Owner financing of House sale

[Luck_Club]

I'm looking to hold the note for a house I own free and clear. The buyers financing fell through so I'm stepping in @6% interest only 36 month balloon mortgage.

The title company who was working with the original lender is completing the deal. The buyers are putting down about 15%. The attorney they found will draw up the note and mortgage for $300. What clauses do I need to include in these two instruments to make sure I'm protected?

Some items from the original lenders settlement document seem un-needed, and I hate to pay for what isn't needed even if it isn't my money. 1 item I'm definitely going to say no-no to is paid up taxes that are paid by me, credited to the buyers, but not paid to the county. I've talked with the buyers and said I want to escrow the taxes, but not charge a fee for that service just to make sure the bills are paid.

For all intents and purposes I've fired the listing agent and am bringing the deal home myself, even though I have to still pay him. Hence my checking to see what to watch out for in the note and mortgage.

 

[Looking4Ward]

I think it's smart of you to make sure any obligations that could result in a lien are processed thru you. In my limited experience many owner-financed arrangements result in the buyers moving on after a year or two and the seller pocketing the profits.

 

[flintnational]

It will vary by State but I would want a real estate attorney representing me drafting the docs. Aside from that, similar to the taxes, you also need to make arrangements for the property insurance payment. You should be listed as the mortgagee/payee on the policy and receive notices of payment and cancellation.

FN

 

[youbet]

Isn't the real risk in these seller-financed deals to the buyer? Unless I was desperate and couldn't obtain traditional credit (a situation I've never experienced so I don't really understand it), I'd avoid a situation where I'm making payments to a private party (including tax escrow) hoping that at the end that party actually delivers a clean title to me.

What happens if the seller dies, goes to prison, goes bankrupt, has the house tied up (as an owned asset) in a law suite, etc. ?

 

[pb4uski]

Just out of curiosity, why did the buyer's financing fall through? On your question on what provisions to put in to protect you, your lawyer should be able to provide guidance on those... if not, then get a different lawyer.

I presume tht you'll be doing an installment sale for tax purposes? If so, just do a quick check to make sure your deal qualifies though from what you write it sounds like it will.

 

[CRLLS]

Isn't the real risk in these seller-financed deals to the buyer? Unless I was desperate and couldn't obtain traditional credit (a situation I've never experienced so I don't really understand it), I'd avoid a situation where I'm making payments to a private party (including tax escrow) hoping that at the end that party actually delivers a clean title to me.

What happens if the seller dies, goes to prison, goes bankrupt, has the house tied up (as an owned asset) in a law suite, etc. ?

"not my circus...." But the recent (coming up on 10 years now?) flood of foreclosures would tell me there is significant risk to the seller if the buyer becomes a deadbeat. It takes several years of legal hoops to evict a buyer and regain legal rights to your home. That does not include the damage that can occur during that time. I have looked at some repo's and they were not pretty. Nothing being maintained, carpet destroyed and holes punched thru walls are just a beginning. Not to say that will happen. but there is seller's risk nonetheless.

 

[Sunset]

OP - you NEED a lawyer to protect your side of everything. The seller's lawyer will write it up to protect the seller and let you hang in the wind.
This is NOT the time to save $1,000 by skipping out on the lawyer. You could end up losing the house.

A big red flag is they couldn't get financing, so I'm unsure why you think you are smarter than a bunch of banks who do this all the time.
Where the house is located, how long do people take to evict when they fight the eviction ?
After they are evicted in say 1.5 yrs, how are you going to collect the payments they never made, and the cost of repairs never made or repairs for damage as they took the furnace with the appliances ?

 

[Big_Hitter]

I owner financed a deal this year, but it was for undeveloped land.

 

[Senator]

If the financing fell through because of credit issues, be prepared to get the house back in much worse shape than you sold it in.

If it fell through because of appraisals issues, maybe it will appraise for higher and the buyers will be able to refinance.

I purchased a contract for deed as a way to purchase a property cheap. Hopefully your 15% down and 6% interest works out.

If the buyers are paying taxes and water bills, be sure to make sure that they do. If not, you may get the house back and owe that money too.

 

[calmloki]

Back last year we sold a rental house - this is what I wrote a lawyer at that time:

"We continue to try and divest of the rentals:

We have a long term tenant in a pretty rough little house. They love the place but it is very old so any inspections for a loan would be problematic. We are considering selling to them and carrying the contract. Doubt they can pay enough down to cover our capital gains tax, but that just means we convert some of our bank account money to money earning interest at the contract rate.

I'm thinking a 30 year land sales contract due on sale would work just fine and keep their monthly payments under their current rent. S*** is wanting to have a beneficiary of the contract in place should we both die before contract payoff. We would sell "not as tenants in common but with right of survivorship" (or whatever the seller equivalent is) so if either of us died the other would have a non-taxable event and continue to get payments. If the contract was paid off before both of us died there would be no contract to transfer to the named recipient, so no event to even have them be aware of. BUT, in the specific case of a contract in existence and Sally and I both deceased, a POD person would already have been named and would start collecting the monthly payments".

