Need advice on Owner-Financing

[Brad Long]

Hello everyone, I am considering putting this deal together and I was hoping someone could give me some advice. I've found a SFR for sale that is currently being used as a daycare. From the looks of it this daycare seems to be well established and to be loosely affiliated with the church next door. The house is in great condition and the roof was just replaced. The seller is motivated and has it listed for $21k (crazy low I know, but not TOO crazy in my market.) It is being rented for $550/month which is a little low for the area but OK with that purchase price. The only thing is, the idea of being liable for a daycare in one of my rental properties scares the hell out of me. My insurance agent is strongly advising me not to buy this. My mentor helped me come up with an alternate strategy that I'm considering, and hoping someone can try to poke holes in it. I was thinking I could purchase the home and then immediately try to convince the tenants to purchase it from me via owner-financing. I'm not interested in owning a house with a daycare in it, but I think it would make sense for the tenant to purchase this from me. They've got vested interest in staying in this house and keeping their business going.

I was thinking I could propose a 15 year note with no money down for $45k. The interest rate would start at 7% and go up a percent every 3 years. At least for the first three years before the rate crept a little, the amortized payment would be $404, much lower than the $550 they are currently paying, but I would also include the property taxes which are only $425 a year. They would be solely liable for their business and daycare as well as repairs, though I wouldn't mind paying for larger expenses down the road and rolling this into their loan. It really seems like a win-win to me. I get a great return with very little risk and they get a chance to build equity, something that is very difficult for people from this neighborhood to do.

What am I missing here?

[Mitch Messer]

Hey @Brad Long. I'm not loving the no-money-down financing. Assuming you close this with an attorney (which you should), you're going to have at least $500-$1000 in hard costs invested in this deal. What happens if, in month 2, the buyer defaults? Now you've got to spend your money foreclosing on the home and then more money evicting them out. Not sure about TN laws, but even here in lender-friendly Georgia that would take at least two months and cost at least $2K in attorney expense. And that's if the buyer doesn't file bankruptcy and delay things.

Also, if you were selling to an entity, like an LLC, I'd feel better about your financing not having to be Dodd-Frank compliant. But, you're probably planning to sell to an individual who will be living in the house. That suggests you might have to do the whole Dodd-Frank dog-and-pony show, including working with a mortgage loan officer (MLO) who really knows the regulations. That means no interest rate going up a percent every 3 years. That's also more cost.

Lastly, "being used as a daycare" sounds like it's probably not a licensed facility. If you know that going into the deal, and anything goes wrong and somebody's child gets injured, you're going to be named in a lawsuit and/or be on the evening news.

In my opinion, it's not at all worth it for 400 bucks a month.