First owner-finance deal; interest only?

Question

We have a wholesale deal we are working on closing, but the end-buyer doesn't have all the cash right now. Since this is a smaller property we have the finances to just buy it ourselves, and the end-buyer suggested us doing owner-finance until she can get her credit right; she predicts 3-6 months.

Curious of people's thoughts on these terms as we've never done an owner-finance before:

15% downpayment

12% interest

ballon payment due in 8 months

Initially wanted to do 20% down but we met in the middle at 15% as she doesn't have enough for 20. Thinking if we should charge interest-only payments or principal and interest. Also, I told her the rates would go up if the ballon payment wasn't met after 8 months; what would be a reasonable amount to raise it to? Wanted to double it to 24% since we really don't want to do this long term and are more doing this just to complete the wholesale deal.

Appreciate any feedback on this.

Mitch Messer · Answer

Hey@Francis Rusnak. Let's back up a bit: Why are you working with this particular buyer? To a wholesaler, a buyer who "doesn't have all the cash right now" is not a buyer. Particularly if you were clear from the start that this was a cash deal. If she's the only buyer who expressed interest in the deal, then it might not be a deal after all.Unless you really want to be in the hard money lending business, I'd send your buyer to an actual HML or suggest she find a private lender. As an investor, how she gets the funds is her responsibility.We specialize in owner finance deals for our investors, but only when it makes sense for us and for the buyer, never as a fallback for a "buyer" without adequate funds to close.Moreover, we operate in Georgia, where foreclosure is very swift and relatively cheap. Unless that's also true of Illinois, I wouldn't recommend you go down this path.

Brian Gibbons · Answer

@Francis RusnakLook at what a "sellable note" looks like to a note broker.See https://www.dropbox.com/s/dp3jes53mudz2tf/Create%2...

Michael Henry · Answer

@Francis Rusnak - I think you are better off doing a lease with option. Do the 15% down as an option payment and charge her rent. Make sure you check her credit report and score to make she the timeframe is truthful. If it is them the option is the better route. I would stay away from the long-term financing unless the exit strategy is refinanced out in 12 months or sale the note on the open market at a discount.

Account Closed · Answer

do not attempt to do any owner occupied loans especially less then 5yr balloon payment 15% is way too low of down payment The only way to attempt it is a lease option with the 15% down under no circumstances transfer title to property without full payment Did you run her credit as suggeste go see a rmlo to see about the condtions needed to underwrite the loan

Adam M. · Answer

Agree w/ @Michael Henry Lease option sounds like the best option. You could take some upfront or on top of their monthly rent (or both). They can renew at the end of the year, buy, or walk and you give them their money back. You might find some stuff out about her while she is renting that might make you less or more likely to do long term financing. It could go either way.

Francis Rusnak · Answer

Appreciate the input boys. Calling around to RMLOs now to see what I should be looking for out of her in regard to LTV, Downpayment, credit score, etc. Haven't seen you around Steve, hope you're well.

Francis Rusnak · Answer

Sage advice @Mitch Messer Thanks for the feedback.This is making me look at this in a different light. But there must be some type of terms that would make this deal one we'd want to go through with where the reward outweighs the risk. Is that a higher downpayment, a higher interest rate, some other legal paperwork signed beforehand, etc.? Maybe it's not a deal as you say and we are trying to force it too much. But since we are still in the negotiating phase, I'm thinking there should be a mark where it makes sense to go through with it.

Michael P. · Answer

I hope other more seasoned owner finance guys will chime in as all mine were done in 2011 so I am not up to date on the current dodd frank laws. So I would definitely look into those, you might need a RMLO to help you out there. If you are thinking about raising the rates if she hasn't paid you off after 8 months you will want to put into the note something called an Escalating Interest Rate. So after 8 months it raises 1% then after 8 months it raises 1%. You can write whatever you want. Once again I don't know the current laws so consult a RMLO. Goodluck...

Damarius Gilbert · Answer

why not interest only, ballon at 12 months and try to do cash out refi with a bank later on after some seasoning. That's if you buying the deal cheap enough. Just my .02 cents.