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Is this a big risk?
Old 11-12-2010, 07:49 AM   #1
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Is this a big risk?

I'm selling my gulf front condo - it's currently under contract. But I found out yesterday, that the buyer's loan application was rejected by the bank. He's pursuing financing with another lender.

Late yesterday, my realtor had one of her contacts review the loan application (he's a mortgage broker...15 years with his company, prior to that 20 years as loan officer with a major bank.) He says that he sees no reason that the application should be denied. Anyway...if the buyer can't get conventional financing...if you were me, would you consider owner financing? The property is paid for. The buyer is putting more than 30% down. It's not my first choice...but...



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Old 11-12-2010, 07:56 AM   #2
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What would you do with the money if they paid it all right now

What interest rate would you charge

How long would you finance? (do you want to be stuck with this investment for 30 years)

Where will you be compared to the condo (in case you need to foreclose)...

Probably many more questions, but these are the major ones I would think about...

OPPS.... also to add... WHY was he rejected To me this is a big red flag...

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Old 11-12-2010, 08:34 AM   #3
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I'd do it but with my terms. I would want a 5 to 7 year balloon with a 15 year mortgage. This will give the buyer time to secure other financing but I get to sell the house. You should be able to get a higher interest rate because of the owner financing.

30% down is a good thing. I would also want to check the credit myself and see something over 700. I don't see a red flag because of the turndown from the bank. Securing credit today is not easy with banks.
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Old 11-12-2010, 08:25 PM   #4
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With a 30% downpayment, I would even be lenient on the credit rating.
You are getting 30% down that is yours to keep even if you have to evict / foreclose them.
That will easily cover the costs involved in the foreclosure plus any potential cleanup (carpet cleaning, painting) and still give you profit, and then you end up back with your condo anyways.

Charge them a profitable interest rate, 30% down, and maybe even add 1 or 2 points in there.

Just consider it as rented in your mind until its paid off, as he could pay you for 2 years then stop and you still get back the entire condo but keep the 30% and 2 years of payments...

Could be good for you in the end if they ever do stop paying after some time...

If anything, I would just have a separate very strict contract addendum outlining SPECIFIC terms they agree to should they stop paying - that way when you go to court to get the foreclose approved, the judge will see that they agreed upfront and knew exactly what would happen down to the "T". So theres no playing the stupid card on their part.
With agreements on how long they have to move out once foreclosure has been approved, they agree to not try to squat in the house, etc.
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Old 11-12-2010, 09:02 PM   #5
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Personally I do not care for the idea of owner financing. When I have sold a house, I want to walk away with the money in hand, and be done with it and move on. I'd rather wait until that was the case, than take the chance of getting into something questionable. YMMV
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Old 11-12-2010, 09:29 PM   #6
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You don't have much at risk if the 30% down is legit (i.e. real cash) and if nothing else smells fishy about the buyer. I would write the contract with a fairly short balloon payment (5 years seems like plenty). In today's market, it's risky to walk away from a sale.
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Old 11-13-2010, 07:31 AM   #7
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My red flags are up and rippling in a 30 knot wind.

I personally would let the buyer get bank financing. The denial by 1 bank is one thing. If the buyer is turned down again by a different lending institution, there is most likely a reason you are not being told about.

My vote is do not enter into an owner financing arrangement. Some headaches cannot be cured by aspirin.
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Old 11-13-2010, 01:42 PM   #8
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Originally Posted by ARB57 View Post
I'm selling my gulf front condo - it's currently under contract. But I found out yesterday, that the buyer's loan application was rejected by the bank. He's pursuing financing with another lender.
First, if your buyer has a contract contingency on obtaining financing, then perhaps your counteroffer should have a contingency allowing you to continue to market the condo and to sell it to a buyer who has no purchase contingencies.

But even if no other buyers are in the wings then you really don't need to get sucked into seller financing. You could contact Calmloki, who might be interested in providing his own financing to the buyer.

People always say "Well, your loan is collateralized by the property." True. However when the situation goes bad the property is usually also occupied by a squatter, unhappy neighbors, possible foreclosure/eviction proceedings, property neglect/damage, and a long litany of other legal hassles. And then you'll have to fix up a vacant property while you go looking for a new buyer.

If the mortgage broker can't figure out how to get a mortgage for what seems to be a qualified buyer, then perhaps the buyer should send $20 to join Pentagon Federal Credit Union for one of their loans.

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Old 11-13-2010, 02:35 PM   #9
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Think the pros and cons are pretty well covered here - if the OP has the cash to sit earning better than CD rate for an undetermined time and the selling climate for gulf coast condos is soft it could be a real good deal for both seller and buyer.

Foreclosure is no fun at all - and the lawyer wants his cash up front and monthly and out of your pocket. We had to start one foreclosure and it was worth every nickle of default interest for the hassle.

Something i haven't seen mentioned is that the buyer can pay off the note at a most inappropriate time tax-wise for the seller. We once paid off a note on a place and i almost had to apologise to the note holder - he was all happy about the high interest rate he was earning and very upset to be losing it. I'd told him we would be paying off the highest rate note first and if he wanted to adjust his rate his note wouldn't get paid off - he probably thought it was a cunning bluff on our part...

We wouldn't be interested in financing a gulf coast condo for a number of reasons:

1: it's a condo
2: it's on the gulf coast, too far to keep an eye on and BTW isn't that Tejas?
3: we're rebuilding cash supply after our latest purchase
4: we charge rude interest - 10-12% for 5 year balloon loans that i anticipate will get paid off much sooner
5: supposedly the Dodd-Frank Wall Street Reform and Consumer Protection Act has made most private lending on personal residences illegal or extremely difficult. We've been lending to investors 'cause I hate throwing widders 'n orphinks out in the snow around Christmas time.
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Old 11-13-2010, 10:46 PM   #10
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Personally I would not consider it mainly for financial reasons. I would not want to be locked into a long term note at current interest rates.

Now if you could make some sort of bridge financing with a short time horizon (say two to three years) than that might be a different story.

Still, given the mess of foreclosing on someone I would have real pause.

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