Are there long(er)-term private lenders for owner occupied?

Question

Hello BP,

I want to see if anyone could point me in the right direction or offer insight on something I'm trying to help an old friend out with.  This situation isn't one I'm looking to profit a dollar from. But if the type of investor exists that I think may, I'd like to connect them or know where to go find them. I'm trying to help a friend navigate a creative loan to buy his current rental house and capture some 'free equity' while keeping the stability in his son's life that he has worked so hard for.

Brief backstory:  I've known the guy since middle school, never really close friends, but we've stayed in touch through Facebook over the years.  He's got a bit of a rough past, basically raised himself from a very young age, served some time in prison, not sure if he's finished high-school, etc. However, he's kept himself out of trouble, for the most part, for the last 7+ years and is the only stable parent to his son, who he has with a woman he's no longer with but often interjects drama into his life still (police calls, charges that get quickly dropped, etc). He does everything for his son that he never had himself in his life. I have friends from school who had it much better than he did and have completely blown their futures by this point (we are all in our young 30's). His future was already 'blown' in many opinions before he even got started, but he's built himself a pretty solid existence from the ashes.

His young son's got a "work station" at his shop and is his "right hand man".  When he's put up adds on FB for roommates, he demands absolutely no drugs, partying, or drama since it is his son's home. In the past few years, he has built himself up a thriving custom car audio shop out of a shop rental space in a warehouse park.  His work is the type where they put excessive sub-woofers and flat screens all over show vehicles, turn a Suburban into a 2-seater with 9 feet of 47billion watts worth of subs, wrapped in flowing body-colored fiberglass with computer controlled LEDs, and make golf carts thump while they cruise car shows. Way way over the top type stuff for most people (myself included), but he is bursting at the seems with customers and is a great business man. Before this business he would buy wrecked Yamaha R6 motorcycles and disassemble them in his garage, selling every single piece, part, nut and bolt that wasn't damaged, individually at swap meets and online.  He's always had that 'hustle', it just took him some years to apply it to legal endeavors like motorcycles and car audio, haha.    With his type past and his likely clientele in that business, his income is almost all cash and unreported (it is what it is).  He doesn't know his credit score and hasn't used it for anything in years, didn't ever plan to, he buys cars, pays rent, and everything else in cash.  However, he's been renting the same house for 7 years and was just recently told that his landlord is planning to list it for sale.  The landlord mentioned something about selling it to him for $120k or listing for $150k, but he can't get a loan and by now, equivalent rentals are a lot more than the $950/mo hes paying.

I think the landlord was knowingly offering him equity but I don't think the landlord wants to seller finance.   Despite the rental history, I know my friend wouldn't be one that buy and hold investors would jump through hoops to rent to: he's tattooed up, has a criminal record,  and no proof of income (likely no evictions though! haha).  But I think his hard work and rental history is at least enough to see if he's got a chance to actually own an asset with equity and continue paying on the note. Banks probably wouldn't touch a loan with no income and questionable credit, and a true hard money loan wouldn't be appropriate since he's not buying it as an investment.  However, after running a CMA, the house that his landlord casually offered him for $120k is likely worth closer to about $150k in its current condition (new AC put in when the old one broke two years ago, everything is solid but dated, I think the house was built in the 90s).  If he did a light cosmetic flip, ARV would be closer to $170k, slightly larger homes in the area have sold for $190-200k recently.  Those also aren't numbers that will have flippers jumping through hoops to buy it at, but my friend still has a potential opportunity of not moving from his home of 7 years, AND capturing $30k+ in equity.

I don't have the capital to lend him, and I know most private money and hard money lenders are in it for the higher margins on short term loans.  I know there are note investors in it for a longer period, but they are buying existing non-performing notes at a discount, making them perform, and then selling or holding.

Are there investors who will make longer term loans for owner occupied but sub-prime borrowers like my friend?  I would imagine it would cost a a few points up front, and carry an interest rate higher than a traditional mortgage.  However, I think if I could find him a loan at, say, 8-9% amortized for 30 years but maybe with a 5 year balloon, it would give him some time to fix his credit and either refi to pay off the loan or fix and flip it to have some money down on the next property. Even $120k at 9% for 30 years, P&I would be in the ballpark of the rent he currently pays. If higher interest, maybe it could even be interest only for a period to keep his payments manageable and he'd have equity before any principle pay down.  I'm sure he could afford a bit more by now for taxes and insurance, but his landlord hasn't raised rents so he hasn't had to.   His credit likely sucks, but if the mortgage payment came out to within $100 or so of his rent payment that he's paid for 7 years, I would think that rental history would be good for something, showing that he would likely continue to pay his housing payment.  If he got in a bind and had to sell,  or if the lender had to foreclose, there's equity there, much more so than I had buying my house in 09 with FHA, first time home buyers credit, and zero out of pocket.

