Advice for acquiring a true owner financed home?

Question

My husband and I are looking to purchase a home at a price of $65000 or less (low market values in our area, and we are open to some fixer uppers).  Our credit is not good due to a layoff about 3 years ago that devastated our finances, so we are unable to get a mortgage.   We are hoping to find a reasonably priced home in which the owner is willing to truly finance for us.  We have a small down payment ($3-$5 K) and can only afford to pay $450 per month.  We can make a yearly lump sum payment of at least $5K when we get our tax returns, so even on a $65K home, we could pay off in as little as 7 years.   Do any of you have any advice on finding someone willing to accept these terms?  This would be for our primary residence, not an investment property.  Thanks in advance for any help.

Steve Babiak · Answer

If you can only afford $450 a month for housing, then why are you making interest-free loans to the U.S. government of $5K per year?  That's a monthly amount almost identical to your housing number!

Bill Gulley · Answer

First thing I suggest is for you to talk to a lender (bank, credit union AND a mortgage broker). They can pull an infile credit report and get an idea of where you are. The questions you need to ask are:

1. What do we qualify for payment wise.
2. What debts should be paid off and when to qualify for more or to make a better loan?
3. Following the advice of the lender, when should we expect to be able to qualify?

You are three years past your financial hickup, but you really don't know the answer to these questions and the answers will tell you really where you are today.

Steve made a very good point, you need to use your money and stop overpaying your taxes so much. Use that money initially to get bills in order.

As to a property: GET THE PROPERTY APPRAISED! Do not pay more for a property because you are getting seller financing, never! Ask your lender who they use. When you get near having to refinance the loan, maybe 2, 3 or even 5 years later, the old appraisal can jog the memory of the appraiser and help them in doing a new one. The lender might like to see it as well especially if you did work to the property, but understand that you will need a new appraisal for your loan. What this can show is what lenders call "pride of ownership" and if you made quality improvements that will indicate that you take an interest in your property which will likely continue with you being a borrower.

Marc has an excellant idea about finding a less expensive home and making improvements.....but,

Don't bite off more than you can chew! There is nothing that will reduce the value of your home like botched work! Anyone...almost....can paint and clean, if you need new doors or things that begin some skill, get help from friends/family or hire someone and make sure it's done right. I can't count how many people did work on a house and got to the point where they had to refinance out of a seller financed deal and could not due to work being required by the appraiser....and some lost the house! So if you go this route, you gotta know your limitations.

Now, I'm gonna get in trouble with investors here.....do not do a house that is for sale "rent to own"! It is usually over priced and you will be dealing with someone whose business is selling using seller financing, some use tricks to basically cheat folks while some are straight arrows, but I suggest you make your own deal, not follow someone's program as programs are designed for the sellers.

Look for an elderly landlord who is still leasing and see if you can talk them into selling close to the rental amount. They should be tired of landlording, cleaning ups, repairs, advertising, collecting rents,  etc. where they can let you do all the repairs, pay for maintenance and pay them about what they usually get. Any way you do it, I strongly suggest you find your own deal

As to financing, as Nathan mentioned try to stay away from lump sum payments over the note term, it complicates issues and you may be explaining the deal to the seller in your offer, so keep it clean. Now that you lender said you should qualify in say 2 1/2 to 3 years, you know you can't do a 2 year deal. But also give yourself MORE time, at least 6 months. This is very important as if you were to apply 30 days before your note is due, if anything goes wrong, you could easily begin to get in default on the note being refinanced and this could become a serious problem. So in this instance you should not take any balloon note required to be paid off in less than 3 1/2 years and 4 is better.

Your interest rate should be competitive with what the seller would get if they had cash. The sale happens on day one, that house then becomes an investment to the seller and should be viewed as a better deal than what they would get if they had cash. It is not part of a sale price nor is it any great favor you need to pay for as they may also receive tax advanatges from taking the note instead of cash. Anyone claiming anything differently is being greedy, IMO. Interest should be based on risk, not a profit center. And the risk will be seen as being greater than a bank loan (and it is) so you will be paying more than the current mortgage rate on the street, but don't allow the seller to get silly about it. And, if you say 10% to some elderly couple dumping a rental, they know they can't get that rate on anything else!

