Help with Owner Financing Deal

[Joseph Ambrose]

Hello everyone and I appreciate any help/advice upfront. I am trying to help very close friends of mine with a real estate transaction. Below is the following scenario:

The house: 1800's Greek revival made into a duplex. One side is able to be occupied at $825 per month, the other side is gutted. Total cost of restoration estimated at $100,000. Current value $80,000 to $90,000.

The buyer: A close family friend of the seller. 30 year old blue collar worker that suffered a health issue costing him his job and resulting in a foreclosure on his house. He owes $10,000 in credit card debt, student loans, and property taxes. He is reliably employed at $20 per hour. He will be actively restoring the house while living in one side (construction is in his wheelhouse).

The seller: Seller owns the house, there is no mortgage. Seller wants to engage in a owner financing agreement with the buyer. Seller plans to purchase a primary residence needing repairs, and will be applying for a 203k instead of using the funds from the sale of the duplex. As such, seller wishes to minimize the length of time he holds the note, which means maximizing the likelihood of the buyer being able to refinance with a bank.

Questions: Seller proposes to value the house at $85,000 and charge 5% interest for the first year, and incrementally increase the rate to incentivize the refinancing.

1) Is it likely that the buyer would be able to refinance within a three year period given his credit situation?

2) Will the principal be high enough for a bank to issue a mortgage at three years, or after?

3) Is 5% a good starting rate? Should he alternatively inflate the purchase price and lower the interest rate to keep the principal higher for a more attractive loan to the bank?

4) What terms should be in the owner financing?

5) Is this a good schedule? Should the rates increase more frequently and/or more aggressively?

[Ty Kirkpatrick]

@Joseph Ambrose this deal is "not the best".  It is not the worst either.  I am speaking from the lenders perspective.  The seller is carrying the mortgage for a buyer who intends to occupy the property?

I would have the buyer make all payments to a third party servicing company. This will allow your seller to have a perfect and documentable pay history. Based upon the credir history a FHA refinance will be the exit strategy for the seller on this one.

I would not do a three year deal. I would structure as a 12 month deal with (2) extensions. This will protect your seller further in case of default. I would have those extensions be contingent upon a mutually agreed upon set fee. Which is not applied to principal. This gives your buyer incentive to payoff the loan early. Remember FHA and alike loans are 85% of market value.

I would check into the buyers rental history.  That will further give you an indicator if he will pay on time.

Hope that helps