Which form of owner financing?

Question

I have a duplex that the owner is willing to do owner financing with, but unfortunately it's listed and can't speak with the seller directly. The seller owns it free and clear. They want to know what type of terms/owner financing I'm offering. I have two questions: as the buyer would you rather have do a lease option, land contract, or a private note with the seller and why?

Then as a seller which option would you prefer?

Jon Holdman · Answer

@Ron Kelley no.  That would be a contract for deed.  A private note is just like a note from a bank.  The buyer gets a deed for the property and now owns it.  The lender (former seller) becomes the lender and has a security interest in the property.  That's usually in the form of a "deed of trust" or "mortgage", depending on the state.  A promissory note is an additional, non-recorded document that outlines the details of the agreement between the borrower and lender.

Bill Gulley · Answer

I suggest you totally disregard the above post, Brian that is horrible advice IMO on two counts.

Note and deed of trust and I really wish these ideas of zero interest would go away as they are trouble.

Always trying to do deals at the whim of creative that puts your seller at a disadvantage is never a good idea. Seems every time you turn around there is some twist as to an opportunity to stick the buyer's thumb in the eye of a seller or the other way around, as if it's never a really, really good snazzy  deal unless you can add some twist to it.

Listed properties mean the seller is paying an agent and they expect their agent to advise them. They don't usually hold a smooth talker in higher esteem than the person they selected to represent them.

If some "investor type" went to my client, 1. they'd be on my "S" list, 2. I'd have them so discredited not only would my client never deal with that investor, there would be a hundred Realtors that wouldn't be dealing with that investor. 3. I might even go further investigating that investor and flip them over for any infractions in RE. It's a very bad idea for a new investor to try and cut out a Realtor in their duties with their client. The way to present your deal ethically is in person to the agent and the owner.

You get a savvy seller and they will know they will get stuck with imputed taxes and that comes right out of the gain from the sale.

Go up in price and discount it, not creative that's just funny business. Look at those payments, then put the unknown imputed tax rate on that higher amount, deduct the taxes and you'll see you're probably worse off over the long haul. '

If you can't pay 3% to stay away from interest issues in fairness your deal is way to tight and you need to get out of it. If you can't operate a calculator to pay 8% and discount the price to compensate for a good deal, that is straight up, clear and without jazzy stuff, you ought to take a math class or get out of real estate. "You" doesn't mean you so much Brad.

This deal is a SFD by definition and it's not owner occupied, you may not be exempt from the SAFE Act, you'll need a mortgage originator/attorney. If the seller is not exempt he can not really negotiate note terms, both need the originator/attorney and neither will allow zero interest I'm sure.

As Jon mentioned, the note and deed of trust is the best way for a buyer. Period.

Make an offer and state your best shot reasonably, as to the down, the loan term and interest rate with the payment amount. A decent offer will have enough to pay costs of the seller and pay commissions or it will be an uphill battle depending on the motivation of the sellers.

If the property is listed and you are lean on experience consider getting an agent on your side to help.

Then, if that is rejected then you can try other approaches, asking if they will do an installment contract or master lease long term with an option. you don't have the due on sale clause issues here, that's a good thing to reach some agreement. Good luck.    :)

Jon Holdman · Answer

Private note, hands down.  Its a very clear process with well defined rules.  The buyer has full ownership.  The seller turned lender will have to do a full foreclosure if you default.  You can further encumber the property or sell it as you wish.

With a land contract you don't actually own the house.  The seller retains title and you have a contract to get the title later.  Essentially like a car note.  Laws are more varied from state to state on land contracts.  So, you'd have to investigate your rights in your specific state.

A lease/option is weakest for the buyer.  You have possession via the lease.  Same as if you were just renting.  You have an option that will let you buy, as long as you conform to all the terms of the option.  Sometimes these options can be heavily tilted to the seller.  You have no ownership at all, nor any ability to borrow against the property.   Selling requires you exercise your option to buy and then turn around and sell.

Try for a note first.  If the seller refuses, offer less money and weaker terms.  Realize that, especially with the lease/option, you're in a very weak position and the seller could leave you out in the cold in the future.

Ron Kelley · Answer

@Jon Holdman

Thanks for clearing the haze for me.

Ron Kelley · Answer

@Jon Holdman

Jon in-regards to the private note, wouldn't the seller/lender hold the title until the loan was paid in full?

Brian Gibbons · Answer

Give him $70,000 on a note, no interest, 70% of market rent ($700 per month).

Have him pay the commission.

$70000 div by 700 per month  = 100 months, then its paid off.

In 8.3 yrs you have $650 x 2 coming in, no debt service.

Agent usually gets in your way.  Knock on the door and see the seller yourself.

Brad Bailey · Answer

@Brian Gibbons thanks for that video and @Jon Holdman I appreciate the in depth explanation.  Very helpful. I realize I didn't give any numbers for the property, not that it changes the strategy. Duplex with unit 1 3bed/1bth unit 2 2 bed/1bth. Current rents are $500/unit. This area easily commands 650 for the 2 bed and 750 for the 3 bed. Owner is asking 65K. Any recommendations since it is listed and I have to deal with the realtor?

Brad Bailey · Answer

Ok I thought the private note would be the best especially for someone who really wants to sell the property. It would be easier for them to sell the note if they needed to cash out. Thanks. Would the title company or attorney write the private note then? or would we write it and submit it for closing?

Brian Gibbons · Answer

Free and Clear properties allow for creativity.

You can create a private mortgage with no interest but pay MORE for the property.

Which form of owner financing?

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