Fair interest rate for owner financing.

[Ivan Reyes]

Can anyone chime in and give their thoughts on what interest rate you would charge when giving owner financing.

We are going to rehab a 3/1 property that will have an ARV of $60k. We're selling it with owner financing. What would be a reasonable interest rate. Or do you base it on a certain ROI.

I'm thinking 8% but that only yields $440 for a property in good condition, in a good location. As a rental I could get more. Any thoughts?

[Frank Adams]

I've done some 12s, but mostly 8-9. My key is that my SALES PRICE bears no relationship to "real" FMV. Of course I'm only getting about $2000 as a downstroke.

When you offer owner financing (particularly like mine) the buyer DOES NOT CARE ABOUT THE PRICE. He's like a typical new car buyer. His only questions are; "what's the downstroke?" (read-do I have enough cash from this month's pay?) and "what's the monthly total?" (read-after my beer, cable and new truck payment do I have enough to swing this deal?).

In my typical deal sometime during the signing of the contract the buyer, or more typically his wife, will look at the papers and say, "Oh, $95,000 is the price, we kind of wondered how much it was". This is AFTER they've signed!

Too high and they'll refinance on you, although I have a five year prepayment clause. By pricing it above FMV they won't be tempted to refi because the place won't have appreciated up to market quickly enough. I had one that had a prepayment penalty of six month's interest who refinanced from my 12% because rates had dropped enough.

Heck I would have dropped him to 9 or so had I known before he paid the fees to the new lender. I hated losing that income stream. I really hated LOSING THE OPPORTUNITY FOR FORCLOSURE when his wife left him a year later and they let it go. The bank sold it for $8K MORE than I had charged them when I first sold it. I would have sold it for another $12-$15K. OUCH.

Frank