Author Topic: Seller Financing?  (Read 4141 times)

Shane

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Seller Financing?
« on: November 07, 2015, 01:42:19 PM »
Anyone have experience with seller financing?

What would be a fair interest rate to charge a buyer now? How much of a down payment would you require?

Is there a website we could use as an intermediary between buyer and seller?

MDM

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Re: Seller Financing?
« Reply #1 on: November 07, 2015, 02:20:54 PM »
Anyone have experience with seller financing?

What would be a fair interest rate to charge a buyer now? How much of a down payment would you require?

Is there a website we could use as an intermediary between buyer and seller?
Yes, we've done it a couple of times.  Not a large sample size, but no problems with them.

Fair is whatever the buyer and seller agree to.  With banks charging ~4% now, I'd expect seller financing to be at least 5%.  Down payment also depends on the buyer's and seller's motivations.  Enough to cover all the seller's closing costs is likely the minimum.

Not familiar with websites for this, but a quick search turned up https://www.realtypact.com/fsbo-seller-financed-mortgage-document-service/ (among others - again, we have no familiarity with any of these).  If there is nothing unusual a local real estate attorney should be able to provide a contract for you for "not too much" money.

Shane

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Re: Seller Financing?
« Reply #2 on: November 11, 2015, 01:00:01 AM »
Thanks for your help MDM.

We're thinking of asking the buyers for a 33% downpayment and a 5% interest rate. I guess we'll calculate their payments as if it were a 30 year fixed rate mortgage, but then there'll be a balloon payment after 5 or 10 years. They're supposed to call us tomorrow...

If it actually happens, we'll get our attorney to draw up the contract for us to make sure everything is legal.

Another Reader

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Re: Seller Financing?
« Reply #3 on: November 11, 2015, 06:20:13 AM »
Seller financing is useful for two situations.  First, when the property is difficult to finance.  Second, when the buyer is difficult to finance.  In the latter case, the rate should be well above the market rate to compensate for the additional risk you acquire and the costs of a more likely foreclosure.  The more questionable the buyer, the higher the rate.  I would never seller finance for a rate that is one percent above market rate.  It's just too much risk and hassle.

Your local real estate investor's association might have members that use seller financing for weak buyers that could help you.  Title companies often have standardized documents, suitable for your state.  You will likely need a title company for the transfer anyway.

K-ice

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Re: Seller Financing?
« Reply #4 on: November 11, 2015, 07:53:34 AM »
I know someone who has done this in the same property a few times.

Yes more than once. The buyers have defaulted & he got the property back. It is his boomerang house.

So just be prepared for that to happen & make sure it is easy for you to repo.

Shane

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Re: Seller Financing?
« Reply #5 on: November 11, 2015, 08:47:00 AM »
Seller financing is useful for two situations.  First, when the property is difficult to finance.  Second, when the buyer is difficult to finance.  In the latter case, the rate should be well above the market rate to compensate for the additional risk you acquire and the costs of a more likely foreclosure.  The more questionable the buyer, the higher the rate.  I would never seller finance for a rate that is one percent above market rate.  It's just too much risk and hassle.

Your local real estate investor's association might have members that use seller financing for weak buyers that could help you.  Title companies often have standardized documents, suitable for your state.  You will likely need a title company for the transfer anyway.


Our realtor has recommended we ask $595K for our place. If we do that and get full asking price, which may be possible in this market, after realtors' fees we'll net ~$559K. The potential buyers we showed our property to a couple of days ago are friends of a friend. They are a super-nice, young couple who really loved our property and seem really interested in buying it. I told them we may be willing to owner finance for them at $600K if they can come up with at least a $200K downpayment. It seems to me that with that much "skin in the game" they would be relatively unlikely to default on the mortgage, because if they did, they'd lose their downpayment.

The wife is a veterinarian, the husband is a farrier and they've got 4 horses, which is why they love our place because it's perfect for horses. We haven't gone into the financial details with the couple yet, but they've told us that they've been looking for a place for awhile, and that they've been turned down by a bank/mortgage company for a loan on raw land where they'd been hoping to build a home. Apparently getting a loan on raw land is hard no matter how good your credit is, so it may not be that they have bad credit. My guess is that, since they're relatively young (maybe mid 30's), the wife may still have big student loans outstanding from medical school, which may make it harder for them to qualify for a big mortgage. 

Our property is probably worth more than $595K. Our home is super well built and everything was built to code or better, but we didn't get permits for an addition (~40% of the total square footage of the house) we added in 2012, which our realtor says means it probably won't appraise for >$600K. We could get permits for the addition and some other unpermitted outbuildings on our property, which would bring up the appraisal, but it would probably take a year(s) of dealing with bureaucrats, which isn't very appealing to us at this stage in our lives. We'd rather take a little less money and let the new owners deal with the bureaucrats to get permits if they want to.

