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Thinking of selling house and carry back 1st mtg.
Old 10-16-2018, 01:23 AM   #1
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Thinking of selling house and carry back 1st mtg.

Likely going to sell the house, going to split future time between elderly mothers house and cabin cruiser in the harbor..... ( that is a whole other story - stay tuned).

Been there over 30 years, location is not attractive to me anymore, and the house needs major upgrade/ refurb. It's 76 years old . WW2 era tract home. However, demand and prices are as crazy as pre meltdown of 10 years ago.

I don't want to be a landlord. Also don't have near term need of the money, but 4% for up to 10 years would be attractive to me as passive income.

Would set up trust deed note collection with a regional bank.

Worst case , if I had to repo it and resell , not a problem. However,

? what would happen if the debtor declared bankruptcy ? Could I be stuck modifying a loan ?
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Old 10-16-2018, 04:48 AM   #2
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Only way you should consider an installment sale is if you're getting top dollar for the home. You should also check out the purchaser in the credit bureau, and not do business with anyone with any negative information. And they should be making a sufficient down payment as an incentive to take care of the property. I might go as far as to interview them in their present home/apartment to see their quality of life.

You should collect the payments and keep close records. And you need to be prepared to make hard decisions if payments are not prompt. Make yourself rules and be prepared to follow them without fail. Don't listen to any sob stories as this is a business situation.

Foreclosure laws vary state by state. In our state, it can take as long as a year to get someone into court for foreclosure and to get the sheriff to physically force them to vacate the property. If a bankruptcy is involved, they can drag you through Chapter XIII for a couple of years and then revert to a Chapter VII before you can foreclose. And then they have a year after vacating to "redeem in full" by paying the loan off (and expenses.) That means you cannot easily sell the property for as long as 3 years.

Needless to say, you have to be careful selling a house on time as many sellers have too passive of personalities to deal with it. 4% APR financing is not necessarily worth the risk when the housing market is good and there are other buyers in the market that can get their own financing.
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Old 10-16-2018, 05:02 AM   #3
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I think this is a bad decision.

If you want to sell, do it, take the money, and get your passive income elsewhere. You're likely going to be able to get 4% on 10-year CDs in the next 12 months.

Why would you want to carry a 4% loan and become a creditor to an individual when the bank won't do it for that rate? You're taking on risk, and that income is going to be taxable. You can get 3.7% today for 10 years with zero risk in CDs. Do you really believe the 0.3% extra you'd get is worth it? That's $3000 a year on $1 million. Not worth it in my mind for the additional risk. High quality taxable municipal bonds are going for 4% for 10 years today. Similarly high quality tax free munis for 10 years are paying taxable equivalent 4%.

Lastly, if you're going to sell, if the demand and prices are crazy I would sell right now, because in these markets lately there has been an abundance of folks rushing to sell and having to lower asking prices. With interest rates continuing higher, come spring, prices could be sliding lower.
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Old 10-16-2018, 07:35 AM   #4
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Originally Posted by Lakewood90712 View Post
Likely going to sell the house, going to split future time between elderly mothers house and cabin cruiser in the harbor..... ( that is a whole other story - stay tuned).

Been there over 30 years, location is not attractive to me anymore, and the house needs major upgrade/ refurb. It's 76 years old . WW2 era tract home. However, demand and prices are as crazy as pre meltdown of 10 years ago.

I don't want to be a landlord. Also don't have near term need of the money, but 4% for up to 10 years would be attractive to me as passive income.

Would set up trust deed note collection with a regional bank.

Worst case , if I had to repo it and resell , not a problem. However,

? what would happen if the debtor declared bankruptcy ? Could I be stuck modifying a loan ?
Why would you want to do this in a hot market? I can't see the upside and there is lots of downside. Not a problem if you to have to repo it and resell it? Here are a few I can think of house values go down and your buyer has second thoughts or loses his job. They don't cooperate with you just sit in the house until the sheriffs eviction. They leave you a parting gift of taking everything that isn't nailed down and a few things that are.

Your buyer rents out your house and then is getting rental checks but not paying on their note. Good luck with that one.

Well you would have a ready answer for the question What do you do all day....
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Old 10-16-2018, 08:01 AM   #5
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They could trash the place and walk away.
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Old 10-16-2018, 08:04 AM   #6
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I have two words for you: Bad idea.
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Old 10-16-2018, 08:13 AM   #7
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OP, are you taking a loan because you want to or because you have to in order to sell the property? It is unclear to me.

