Owner financing one of my properties?

Question

I'm thinking of selling one of our single families, owner financing. The house is a 2 bed 2 bath in a great area and it's paid for. My husband and I are in thinking of relocating. Our kids and grand kids all live in Los Angeles and we're looking to move closer to them, but not to California. Since I manage our properties myself I don't like having properties across the nation. I'm flying to Vegas next week, meeting with a friend who is a realtor to look at properties. The tenants love the house and the location and I'm fairly sure they would be interested in buying it. I don't know anything about seller financing so I wanted to get some input from some of you who might have sold it that way. I don't think I want to give them more than a 2 years mortgage (ballon in 2 years). Thanks for any input

Ken V. · Answer

@Kishore, I assume you are referring to Orita's situation? If so, my understanding is that Dodd Frank regulates serial Sellers that sell on lease/purchase terms. Without doing a refresher on Dodd Frank it is also my that a Seller's one time sale to a tenant or buyer on lease/purchase terms is okay. But you are right to be concerned. As you know in Michigan we use land contracts. And whether the sale is through land contract or lease purchase the success of the deal depends on the vetting of the buyer.

Ken V. · Answer

Orita: Without knowing more details about the property or the tenants, on the surface a 2 year balloon seems very tight. if they are renters now, and can only afford (presumably) to pay the rent, what will happen in 24 months to change their lot? Will the property appreciate in value so that the house will have equity - and would a bank even recognize the alleged equity? Will their credit allow them to get a mortgage? Don't mean to be a downer but I see a train wreck coming and recommend that you plan on having to foreclose on the property. My vote is that you sell it outright and cut your ties to the property. Again i don't know all the facts and the tenants may be millionaires just slumming, if that is the case then no worries.

Orita Issartel · Answer

Account Closed Thanks. I'll check with a lawyer but I sold a condo to a client ( I'm a Realtor) about 3 years back and the seller, who happened to be a lawyer, financed part of the deal for 2 or 3 years. Better safe then sorry though, right?

Account Closed · Answer

You'll need to check with a lawyer. I believe Federal Dodd-Frank regulations will not allow you to have a balloon payment less than 5 years. There are other restrictions as well.

Kishore P. · Answer

@Ken Vance : I'm just learning about Seller Financing myself so forgive me if I put you on the spot Ken.Can you clarify if a Balloon in this situation complies with the Frank Dodd Act?Thanks in advance.

Orita Issartel · Answer

@Todd Dexheimer Thanks for the input. That's an interesting point, a lease to buy. I'll look into that option too.

Todd Dexheimer · Answer

2 years is good, just make sure you are prepared to give them an extension if they are paying. For terms, that is up to you and the buyer. I would suggest giving them better terms if They give you a large down payment and if they give you a small down payment give them less beneficial terms. I definitely would add a few percentage points to what the market is charging. You could easily charge 6–8% and you could amortize it over a 20 or 25 year period or you could just charge them a flat rental rate with a small amount going towards principal reduction or even nothing towards principal reduction. So we need on the lease with the option to purchase will give you the most control. You will have two contracts. One will be the lease contract and the other will be their option to purchase it in two years. The other way of showing it would be a land contract/contract for deed.

Ken V. · Answer

Orita: Without knowing more details about the property or the tenants, on the surface a 2 year balloon seems very tight. if they are renters now, and can only afford (presumably) to pay the rent, what will happen in 24 months to change their lot? Will the property appreciate in value so that the house will have equity - and would a bank even recognize the alleged equity? Will their credit allow them to get a mortgage? Don't mean to be a downer but I see a train wreck coming and recommend that you plan on having to foreclose on the property. My vote is that you sell it outright and cut your ties to the property. Again i don't know all the facts and the tenants may be millionaires just slumming, if that is the case then no worries.

Orita Issartel · Answer

@Ken Vance Yes, true, a 2 year seems too tight. I think I'll have to agree that selling the property outright might be a better choice. I don't think the tenants are millionaires slumming but I do believe they both have good secure jobs. Maybe they can get a mortgage to buy it outright. Thanks.