My reading indicated a land sales contract was a superior way to go if foreclosure took place.

 

[phil1ben]

OP - you NEED a lawyer to protect your side of everything. The seller's lawyer will write it up to protect the seller and let you hang in the wind.
This is NOT the time to save $1,000 by skipping out on the lawyer. You could end up losing the house.

A big red flag is they couldn't get financing, so I'm unsure why you think you are smarter than a bunch of banks who do this all the time.
Where the house is located, how long do people take to evict when they fight the eviction ?
After they are evicted in say 1.5 yrs, how are you going to collect the payments they never made, and the cost of repairs never made or repairs for damage as they took the furnace with the appliances ?

The above is precisely on point. Without going into detail, I work in this field. In my humble opinion you would be crazy not to have YOUR LAWYER draw up the Note and Mortgage and other security documents. You should also have the Buyer pay for a Lender's policy of title insurance. Importantly the Mortgage must deal with the payment of taxes (which prime your mortgage) and insurance. You need to make sure all insurance payments go to you as the mortgagee. If you do not work in this field, you cannot trust the other team to protect your interests. They are on the other team.

You are knowingly entering a transaction which has risk. At the very least protect yourself.

 

[Aerides]

Even with the best of lawyers... why would you want to do this? Every month wondering if they're going to pay...(assuming there is some issue with them that precludes traditional lending).

It's a sellers market in most places right now. If not, I'd either hold the property off the market for a year, or just mark it down 10%, and sell to someone else with a bank mortgage.

Your tag line says you plan to start a lot of away travel in the next couple of years. Peace of mind is kind of a prerequisite for that to go well.

 

[OldShooter]

+1 on the lawyer!

In our state one can sell on a "Contract for Deed." This is a much tighter situation than a mortgage, which must go through an elaborate foreclosure procedure if the buyer defaults. With a CD, if a payment is 30 days late the buyer is out. End of story.

Ask your lawyer whether a mortgage is the right instrument or whether something more favorable to the lender (you) is available.

Note I am not recommending for or against selling the house to a credit-impaired buyer. That's your issue and people have already commented on it.

 

[athena53]

Isn't the real risk in these seller-financed deals to the buyer? Unless I was desperate and couldn't obtain traditional credit (a situation I've never experienced so I don't really understand it), I'd avoid a situation where I'm making payments to a private party (including tax escrow) hoping that at the end that party actually delivers a clean title to me.

What happens if the seller dies, goes to prison, goes bankrupt, has the house tied up (as an owned asset) in a law suite, etc. ?

What you're describing is the "contract for deed" situation in which the owner maintains title to the property till all the payments have been made.

What the OP is considering is taking the place of a bank. He/she turns over the title to the buyer at closing and loans 85% of the purchase price to the buyer, in return for the buyer's promise to make monthly payments for 3 years and then pay the remaining amount due (the "balloon"), presumably by getting a bank mortgage. If they don't keep their promises the OP has to go through foreclosing on them to get the property back.

Seller financing was something realtors pushed back in the late 1970s/early 1980s when mortgage rates were in the double digits. Not something I'd ever consider; too much could go wrong. My main concern would be the reason the buyers can't get financing. Before the financial meltdown, many buyers with poor credit were given mortgages that had OK terms for the first 2 or 3 years, after which rates would rise to market levels. They were assured that at that point, if they'd improved their credit, they could refinance to a favorable fixed-rate mortgage. Many found that they couldn't, and as the defaults rose and housing prices tanked, even fewer of those subprime borrowers could refinance because they were underwater. The OP is proposing collecting interest only for 3 years so the buyers wouldn't even be building up equity through repayment of principal. I'd be very concerned about the buyers' ability to get a mortgage in 3 years.

 

[Teacher Terry]

In similar situation we ended up with a house back after a year. They took care of it fine but the market dropped a ton in that year and then we could not sell it. Ugh!

 

[ExFlyBoy5]

+1 on getting your OWN ATTORNEY. But, no way would I want to get in on a deal like this. There are other investment vehicles that can get you about 6% with less risk.

 

[Sunset]

In similar situation we ended up with a house back after a year. They took care of it fine but the market dropped a ton in that year and then we could not sell it. Ugh!

Something I never considered as a risk until after 2008, and still easy to forget they buyers will walk if it drops more than 15%

 

[Weathering]

Why not switch to a rental agreement (until they can get financing) or a rent-to-own? Then you won’t be paying your failed realtor. It will also be simpler.

 

[RenoJay]

I've made something like 12 loans to complete strangers for the purchase of real estate. On my deals, I insist on at least 30% down payment (to account for potential drop in property value) but when you're wanting out of your own home, I think 15% is likely about the best you'll do. A few things I believe are:

1. Don't skimp. Pay $1,000 for good legal docs. It's ok to pass this expense to the borrower if they'll agree. In my deals, the borrower pays all fees.

