How to advertise a house to sell using owner finance

Question

Hi, we have acquired three properties in the past 4 months.  We just closed on a house in Berkeley and we found out today the area/subdivision has an ordinance stating not over 30% of the homes can be rented. Sense it was our intent to rent this house, and the subdivision is already over rented, now we can only resell or owner occupy this house.  So I need to start looking in to selling with owner finance strategy.  Since the house is paid for with cash, what is the best way to sell and carry the note?  The house would market well in the mid to high 50s.

Should we Market the house through a realtor, or FSBO, and how should we structure the deal to a potential buyer?  How can we vet a buyer?  Same person that vets a rent?  We would like to get a down payment and monthly  payments for 5-10 years.  Should / can we charge interest?  Can we structure a no interest loan for more than the house is worth?  Any help or ideas would be appreciated.

Thank you,

Mike

Curt Smith · Answer

#1 Every closing attorney can create a seller friendly note and mortgage.  But its best to call around to other investors to get a few referals for attorneys who have closed seller financed deals.  Then verify that the attorney has done a bunch.   Read their boiler plate note and mortgage, after asking for a seller friendly version.

#2 Even if we assume Dodd Frank and the CFPB stay in its current form (not likely) you get 1 seller financed note per 12 months where you don't need a Licensed Mortgage Originator, but you must follow the intent of ATR ability to repay documentation.  IE do full doc, and calc DTI to your standards.  43% was only a recommendation, a good one though.  Use renter screening tools THEN sit down with them and get paper copies of all docs.  And go over monthly payments to bills and income ...  You can figure this out.   BTW this is for the lenders protection as well (YOU) to only lend to folks who can afford the mortgage and who are strong and are likely to stay and pay.

#3 You have a tax problem!   Selling inventory on seller financing means you pay all of the cap gains in the year of sale.  Think about this. BUT if your intent was to rent, but couldn't etc then you should be entitled to take installment sale treatment, albeit at short term cap gains, is the only viable tax treatment for this sale.  You'll be killed come April 15 otherwise.  You will need to work with your tax prep folks re this one.

#4 Make sure the late fee is sizable.  This was my mistake in my first seller financing (among a few others...).   I'd pick at least 10% of the monthly.  I now make it a flat $100.

#5 Always escrow taxes and insurance.

#6 Always use a 3rd party servicer to file the 1098's  etc and to pay the insurance and taxes.  You might look into trustfci dot com.  And have the servicing fee $30/mo added to the Closing Statement for the PITI + servicing cost so the borrower covers the cost.

#7. Don't be affraid to text, email, call WHEN not if the mortgage payments are late.  IE by the 20th and still no payment.  trustfci is slow to post their payment so your forced to wait till end of month to see if they paid.  Just because they are buyers and not renters does not mean you can't communicate with them as if they are renters, IE frequently, checking in to see how they are doing etc.

#8 File for foreclosure quickly.   They'll get the picture and pay up and cover the costs to file and come current.  I mean by month #2 (per your mortage and note, you need to have 30 days till deliquent) and no payment and texting and email gets weak answers, file for foreclosure.   Its too bad that foreclosure is not like eviction in that the Sherrif tacks a nice big red sticker on the door in eviction.  Foreclosure is way too quiet so you have to be the initiator with the borrower.

Cancel your insurance at the date of closing, the buyers insurance picks up at closing.  The usual turning off utllities at a few days AFTER closing.  Utilitly cos need the closing statement to create a new account in the buyers names.  Its just easier to turn off utiliities a few days after...

Thomas S. · Answer

Hi Mike,

In response to your post regarding "where" you can market your Owner Financed home, try:

www.OnlyOwnerFinanced.com

The site allows for sellers of owner financed homes to upload their listing(s) and display the terms of the owner financing they are willing to entertain. Buyers are also able to sort their search by these terms.

In addition, there is an "Agent" option where Agents can upload unlimited properties and get leads. All inquiries go to the individual that uploaded the property. Never sold and NO "Featured Agents".

Good luck with your sale.

Mike Stahlman · Answer

Wow, Thanks.  We will have to get with our lawyer and accountant to discuss the options we have.

So the tax problem is only due to Owner Finance?  Or will we have the same problem if we do standard bank financing with new buyers?  Thanks for that tip.  Good stuff to know!!!

All the rest of the information is great information.  I will keep this and review it with my wife and our professionals to make a decision on how to proceed.  But really great tips and information.

Thanks again.

Jeff Filali · Answer

@Mike Stahlman Its no different then any other home for sale.  Either advertise it FSBO or via a Realtor and include in the description "Owner Carry/Seller Financing available to qualified buyers with X down payment".  Also, if this is the only one you will be doing with seller financing, you still need to verify their ability to pay, but are not required to use RMLO to be Dodd Frank compliant.   Yes, you should ask for a sizeable down payment, I would ask for 10-20%, and yes you can definitely charge interest on the note.  Interest rates on seller financing are traditionally going to be higher then a traditional mortgage.  Good luck!!

Ryan Landis · Answer

@Mike Stahlman you should be able to put it on the market like you would any other house with a Realtor and have them make a note in the MLS that the buyer must purchase via seller financing (if you are going to require them to). For the loan, call up your preferred lender and see if they can take care of the pieces for you. Good luck!

Mike Stahlman · Answer

Tthank you for the response. We will use our lawyer to write the contract and research the mortgage originator to set up the loan. I'll let you know as this progresses.

Shawn Devoid · Answer

I just listened to a podcast yesterday.  The guest who did seller financing used a "mortgage originator" to do the paperwork.  They should be able to answer all these questions.  Try calling around to the title companies and ask if they know anyone that does this.  It's very important that you use a professional (either a mortgage originator or a lawyer who specializes in this) as Frank Dodd regulations put the same requirements on you as they do a regular mortgage lender.  They should also be able to direct you to a mortgage servicing company.  As far as Realtor or FSBO, it depends on whether you want to market it yourself and have a lawyer do the contract or pay a realtor to do both.

James A. · Answer

@Mike Stahlman  Unfortunately I don't have a clear answer.  I do know a lawyer is the best person to consult and a licensed RMLO can neg the terms with your potential buyer.  I remember listening to a pod cast, not sure what number, but it was with Grant Kemp and he spoke about doing wraps and owner financing.  I am really interested to hear from an expert as I am considering doing this with my house when I move.  I wish you the best of luck.

How to advertise a house to sell using owner finance

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