owner financed deal hesitations

[Brian Walsh]

I am a middle aged male, married with 2 kids (16 and 6). I have never owned a home and have always rented while I completed my education (am now a doctor).

My wife and I found a deal where the owner is willing to finance the property (price 296K). The assessed value of the home in 2009 was 287K. The owner will hold the mortgage starting at $1000 for first 2 years of deal. Then after 2 years, owner held mortgage rate is set at FED Rate (currently almost zero) plus 3%. All the while the owner states she is just looking for $1000 per month. There is no pre-payment penalty. We are putting 10K down.

My radar is going off on this deal, and I am trying not to get emotionally attached to the house. When I look up amortization tables on 286K at 3% the normal payment is about $1250. What I figure is happening is the owners want the design of the contract to pay little equity, get a decent down payment, then keep the person in the contract for as long as possible. Also what I am questioning is the use of the FED rate as the means to adjust the payment up or down. Has anyone ever heard of this? If the FED goes up to 6% then I would be paying 9% on a house with slow moving equity.

I am a good doctor but a lousy money manager. Any help and information would be appreciated.

Thank you.

[Jon Holdman]

I'll add that if someone offered me $120K for that house I'd sell it in a heartbeat.

A house is just a pile of sticks and sheetrock. Unless you're talking about million dollar houses on the shores of Maui, there are dozens more just like any one you look at. Just like good oysters, each one is a unique delight. And there's plenty more where that came from.