HELP! I am a newbie and was offered an owner finance option!

[Isamar Ochoa]

HELP!

I am a newbie and was offered an owner finance option!

I know very little on this topic but have heard this can be a great option. I am hopeful you all can share your experiences, warning, and tips.

I am planning to live in the home and househack… The numbers look promising even if rents drop a bit in the Bay Area. This home is 30 years old, fully renovated, a good part of town, one block away from a university, pretty much an A-list home.

I spoke with the representative of the owner and she shared the following…

Price is $1.5M and the seller wants 20% down payment which I DO NOT have. The seller is not set on an interest rate, but they are thinking (4.65-4.77). I think this is high since I just did a refinance and was offered 3.65% but on a much smaller loan. But I understand the terms are different on an owner finance deal. When we began discussing owner financing, I was hoping to negotiate a lower down payment, but the owner is pretty set on 20%.

Should I ask my loan officer (who is currently doing my refinance) about getting me a loan for this down payment? Has anyone had to get creative for a DP this large?

What should I be looking out for? Warnings? Negotiating tips etc…

Does this flat-out sound like a terrible deal?

The seller knows the mortgage can be covered with the rents so they are confident who over purchases the home can make the payment. So, I am hopeful I can make this work since my income isn’t high enough to easily qualify for a loan this big on my own (I’d need a co-signer which is not impossible but would rather do this on my own).

I am also going to have my agent check comps to see if we should offer less.

Thanks in advance!

[Jonathan Pflueger]

@Isamar Ochoa

Owner financing is completely negotiable and an excellent option under the right terms and conditions. There are a few things to keep in mind as you evaluate this deal: 

1. Always negotiate the terms of the note with your exit strategy in mind. For instance, a 3 year note vs. a 20 year note will affect how you structure your deal. Will you do interest only for 3 years and then refinance or ask for an amortized loan stretched over 30 years with a 20 year balloon. These are just two options in a a endless sea of options, but tailoring your offer to your exit strategy is imperative. Even better is tailoring your offer as to allow for multiple exits in case of the unexpected (interest rates may be at 8% in 3 years - who knows?).

2. Do you have to use a realtor for this transaction? If you can save the owner the 5-6% realtor fee and pay a lawyer a set fee this may be a good way to get the price lower or negotiate a lower interest rate. With that said and depending on your experience level, a good realtor can be worth their weight in gold in terms of liability protection and experience. Just depends on the situation. 

3. Why is the owner wanting to owner-finance to you? It is important that you understand his/her motivations, not only will this help you tailor your deal but it may also help you avoid buying a dud. Motivation is key - it will dictate terms of the deal in more ways than one. 

4. Everything is negotiable - do not forget this!

Best of luck!