Buyer wants to put 100K down

[Matt Batson]

We are trying to sell our house and found a buyer who wants to do owner financing with us. This is not an investment property, but will be their primary residence. They came into some inheritance and want to put 100K down on a three year term.
Anyone have experience with the business end of an owner finance deal?

I would think this is a foolproof deal for us. If they miss payments two years in and we have to foreclose, we get to keep the 100K. I dont see how we can lose on this one.

thoughts?

[Jon Holdman]

What you're talking about is a "wrap". You're creating a new mortgage and wrapping the existing one. No matter how you slice it, when you sell the house to them, you'll violate the due on sale clause in your existing note. That will give Countryside the right to call the note due. But, if you keep making the payments, its unlikely they will do that.

As the new owners, your buyers would be responsible for taxes and insurance.

There are several ways to do this. One is just create an "all inclusive trust deed." You create a new mortgage and transfer ownership to them. You keep your existing mortgage, and continue to make payments.

Another way to do it is an installment land contract. You keep the deed, but have a contract with them to make the payments for a period of time. At that point, they finish paying it off (i.e., they refi), and you give them the deed.

Another way to do it is a lease option. Essentially two separate transactions. A lease and an option to buy. You establish a option price. They pay your the option money (the $100K). That gives them the option to buy at some point in the future. The lease is separate.

The upside to a lease option is that if they stop paying, its just an eviction rather than a foreclosure. However, given their large investment, a judge would almost certainly rule this is really a sale and not a lease, and force a foreclosure to get them out.

That said, you're pretty well protected if you do have to foreclose. At the sale, it should bring well above the amount you're owed, even with late charges, back payments, and legal fees. You may well have some damage to deal with. A good lawyer might be able to help you recover some of that.

You probably won't do a three year, fully amortized loan. You would typically do a balloon payment in a case like this. Say you charge them 10% interest (you definately want a rate well above market for a deal like this.) Payments for three years would be $4517. Pretty steep. So, what you might do is do a 30 year loan due in three. That makes the payments $1229. But, the remaining amount is due in three years. At that point, they would need to refi to pay you off.

They would need to get insurance, with both you and countrywide listed as payees. If anything, this is what may tip countrywide off to the transaction. In the worst case, they would call the loan. They would have to foreclose to get the house back. Your buyer would then have to refi quickly to avoid losing the house.