MRG]

Bingo and CO real estate is on fire right now. I would be tempted to wait it out for a cleaner offer.

Literally on fire.

One thing I didn't mention about my late FIL's deals. As far as I know they were all 5-10 balloon deals. Allowing him to bail or reset the terms. Not sure if that's legal everywhere.

 

[Sunset]

OP - You really want them to have a lot of $$$ invested in the purchase, or you could lose out.

Think of this, you get 10% from them, and finance the 90%. Then the nice hot market drops 25%, They tell you reduce the debt by 15% or they walk.
You refuse, so they walk.
Now you resell the place for 25% less

They buy the place down the street for 25% less and wave to you as they go past, yelling out they saved 15%

 

[kite_rider]

Lots of good advice already given. Some of the upside that I didn't see yet was that you don't get stuck paying realtor commissions and crazy closing costs that only seem to benefit the title companies and related industries. You are also in a strong position where you can write the contract in such a way that it is more favorable to you.

Upsides already mentioned are that you can often get at or above market prices and interest rates. I was getting 7-10% on my deals when federally subsidized rates were around 4%.

I've 'owner carried' on three properties so far. In each case I sold to renters who I already had a rental history with and whom I had some insight on how they kept up the properties. The big upside for me was that I didn't get a phone call when the furnace wasn't working or the dishwasher drain was clogged. The biggest upside of all; I have more time to go out and enjoy my early retirement!

Recently one owner sold and the another refinanced. So you never know how long the deal will last. I'm still collecting on the third deal.

On the downside (if you want to call it that) is that all that interest is fully taxed - state and federal - so forget about managing your income to get an ACA subsidy or low cost Roth conversions. Also, this isn't 'earned income' so you can't put it in a pre-tax IRA.

My buddy has an old mining cabin in La Plata Canyon. I like to backcountry ski there, maybe we'll see you out there some time?

 

[hesperus]

Bingo and CO real estate is on fire right now. I would be tempted to wait it out for a cleaner offer.

Bingo is right, literally and figuratively. Durango has a good sized wildfire near town right now, and the local market is red hot. I am going to wait for a clean offer. But I did want to get some others opinions on owner carry, as I've never considered it before. Thanks to everyone, and fingers crossed that the 416 fire will be contained. Evacuations north of town are spreading. Not affecting our property - at least not yet.

 

[hesperus]

Lots of good advice already given. Some of the upside that I didn't see yet was that you don't get stuck paying realtor commissions and crazy closing costs that only seem to benefit the title companies and related industries. You are also in a strong position where you can write the contract in such a way that it is more favorable to you.

Upsides already mentioned are that you can often get at or above market prices and interest rates. I was getting 7-10% on my deals when federally subsidized rates were around 4%.

I've 'owner carried' on three properties so far. In each case I sold to renters who I already had a rental history with and whom I had some insight on how they kept up the properties. The big upside for me was that I didn't get a phone call when the furnace wasn't working or the dishwasher drain was clogged. The biggest upside of all; I have more time to go out and enjoy my early retirement!

Recently one owner sold and the another refinanced. So you never know how long the deal will last. I'm still collecting on the third deal.

On the downside (if you want to call it that) is that all that interest is fully taxed - state and federal - so forget about managing your income to get an ACA subsidy or low cost Roth conversions. Also, this isn't 'earned income' so you can't put it in a pre-tax IRA.

My buddy has an old mining cabin in La Plata Canyon. I like to backcountry ski there, maybe we'll see you out there some time?

I know La Plata Canyon very well! Indeed I do ski up there, or more accurately I sometimes ski between la plata canyon and to the west over into the la plata mtns. I like to call that area the 'quiet side' of the san juans. Beautiful.

 

[RenoJay]

I’ve done lots of private mortgage lending. I couldn’t care less about credit score. I care a lot about equity in the property and person’s income. I would require significant cash down payment like 10% to 30%. I would never do a 100% loan because the borrower will default at exactly the time the house loses value.

 

[Lienlord]

Count me as a fan of owner-financed selling. We have done this with several rentals and some flips. In 7 cases (so far), we sold to occupants who put up good down payments of 10%-30% and 15 year amortized mortgages @ 8%. In another 9 cases, I've owner-financed rentals to investors with established tenants in them.
These provide consistent cashflow that will soon be used to partially fund our retirement.
Agree that it's best to get a good downpayment and make sure the payment isn't going to be difficult for them to make.