So while I'm not offering to personally loan or to guarantee the loan to help this friend out, I hate to see someone who's worked hard to climb out of a rough past not be able to take an opportunity to capture some equity and an asset by buying a house he's already paid $80,000 in rent to live in. Numbers wise, it seems like there could be an investor looking for a moderate-term passive investment for 8-9%, but maybe I'm off base.  What do you all think? What would you call that type of loan?

Being that it's a tenant buying from a landlord and the numbers are tight, I wouldn't feel right putting my self between them as a Realtor making 3% UNLESS the landlord lists the property on the market in which case the seller is going to pay the buyers side to either me or his Realtor.  In that case I'd represent him as the buyers agent and the financing side would be creative.  Otherwise, I'd rather him just be able to get the property for as cheap as possible to stay in it another 10 years by me getting him the phone number or email of the right person.

Thanks for any insight!

Odie Ayaga · Answer

Any update on how this is working out @Russell Holmes?

Mike Grandjean · Answer

The note can be made more marketable by using an RMLO service who can document the file- the seller acts as the underwriter in approving the financing, but they will verify rent and perhaps in this case put together some non-traditional credit sources and income documentation in trying to establish ATP (Ability to Pay)   The seller could potentially sell the note at the closing table (likely around 70% of the Note Value.)  In answering the question of note value after 12 payments- several factors to consider:  Note Investor looks at Investment to Value ratio- so from worst case scenario want to make sure they are in a good position if the note turns non-performing.  There are several marketplaces for notes and more coming online- Hard to say where the discount would fall without putting it out there- but the more solid the package and the the more in-line with property valuation it is, the easier to market.  You are on the right track- worst thing that could be done is to have a note balance higher than the value of the property.  (Last comment here- Florida is a hardest hit state- many of the funds from TARP that were not used for modification are now made available for down payment assistance in some instances.  That could be something to look into- google hardest hit states and find the matrix for Florida as a side bar.  Good Luck!

Mike Grandjean · Answer

The potential for the seller would be to owner finance to the tenant- with a solid note and payment history in place he could then sell the note (at a discount likely) with some payment history.  (An investor could so the same thing but would likely price it higher for their risk & time.) Would accomplish a win-win for the occupant and the seller could carry a loan amount that even when sold at a discount cashes him out of the property with the proceeds he is looking for.  (On another note- there are bank statement programs for self-employed that exist and if he wants to become bankable, he will have to report income taxes or show the cash flow and do something to establish credit.  Hope that helps.

Debra A. · Answer

I would ask the owner of the property he is renting from for owner-financing. They already have an established relationship of 7 years, I don't see why he would say no. He already knows his rental history, which sounds very good. If he has cash, and enough of it, maybe he can offer the owner a significant down payment for the home and they can work out a payment plan together for the remainder.

Odie Ayaga · Answer

That's good news @Russell Holmes! I'm hardly an expert, but your description of how to proceed sounds like what I'd typically expect from a seller finance situation.

Russell Holmes · Answer

@Odie Ayaga actually I spoke too soon!  I just heard from the friend.  He spoke with the owner a couple times and got quite far with owner financing.  I think the original $120k wasn't valid, but the owner has verbally said he'll sell it owner finance for $150k with $12k down, and he's giving my friend until 1/1/19 to come up with the down payment as he continues to rent.  He said it likely needs a new roof and some light rehab (painting, maybe some cabinet doors or fixtures).  If it were fully rehabbed with a new roof, AC, cabinets, flooring, etc I think he could sell it for $180k.  Now hes not looking at this like any flippers on BP would, hes not trying to make a huge profit but more so save his residence and come out ahead with a slight discount.  If he can buy it for what it is currently worth or less, he's happy with the deal.   Owner financing $138k is extremely helpful.  Not sure of the terms etc, but I did tell him that he can work on repairing his credit and refinancing out of the owner finance loan down the road, so even if 30 years of payments he isn't bound to that one loan and rate.