2. Get an "Absolute Assignment of Rents." At least in my state, this means that if the borrower defaults on me, but brings renters into the property, I can approach the renters and tell them (legally) that they need to pay their rent to me, not the person they thought was their landlord.

3. Obviously maintain a first lien on the property.

4. There are note collection services that will collect principle, interest, property taxes, insurance, etc. in an automated way every month. I always insist the borrowers use the note service of my choice. Also these services will notify me if the borrower's insurance lapses. This is important in case the borrower makes a change, and then the house burns down. You don't want to be in that situation.

5. I'd put in a default interest rate meaning they can pay you 6% or whatever as long as they're in compliance, but if they miss a payment, the interest rate automatically jumps significantly.

Sounds like the borrower is pretty motivated in your case and likely things will turn out fine, but again, spend $1,000 and deal with a real estate lawyer who's familiar with what's likely to happen if the borrower declares bankruptcy. Find out if there's forced mediation in your state which would prevent easy foreclosure. Just make sure to dot the i's and cross the t's on this one. Good luck!

 

[brucethebroker]

I've made something like 12 loans to complete strangers for the purchase of real estate. On my deals, I insist on at least 30% down payment (to account for potential drop in property value) but when you're wanting out of your own home, I think 15% is likely about the best you'll do. A few things I believe are:

1. Don't skimp. Pay $1,000 for good legal docs. It's ok to pass this expense to the borrower if they'll agree. In my deals, the borrower pays all fees.

2. Get an "Absolute Assignment of Rents." At least in my state, this means that if the borrower defaults on me, but brings renters into the property, I can approach the renters and tell them (legally) that they need to pay their rent to me, not the person they thought was their landlord.

3. Obviously maintain a first lien on the property.

4. There are note collection services that will collect principle, interest, property taxes, insurance, etc. in an automated way every month. I always insist the borrowers use the note service of my choice. Also these services will notify me if the borrower's insurance lapses. This is important in case the borrower makes a change, and then the house burns down. You don't want to be in that situation.

5. I'd put in a default interest rate meaning they can pay you 6% or whatever as long as they're in compliance, but if they miss a payment, the interest rate automatically jumps significantly.

Sounds like the borrower is pretty motivated in your case and likely things will turn out fine, but again, spend $1,000 and deal with a real estate lawyer who's familiar with what's likely to happen if the borrower declares bankruptcy. Find out if there's forced mediation in your state which would prevent easy foreclosure. Just make sure to dot the i's and cross the t's on this one. Good luck!

Really good advice, RJ. I would a provision that if they did not buy/finance the house after (is it 3 years?), the rate jumps from 6% to 7% and 1 percent each year, perhaps capping at 10%. Many put off the financing until the last minute, so the penalty phase helps keep them motivated.

 

[Ronstar]

Another option is that you execute an “agreement for deed”. You retain title to the property until the buyer makes the final payment. Then you execute a deed to the buyer. This is a common method of conveying seller financed property. Make sure there are provisions for payment of real estate taxes and that the property is insured by the buyer. I bought a vacant lot by “agreement for deed” (seller financed) and it went smoothly.

 

[BeachOrCity]

You did not mention their credit score. Did you check? And look at the actual credit history?
15 percent down is not much if the buyer has problems. Between missed payments, rehab if property is damaged, repossetion and rehab costs you will lose money if you have to foreclose.

I like the poster who said rent to own. Esp if ur realtor sucks you dont have to pay them for not getting the job done. Less risk for you, and frankly for the buyer as well. Be sure to offer them 3-5 years to get it owned. Even if they have credit issues they can clean them up in that time unless they had bankruptcy or foreclosure in which case you should never seller finance anyway.

 

[W2R]

Personally I'd ditch these buyers in a heartbeat, get a new listing agent who knows what he is doing, put it back on the market, and sell it to someone with good financing lined up. I can think of no good reason to put up with these worries and problems. Sell it to a qualified buyer, take the money, and go enjoy your life.

 

[Luck_Club]

OP Update:
The reason for financing issues is 1 of 2 owners is commission only, with less than 2 years of history. Another few months and he would be OK to qualify. Credit are OK high 600's and low 700's. They are buying it for investment. Rents in the area are good, and they are getting a deal.

Selling the house is in preparation for estate trust planning. Delaying the sale can cost the estate $10K+ per month, so I'm pretty motivated to get her done now.

Contract for deed, though a better solution in most instances, has a negative tax consequence of gifting the cost basis, and realizing a $70K capital gain.

Property destruction: The property is in pretty bad shape already. I was looking at 60 days and about $10K in materials just to get it to attract first time buyers.

The original realtor really jammed me up, by telling me it would sell quickly as is, so I didn't do a thing. Then he brought and encouraged acceptance of offers in the 30%-50% under asking. I wasted 3 months counting on him to do his job. When this deal fell through the day before close, I was screwed. He brought me 2 more offers back in the 30% below his listing price, within hours. He encouraged me to accept a first time buyer with 5% down, basically setting me up for another potential repeat in 30 days. He really wasn't watching out for my best interest, so i worked with the only buyer I could get my hands on, and completed the deal.