owner financing - first time

[Julia Puig Jordan]

Hello,

i have a property in Houston market up for sale or rent and think about adding owner financing as well.

The house value is $ 185.000.

How much would $ you recommend for downpayment, for expected appreciation ( this market appreciated 5 to 12 % last 3 years) , would you have different amounts for a 1 year, 2 year, 3 year financing? Would you recommend a lawyer? I am a real estate agent myself but have never done a owner financing and have heard it's not recommended to do them as a agent yourself.

Thank you for your recommendations,

Julia

[Bryan Scott]

I'm assuming you own the property in question, right?  You never really said for sure and it makes a huge difference in my answers to your questions.  For now, I will assume you are the owner, who just happens to be a licensed agent as well.

If you have never done one of these, I would strongly encourage you to stop and seek out a real estate attorney who understands these really well.  Even before than however, I would inform my employing or managing broker, because he/she may require you to run the transaction through their books.

There are more pitfalls to these than I will have space to reply via this post.  Just know that you need to handle it like any other "arms-length" transaction.  Anticipate everything, treat your buyer like they know nothing and conduct the transaction as if you might be sued.

To start with, you need to identify how title will be held for the duration of whatever contract period exists after close.  Either you pass title publicly (seller carry wrap-around if there is an existing mortgage/loan), or you have it held in escrow (land contract/contract-for-deed).  If the former, you have potential issues with violating your deed of trust covenants.  If the latter, you have potentially the same issue, but you may get to keep the tax advantage.  As well, land contracts do not change your hazard insurance policy.  Also know that most mainstream title companies will not close a land contract transaction, but most all will close a seller-carry wrap-around deal.

Once you get past the above, you must handle this transaction like any other for one of your brokerage clients.  This means they need to inspect the property (they order and pay for), obtain a fair market appraisal (they order and pay for) and have the transaction closed by a competent title/escrow company, real estate attorney, or other qualified intermediary.  This closing may need to include title insurance and all the other trimmings depending on your answer to the above question about passing title (or not).

You have potential issues with the Dodd-Frank Act, with imposing a balloon payment, with properly notifying at least two offices of the county of record (treasurer and assessor).  You will also have issues related to receiving loan payments and disbursing funds to the underlying mortgagor, as well as issues related to year-end reporting.

You asked about down payment and mentioned appreciation after year 1, year 2, year 3.  When you say, "Down Payment," I presume you are not talking about a Lease/Option sort of transaction, which is somewhat implied by the year 1 - 3 mention.  I suppose you can try to take the buyer's appreciation in years subsequent to closing, but I am not sure whether such a tactic is even legal whether the property is sold and title passes, or is held in escrow.  As to the remaining question about down-payment, you can ask whatever you want, but personally, I would not accept less than 5%, but I would expect to get full market value for the property, or even the high end of the range on a new appraisal.  Depends on how much skin in the game you wish your buyer to have.  More is better.