Seller Financed Mortgage

[Nate T]

Hello,

I am a 31 year old professor living in CA. Rather new to the world of personal finance but very convinced by the "mustachian" outlook. I recently mentioned to my landlord that I was thinking about buying property, and he offered to sell me the condo I rent, and to finance it.

I'm rather unfamiliar with the home buying process and was hoping some folks in this community might have words of wisdom.

The landlord himself is a very kind guy (who retired early by applying mustachian principles!). His offer is as follows:

$210,000 for the unit (a fair price in this area)
30 year note
4% interest rate

Which gives $1002.57 in principle and interest a month. Adding on the HOA fees would come to roughly $1307 (about $100 more than I pay in rent each month).

The only catch is that he wants to have a 5 year balloon (as I am told is common in seller financed mortgages). And I assume I would miss out on any first time home buyer assistance that CA offers.

What do you all think?

Many thanks for any advice,
Nate

[Dicey]

Hi Nate,
Need to know more about your financial picture to know if you can afford it.
Have you been pre-qualified? How much do the lenders say they're willing to give you?

You might counter with a seven-year balloon.

I'd offer an interest-only deal with a seven-year balloon amortized over 30 (or fewer) years. That way every penny you pay him is deductible. Easier to manage. Your payment will be even lower. Then you can save your ass off with the goal of paying it off in full at the end of seven years. Should you miss by a bit, you will only need a very small loan.

Make sure the HOA is well-financed and doesn't have any assessments on the horizon. Get an attorney to iron out all the who-pays-for-what-details.

Don't know about first-time buyer assistance, but this is potentially a far better deal.

If you are SURE you will love living in your place that long and confident in your ability to save, I'd say got for it!!!

[MDM]

Will he sell it to you only if you finance through him?

If not, what terms can you get from other lenders?

[Nate T]

Hello again,

As I read through these forums I am astounded at how helpful this community is. Thank you very much for your replies!

Diane C:

My financial situation is roughly as follows:
Monthly net income: $4400
Student loan payments: $300 (on roughly $85k in student loans... I know)

Other than that I have no debts, and about $20k saved up for a downpayment if needed. Additionally there is roughly 15k in a Roth, and 2k in a savings account.

I have not yet been pre-qualified as all this is happening a bit sooner than I planned. My credit is good (in the 720s), and I have spoken with a few lenders but have not asked for pre-qualification yet.

A seven year balloon and saving sounds interesting. Thank you for the suggestion, I will ask my landlord what he thinks.

The HOA does indeed seem well financed and long established.

Do you think that I should hire my own real estate lawyer to look at the contract after it is drawn up? Should I be worried that interest rates will rise over the next 5-7 years if I do not save enough to pay the entire thing off?


MDM:

No, he seems willing to sell even if I go with another lender. The mortgage lenders I have spoken with are quoting me 4.125 - 4.25% for a 30 year fixed. Because I only have 10% down, there would be mortgage insurance added on. Monthly payments look roughly equivalent as far as I can tell.

Best,
Nate

[jmoney]

Come back at him with Dodd Frank says no balloons to owner occupants which is the truth as of this January 18th. If he finances it to you over thirty years, he has to carry it for the whole term if you don't choose to sell or refi. Balloons are only ok to businesses. He could get himself in a ton of trouble if he financed on a balloon to you. A ton means at least the last three years worth of payments plus attorney fees.

Do you really love this condo? If he is getting market sales price and you are getting almost market terms where is the great deal? If you are in love with the place that's another thing but the only deal I see you getting is that you can avoid some bank origination fees from getting a loan from him.

This is a question for you or someone local in your market. Are condos a good long term investment where you live? In Ohio condos aren't much of a better investment than a mobile home or boat. The land is so cheap that builders overbuild them like crazy and the new ones are so cheap as it is (~100 k or slightly under) demand is so poor for the old ones. The HOAs seem to maintain the exterior, but they don't really modernize it and there is surplus of outdated condos for sale. There are some exceptions in downtown areas but here in Ohio at least condos in the suburbs are a poor investment as far as appreciation goes.