There are`also new seller financing laws and your note needs to be originated by a mortgage originator or attorney (but use the finance guy and most likely the mention of one will have any attorney agree) Do not use a canned note from a Realtor or the seller's cousin! Have a mortgage originator do a note and have it reviewed so that it is clear to both of you.

Well, I'm not writing a book here so I'm outa here....if you like you can contact me and I'll point you to some reading. Good luck...

Marc Faulkner · Answer

Amanda-

My company has been trading in seller financed notes since 1999 and I can tell you that there is more seller financing going on right now then there has been since I got started.  It is EASY to find folks willing to carry back owner financing.

The problem here is that your budget will not allow you to get into this much of a house most likely.  Your $3 to $5K down payment does not equate to 10% down and most sellers would be more comfortable with more skin in the game on your part.  Also if the home needs repairs you are going to need to be able to cover the cost of these or be stuck living with the problems.  Also at a $65,000 purchase price, and $5k down you would be financing $60,000.  A $60,000 note at 9% for 360 months is going to be $483 a month, PLUS taxes, insurance, utilities, maintenance and repairs.  The math just doesn't work.

A better plan might be to find a home that COULD be worth $65,000 if it were fixed up.  I would look for something that is vacant and needs work and only look in the areas you want to live in.  Make sure the home needs less than $5k worth of repairs and the repairs are mostly cosmetic.  Try to find something that you can negotiate down to about $45,000.  I would then negotiate the work as my down payment.  CONVINCE the seller that you WILL do a great job on the work that needs done and that it will be done quickly.  The sellers worst case scenario is that they end up with a better property than they had before, should you not be able to handle your obligation.  If you can handle $450 a month, then you will be able to figure out a lot of ways to get into a creative financing deal, for a $45-$50k deal than a $65K deal.  Just my 2 cents!

Nathan Emmert · Answer

Key is to understand what pain the seller has and fix that.  Some need a pop of money which is why they're selling but you might be able to cover that in a down payment.

In your situation, I would recommend saving up a larger down payment.  You can find seller's on MLS willing to owner finance but most will be looking for 10 - 20% down there.  The only 0 - 10% down you're going to find are the desperate sellers and FSBO (think about it, seller is going to pay 6 - 8% just in closing costs... would you come to closing with cash to sell your own place??).

Beyond that, offer a balloon.  You can't get financing now but in 3 or 5 years you should be able to.  Asking someone to hold a note for 10, 20, or 30 years is tough (again, unless they are REALLY desperate).  But offering them payments for 3 to 5 years and having that full payday lingering out there is more palitable.

As for the lump payments... I would ignore that as it will simply confuse early payoffs.  Try to offer simple interest only terms (doesn't affect the monthly payment much anyhow and keeps the payoff math easy).

Biggest thing, IMO, don't appear too "slick willy" fancy dancy real estate investory to people.  Keep things simple.  I am giving you $10,000 cash today.  You're going to carry the balance of $55,000 for 5 years.  I will make monthly interest only payments of $300.  On or before today's date in 2017 you will receive a lump sum payment of $55,000.

Michael Cox · Answer

Where are you located?  I get owner financing deals all the time and I would be willing to sell some of them because I make my deals assignable with the sellers permission.

Corey Dutton · Answer

I would get 3 different broker value opinions...

Stacy Dieckman · Answer

Amanda,

Maybe you can find a local real estate investor first and try to make a deal with him/her to find a property that will work for you both.

You may have to offer to help out with the house to make the deal more attractive to the investor.  Good luck and let us know how things turn out.

Stacy

Tom S. · Answer

Hi Amanda,

Beyond the good advice Nathan offered, I've purchased a few owner finance deals and would recommend:

- Get the place appraised and make sure you're not overpaying.  The seller's prob not going to require an appraisal like a standard bank would.  This is critical because if you overpay and have to refinance in 5 years, it's going to be much harder.

- Simple interest and a 5 year balloon are great selling points.  Be careful of a 3 year balloon - time moves quickly!

- If the place is a true fixer, there should be language stating the lien could be moved to second position if all parties agree.  Rehab lenders will only take first position, and I ran into this issue with  one of my first big rehab projects with owner financing involved (got it resolved, but took some work and expense)!

Hope that helps,

- Tom

Advice for acquiring a true owner financed home?

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