What are the drawbacks to owner financing?

Question

I may be transferring with my job and may need to get rid of my house. It's worth about $160K so that's almost $10K in commissions to a realtor. I'd like to keep all of the equity so I want to sell it myself. The market where I live is pretty slow so I figured a good selling point may be to offer owner financing. What are the drawbacks to owner financing for the auctual owner of the property (me)?

Frank Adams · Answer

Is your sale going to trigger a due on sale clause? How much equity in the house? How much gain can you put in your pocket tax-free? If they quit paying you the following questions become relavent: Is NC a "trust-deed", state or a judicial foreclosure state? How much is it likely you cost you to get it back, in either case? How long wil it take you to get it back? How much does it cost you to miss that many payments? There's nothing wrong with doing a FSBO, no special talent needed and you can learn it in a few weeks, after all most Realtors did! Not knocking the few that are really good, just the many that are below average. I've done about 30 seller finance deals, in the old days on "wraps" on FHA and VA fully assumable loans. I got one or two of those back! Most of them though have been straight up seller financing of 95%+ of the sales price. I know going in that most of the people responding to my ads are going to be those with bruised and battered credit. I've done about 5 foreclosures, (trustee's sales as TX is a trust deed state) at a cost of between $1K and $3K apiece. However, this isn't a "part time" thing with me, it's what I do for a living. I don't lose sleep over late and missed payments. I just collect my late fees and call the attorney when the problem gets too big, ie; 30 days behind and no serious effort to rectify. Think it over long and hard before you start. all cash

Account Closed · Answer

Possible dangers? They stop paying and you must forclose. New foreclosure laws do not favor the seller. Dangers if you have to take the property back. They damage the property. They think that since they own the home they can redecorate and rearrange to their hearts content. They tear out walls, do very bad paint jobs. Somewhere floating around on the web are photos of "the golden throne". That's a regular porcelain toilet that the new owner painted with metallic gold paint. She also built wobbly brick walls inside the house before she stopped paying and had to be evicted. Make sure you have a recorded contract that says they can not borrow any money against the property or place any liens on the property until it's paid for (or 50% paid for or whatever figure you and the buyer negotiate). You don't want to get it back with 50K second mortgage attached to it and 15k of workman's liens.

Ty Kirkpatrick · Answer

Simple owner financing can be very dangerous and I have done it a few times and quickly regretted it. I have come up with a new solution with a business partner to solve the risks and give more protection to both sides. This process is very simple and once it is done, you will need to get an attorney to give you a legal opinion, but other than that its very safe

Dick Green · Answer

Number one is the obvious...what if they don't pay? Then there's possible acceleration by the original lien holder. And what if they trash the property? Having said that still owner financing could be a feasible option. Generally the consumer involved in a fsbo/owner financing arrangement will take better care of the property having an ownership interest. An owner selling by themselves can forego/accidently overlook certain steps in the transaction whereby a licensed agent would be compelled to expound i.e. inspections and disclosures. I would limit my exposure by offering owner financing bad credit ok with 5 or 10% down, then sift thru the possible leads for someone who qualifies for an 90 to 95% sub-prime mortgage or who has the best possibilty of qualifying for one in a year. I would definitely require that they obtain conventional financing in 12 months. Depending on the stability of the purchaser you might want to consider carrying a small 5 to 10% sub-ordinate lien but keep in mind that they (seconds), aren't worth anything should the borrower decide not to pay. There's 100% financing availble for individuals having credit scores as low as 570 sub-prime and 95% LTV starting at 540 provided they possess sufficient tradelines. In my opinion it would be much easier and safer transaction to structure a one year lease option to buy with a sizable amount down from the tenant. Good luck!

Dick Green · Answer

Accidentally double post