[MDM]

Dodd Frank says no balloons to owner occupants

Is that true in all cases?  Some information, e.g.
http://berlinlawfirm.wordpress.com/2014/01/24/quick-breakdown-of-dodd-frank-act-in-effect-jan-10-2014/, and
http://www.biggerpockets.com/renewsblog/2014/01/17/dodd-frank-law-changes-seller-financing-investors/
suggests otherwise if the landlord sells only this property this year.

[jmoney]

The attorney that spoke at our REIA said no balloons ever. I guess it depends who you believe and it seems like everyone (even the big banks) are trying to sort out what Dodd Frank really means.

In practicality, there is really no harm for the poster to take a balloon legal or illegal. All the risk is with the lender if they give terms illegal Dodd Frank.

[arebelspy]

OP: It's hard for us to evaluate this without more information.  What are comparable rents in the area?  What is the FMV of the property?  What will the taxes be like when they bump after the sale?  HOAs can be a pain in the rear.

You mention you pay about 1200 rent - doesn't seem like one you'd want to own from a landlord perspective (i.e. if you had to rent it out later) - how long are you planning on living there?  What do you anticipate appreciation to be (any reason to think it will be above average other than "california")?   How is the location?

The attorney that spoke at our REIA said no balloons ever. I guess it depends who you believe and it seems like everyone (even the big banks) are trying to sort out what Dodd Frank really means.

In practicality, there is really no harm for the poster to take a balloon legal or illegal. All the risk is with the lender if they give terms illegal Dodd Frank.

The attorney that spoke at your REIA didn't know what he's talking about.

You can certainly have a balloon in every case, it's just that a certain percentage of the mortgage principal must be paid off first.

And in other cases, as MDM is talking about, you can have a balloon without that qualifier due to being under the threshold of sales (dependent by state).

[Nate T]

JMoney, MDM, and arebelspy:

Thank you for the heads up about potential Dodd-Frank concerns! If I seriously pursue this I will hire a local real estate lawyer to look over the contract and specifically ask about Dodd-Frank implications.


arebelspy:

I am receiving a deal from this landlord. For my unit, rent would likely be around $1800 on the market. Figuring out FMV is tricky because condos in this development aren't frequently on the market, but I would guess (and Zillow seems to confirm) that $210k is roughly at FMV.

I plan on living in the condo for the next 7 years or so. I live in a small college town which also is a commuter suburb of LA. The condo is located next to the historic downtown, and in the 3 years I have lived here has not had any vacancies that last over a month (as far as I can tell from keeping an eye on Zillow and asking around). I'm fairly confident that the condo will hold its value, but not sure what anticipated appreciation would be.

You ask, "What will the taxes be like when they bump after the sale?" I am not sure what this question means, but it sounds like something I would want to find out! Would you mind clarifying?

[Dicey]

Nate T - Property taxes in CA are ~1.25% of the purchase price to start and subject to very small annual adjustments, based on assessed value increases. Thank you, Prop. 13.

Re: HOA, have your landlord provide copies of the board minutes for the past year and READ them. Things are not always as they seem, particularly in the case of aging infrastructure or deferred maintenance. Find out who is on the board and talk to as many of them as possible. As to pre-qual, I'm sure there are online calculators to give you a general idea.

Finally, and this the most important: Trust Zillow for nothing but entertainment and history. They are notoriously bad at predicting future sale prices.

Since today's Sunday, if you can, get out to all of the open houses for condos in your area. Check the paper, look online and just cruise the neighborhood. Talk to the realtors, chat with the other lookers. In my area, lenders often sit on open houses for agents, so you might meet someone who can help with money questions. All of this will help you get a better feel for the market. Repeat and repeat until you are sure this is a good deal for you.

jmoney - Oranges and cumquats to compare Ohio to CA. Since property is so expensive here, condos do just fine overall, as they provide an entry into the market. Sure a single family home might appreciate a tiny bit more over longer periods of time, but they cost you more and are generally more work to maintain.
And please don't mention what 200k would buy in Ohio, because it's well, Ohio, and OP doesn't live there.

[Nate T]

Diane:

Thank you so much for your helpful advice! Reading the minutes of the HOA is a wonderful idea! I have acquired the minutes and am in the process of reviewing them and the rules and regulations of the association.

Thank you also for the word of warning about Zillow. Predicting the future is tough!

I have also spent the weekend looking at open houses and speaking with some agents, and will spend the next few weeks doing this per your advice.

Thank you again, this was really quite helpful.

Nate