IMO a clean exit would be better if that is possible.

My Dad did an installment sale many years ago, but it was on a piece of land with no building.
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Old 10-16-2018, 10:19 AM   #8
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We've sold and carried loans often. Have done hard money loans on property frequently. Works for us, but I strongly suggest the buyer have skin in the game with a downpayment they don't want to walk away from. Also strongly suggest you use an escrow company to hold paper, collect payments, figure interest/principal, and generate tax forms. That way the buyer isn't coming to you and crying or arguing about how interest was computed. Charge more than 4%. We are carrying a little trailer park at 7%. Foreclosed on it 6/2012, sold 12/2012, 30 year contract due 2022. Buyers continue to improve the place, would strongly consider extending the contract if it comes up.
Sold a crappy little rental that needed way too much to get bank financing 10/16 with very little down. 7%. Buyers have done a new roof and a horrible partial paint job. If they don't follow through I'll probably resell as a vacant lot.

Had a borrower go bankrupt on a hard money loan some years back and the judge did adjust our interest rate. Big surprise to me, as I thought the contract spoke directly to that eventuality.
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Old 10-16-2018, 10:47 AM   #9
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4% is too low for me. Not when mortgage rate is almost 5%. Why can’t this person gets a proper mortgage. If not you need to rack up the rate for the risk you are taking.
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Old 10-16-2018, 12:56 PM   #10
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Quote:
Originally Posted by pjigar View Post
I have two words for you: Bad idea.
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Originally Posted by Stormy Kromer View Post
They could trash the place and walk away.
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Originally Posted by ivinsfan View Post
Why would you want to do this in a hot market? I can't see the upside and there is lots of downside.
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Originally Posted by njhowie View Post
I think this is a bad decision.
I agree with everybody else here - - don't do it! At least, I wouldn't do something like that. Sounds like a huge headache. I'd urge you to just sell the house, pay off the mortgage, and be done with it.
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Old 10-16-2018, 02:46 PM   #11
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Not yet on the market , just thinking out loud at this point. If I did this, would require good credit, at least 10% down, and match current rates. I am hearing people say Mortgage rates are 5 % .

As far as being a hot market, simply irrational exuberance or the bigger fool theory. When I bought the place over 30 years ago, it was the same thing, high demand and little inventory, especially with houses in the lower price end of this particular area.

I have seen 4 complete up /down cycles during my ownership. And this is the 5th. The run up to 2007 was extreme and the meltdown equaled it but much faster.

In the current market, after a rehab, it would bring 2 k mo. gross. Keeping the net high as a landlord requires far more effort than I want to do.
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Old 10-16-2018, 03:53 PM   #12
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I've carried many private mortgages. I recently attempted to sell my vacation condo and carry the note, but that buyer flaked out and I ended up selling to someone who got traditional financing. Here are a few thoughts:

1. Require a healthy down payment, preferably 20%+. This is your biggest assurance the borrower will pay. When they have skin in the game, they find a way to pay. (I've never had a borrower be late on a payment from something like 15 loans I've done.)

2. Your interest rate is too low. The kind of borrower who will warm up to seller financing usually has a low credit score, or is an entrepreneur who's tax returns don't show their real income and therefore they can't qualify for traditional financing. I'd suggest you start with at least a 6% rate and see how the market reacts. Write it up as a 7 year balloon, but tell the borrower that if "rates don't move much, you'll consider extending the loan." This gives you some flexibility in the event that rates do shoot up.

3. Yes, in bankruptcy a judge could theoretically re-do the loan. I haven't gone through that with any of my borrowers, but what I hear is that judges are likely to re-do loans at high interest rates (think 10%), as opposed to what you're describing.

4. I suggest requiring borrower to use a loan servicing company that will collect the funds, escrow the property tax/insurance, and deposit funds directly to your account.

5. Make sure you file a proper first lien with your county recorder.

6. To find the right buyer, you may want to try cutting out the Realtor and put an ad on Craigslist and Zillow with the headline: "Seller Financing." This will tend to attract the kind of person who wants you to carry a loan. As it turns out my Craigslist ad for my recent vacation condo ended up attracting the eventual buyer who got traditional financing. But it saved me $25k on Realtor fees!!

Good luck!
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