He was asking for the process and I explained this to him.....please correct me if I'm wrong:

Since he and the seller are discussing directly as his landlord, I said he'd be best to use a real estate attorney and title company, leaving Realtors and commission out of it.  Let me take a look at the house and advise of a comp value (so far just going on his word and comps by MLS listings).  Once he knows hes in the ballpark and $150k is good, get it in an attorney- prepared sales contract contingent on appraisal and inspection.  I explained that I can fill in blanks of a form for a client, but can't practice law by interpreting his contracts with seller.  Then pay for both inspection and appraisal once under contract at $150k and make sure it appraises and the roof doesn't need immediate replacement. If it appraises high, great, if low, ask for discount.   If it does need a roof right away, ask seller if he can do so at an increased financed amount rather than out of pocket....I think coming up with $12k will take some work on my friends part..

I'm not trying to earn a profit or step outside of the bounds of being a Realtor and not a lawyer, but am I right to advise him along this path and direct him to an attorney and title company?  I plan to stop by the house and just give him my opinion of CMA value.  I also explained that my CMA is as valid as the owner's CMA that could be different, so it needs a real appraisal after being under contract.  Anything else I should tell him to keep in mind?

Thanks for all the help guys.  If this assistance helps this friend buy a house he's lived in since cleaning his life up 7 years ago, I'm going to get a picture of him, his awesome shop helper elementary aged son, and some cars on 30" rims with thumping sound systems he built to pull it off to post in this thread. Everyone's story is different, but this would be cool to help him pull off.

Russell Holmes · Answer

@Odie Ayaga thanks for checking in but unfortunately it basically just fizzled out. (Although I, for one, learned a great deal from this thread!)   I was trying to put something together for the guy but I don't think he had an interest in pursuing the owner on seller financing further or other methods.  He wasn't really interested in buying the house before it was offered to him and was content to continue to rent as is.  Being faced with move-out and higher market rents it was all of  sudden a more favorable idea to buy with a mortgage payment near his rent, but I think the lack of 'bankability' making a conventional loan impossible sort of spoiled the deal. Unless there were an 'easy' method of doing so, I think he's likely happier to find a new rental. Last I heard he was looking around for rentals, but I tried!

It all started with me commenting on his FB status about pursuing owner financing and then went into a private message conversation where I realized he had potential free equity....but the margins and lack of credit made it something that wasn't really reasonable for HIM to profit from or buy the house without giving up that free equity to make up for his lack of credit, so it wasn't something I wanted to push him into.

Russell Holmes · Answer

@Debra A. Denimarck I think that you are right, the rental history is the most trusted to the one who has collected the rent (landlord/seller).  I will definitely propose this to him.

@Mike Grandjean your option takes Debra's even one step further, and I like that idea.  It definitely has potential as a viable option.  Say the landlord sells the house to his tenant, and tenant pays the next 12 months of mortgage on time as he had done with rent, what is the typical discount on a solid performing note?  I would guess about .8?  I know I've heard a few people talk about buying non-performing notes at .50 and then getting closer to .8 or so after 6-12 months of performance.  I know when selling a note at a discount, the math effectively makes the interest yield higher for the purchaser, buying at less than face value.  Does the note having a higher than usual interest rate make for less of a discount required?  In other words, are note investors looking for an ultimate percentage yield when discount is factored in, or do they seek the discount and let the yield fall where it may?

I understand the basics, but there are so many nuances to note investing it is still very new to me. Thanks for the input applying note investing to this situation.

I'll pass all this info along to the friend in this specific situation to let him do as he sees fit.  But beyond that, I'm logging away all of this information for potential future use in either investment deals of my own or helping navigate financing for clients, I really appreciate all of the expert insight!

Russell Holmes · Answer

@Jeff Filali thanks for the input, and those are good points.  The numbers really aren't a good deal for a wholesaler, flipper, or buy and hold.  I don't have the capital myself and would only consider creative methods for my own BRRRR or similar project down the road.  This type private loan, or really any lending is above my pay grade, something I may consider in a decade or two, but something that interests me.  If you're saying that it would be a better deal for someone to mark it up that makes perfect sense.  I could also see someone saying its a bad deal at 9% but at 14% it would be great.  In either case, I think that pushes it to be a no go on his end due to monthly cost.  If that's the truth, so be it.  I was just interested to hear feedback on how these type things would be analyzed.  Thanks for the feedback and I welcome any more.

Are there long(er)-term private lenders for owner occupied?

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