Anyone here sell via owner-finance?

[sammybiker]

If anyone here has sold properties via owner-financed, I'd like to hear feedback on the overall experience along with any lessons learned/etc.

Much appreciated!

Sam

[ketchup]

No experience on the selling side, but I was able to buy a (albeit cheap) house seller financed at 20 (2012) on a 5yr note with ~20% down with no proof of income/credit/funds/etc., just by presenting myself as reasonably responsible.  I'd probably vet me better than the seller did.

I keep the sellers on the insurance as owning an "interest" in the house.  I have no idea of the details of the underwriting (long since forgotten), but I'd definitely require that to cover your ass.  He also pays the property taxes and I include that in my payment to him while his name is still on the deed.

[Knapptyme]

I did this back in 2013. I had rented my old house in late 2012 to a guy who wanted to fix things to his liking and eventually buy the house. He, then, needed a permit to do the electrical updating in early 2013. Though sooner than expected, we came to terms with nothing down and 6% for 15 years. It cost me about $1200 to go through a lawyer friend which amounted to about 1.5% of the sale, and even then, there were mistakes made.

Takeaways:

Very positive experience with the buyer. We set up automatic payments. He appreciated being able to talk to a human who lent him money for the house when something came up. I knew he was updating the house, so any default from him was going to be good for me in the long run. I would do it again if the right opportunity presented itself.

--Check property taxes and if they're paid up front or in arrears. That was a mistake the lawyer made because he assumed the county he lived in operated the same way the county the property was in was taxed.

--Be realistic about the interest rate. Some people want to talk down the percent because it's not a big bank. I talked it up because I'm not a big bank and do not have large assets to cover an opportunity cost of this magnitude.

--My guy was believable, and it worked. Basic credit and income verification that would come with renting a home should be done, and you can put that in the finance cost if you'd like.

--Later, which is happening now, he is refinancing because he has enough sweat equity in the place to constitute his 20% down. There is not a good way to help the mortgagor with their credit score unless you pay into the credit rating bureaus, which is not cost effective for one home. My guy didn't like that fact. Feel free to tell them that up front.

--Always get your name on the insurance policy to make sure the buyer has one on the asset they're borrowing your money to own.

--As for the lawyer, I would just get a realtor in your area to prepare the forms for you for a 1% or less commission. Most of them will do this, or you could do it yourself. (My parents sold their home recently and did something similar.)

[SeattleCPA]

One other angle to this to consider... you can also use owner financing to spread your taxable gain out over the years the person repays the loan.

What happens, BTW, is that the depreciation you have on the property gets (essentially) recaptured at the point you sell. But the rest of the gain gets spread over the years you receive your payments.

Note that spreading a real estate gain (or any income) over several years can save you big on taxes. You typically pay lower capital gains tax rates, for example. And you may avoid the "Obamacare" net investment income tax.

P.S. As a CPA let me be the one to say that you shouldn't let the tax tail wag the dog... But just wanted to point out the above nuance.

[sammybiker]

Thanks for all of the feedback, much appreciated!

@Knapptyme - you purchased this property as an investor or as an owner occupant?

Thanks for the numbers re: attorney, very helpful.

In short, I'm having a look at exit options for part of my portfolio over the next 2-3 years, in order to gain maximum value.  The portfolio has no debt on it, so I'd like to sell slowly and charge interest, if possible - but remove myself from the tenant management aspect as much as possible.

[Tr10av]

No experience on the selling side, but I was able to buy a (albeit cheap) house seller financed at 20 (2012) on a 5yr note with ~20% down with no proof of income/credit/funds/etc., just by presenting myself as reasonably responsible.  I'd probably vet me better than the seller did.

I keep the sellers on the insurance as owning an "interest" in the house.  I have no idea of the details of the underwriting (long since forgotten), but I'd definitely require that to cover your ass.  He also pays the property taxes and I include that in my payment to him while his name is still on the deed.

If I'm understanding correctly the deed is still in the seller's name? I would not recommend this at all, what would happen if the "owner" which is not technically you killed someone in a car accident or if any other similar lawsuit were to occur they would come for the house and you would be out all your money because his name is still on the deed.

[Berubeland]

I managed a town house complex out in Hamilton, ON and the owner of the rental property converted the units to condominiums. They sold a few using realtors and we also did rent to own on these condos.

We literally didn't care, every time a property became vacant we would upgrade it and sell it or rent to own it. Some of our regular rentals were going for $1200 but the upgraded units would go for $1800 and we would apply last month's rent plus $100 per month towards their eventual down payment. If the deal didn't go through no problem, if the deal did go through we charged unnegotiated market price and saved the 10K in realtor fees.

Having said that, there are a lot of problems, the market for rent to own is kind of unregulated at this point. If the deal goes wrong, and I've been involved with a few that did go really wrong, you can get kicked out of the Landlord & Tenant Board and have to pursue civil remedy in Superior Court. I happened to be attending a hearing one time, where the courts kept shifting the case between jurisdictions and the whole thing had been going on for a couple years.

[mousebandit]

We sold our previous residence this way, and it has been a great experience.  I wouldn't recommend it to everyone, but it worked great for us, and we will likely do it again in the future. 

Make sure everything is spelled out in the contracts, work with your local title company, find a company to handle the monthly payments and mortgage interest statements.  Spend some time getting to know your buyer, what they plan to do with the property, who their friends and family are.  Keep an eye on the place as best you can, without being a stalker, after the sale. 

We didn't do these fees, but have a friend who does this on many properties, and he charges a high interest rate plus a loan origination fee of 25% of the loan amount, jokingly referred to as his scalp fee.  (I haven't talked details with him in years, so not sure if that scalp fee is legal or if he still does it,  but he did for years.). He made a lot of money this way and although most people ended up turning the homes back over to him (they defaulted), there were plenty that got a shot at home ownership and turning around their finances this way, and they appreciated it.  Just more things to think about if you decide to go this way.

[totoro]

I did this with a hard to sell recreational lot.  I registered a private mortgage on title as security.  It has gone fine.  There has been no default.  If there was I'd have foreclosure remedies.