If we get a $200K downpayment, I was planning to put it all into VTSAX and just leave it there to grow. Financing the remaining $400K at 5% would bring us $20K/year in interest payments which, supplemented as needed by savings, we were planning on living off of while we slow travel around the world for a couple of years. To me, a $400K loan, secured by real estate, seemed like a nice diversification away from equities.

As you can probably tell, we have no experience with real estate other than the current property that we own and are about to sell. If we go through with the owner financing of $400K, that will be about 45% of our total net worth, so it's pretty important that we not lose it. I just figured that if the couple defaults on the loan some years down the road, we can just take the property (which we love) back, live in it for awhile, and then resell it to another buyer...

Does this make sense? Any advice/suggestions would be greatly appreciated. We're supposed to talk with the buyers again later today.

@anotherreader, if you wouldn't owner finance for 5%, in our case, what do you think would be a fair interest rate?


Another Reader

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Re: Seller Financing?
« Reply #6 on: November 11, 2015, 08:58:18 AM »
I would have to have more financial information about the buyer to determine that.  You are acting as a bank here, and I would want a full documentation loan "application" before I considered doing this.

Shane

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Re: Seller Financing?
« Reply #7 on: November 11, 2015, 09:57:13 AM »
I would have to have more financial information about the buyer to determine that.  You are acting as a bank here, and I would want a full documentation loan "application" before I considered doing this.

That makes sense. If the sale to these buyers progresses, we'll ask them for details on their finances. We'll definitely get our attorney involved in drawing up the contract as well to make sure everything is done properly and legally. Would it make sense for us to ask the buyers to pay our attorney's fees, since they're the ones asking for the owner financing?

Another Reader

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Re: Seller Financing?
« Reply #8 on: November 11, 2015, 10:01:56 AM »
The person that employs the attorney should pay the fees.

Get a Fannie Mae loan application and have them fill it out if you decide to go through with this.  Again, you are the bank and you should behave like one to protect yourself.  You don't want to take this house back in foreclosure.

Shane

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Re: Seller Financing?
« Reply #9 on: November 11, 2015, 11:43:55 AM »
The person that employs the attorney should pay the fees.

Get a Fannie Mae loan application and have them fill it out if you decide to go through with this.  Again, you are the bank and you should behave like one to protect yourself.  You don't want to take this house back in foreclosure.

Downloaded the Fannie Mae loan application form. Thanks for the advice AR!

Shane

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Re: Seller Financing?
« Reply #10 on: November 12, 2015, 09:26:43 AM »
The buyers called yesterday and said they didn't think they could come up with the downpayment we were asking for, so we're back to listing our property with a realtor for a higher price to cover their commissions.

Thank you everyone for your advice!

MDM

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Re: Seller Financing?
« Reply #11 on: November 12, 2015, 09:35:14 AM »
The buyers called yesterday and said they didn't think they could come up with the downpayment we were asking for, so we're back to listing our property with a realtor for a higher price to cover their commissions.

You could ask "what interest rate would you be willing to pay in return for a much lower down payment?"

Shane

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Re: Seller Financing?
« Reply #12 on: November 12, 2015, 10:00:32 AM »
The buyers called yesterday and said they didn't think they could come up with the downpayment we were asking for, so we're back to listing our property with a realtor for a higher price to cover their commissions.

You could ask "what interest rate would you be willing to pay in return for a much lower down payment?"

That makes sense and might work for some buyers, but there's more to the story that they explained to me on the phone yesterday. They told me they still own a house in Portland that they're planning on selling, and they've decided they don't want to buy anything here until they get rid of their other place. By then, our place will hopefully belong to some new owners.

Thanks again.

Bearded Man

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Re: Seller Financing?
« Reply #13 on: November 19, 2015, 10:40:38 PM »
Your buyer will likely not get financing for a house with that much unpermitted addition.

Shane

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Re: Seller Financing?
« Reply #14 on: November 20, 2015, 12:11:41 AM »
Your buyer will likely not get financing for a house with that much unpermitted addition.

Banks will lend on the permitted portion of the primary residence, and apparently an appraiser will attribute ~50% of the normal value to the unpermitted portion of the house. That's what an appraiser working in our market has told us, anyway.

The unpermitted addition was built to code or better. It's just that we chose to not deal with the County and their bureaucratic bullshit. In hindsight, we should've just gotten the permits at the time we did the addition.

We've discussed it with our real estate agent and his boss who has 35 years experience selling homes in our market, and they've advised us that it's probably not worth it for us to go through the time and money to get the permits now, after the fact, as there may not be a big enough ROI to make it worthwhile. They've told us that for a property like ours, there's a 50-75% likelihood that the buyers will pay all cash anyway. In the event that the buyers have a good downpayment but, for whatever reason can't or choose not to get conventional financing, we will consider loaning them the money to buy the property.

We just signed a sales agreement with our realtor today, and he's hoping to have our place on the market by December 26. Hopefully, it's going to sell quickly. If we do have troubles selling because of the unpermitted addition, we can always get as-built permits for the addition at that time. I'm pretty sure it won't be that hard to do. We've got professionally drawn plans for the house. Everything was done on the up and up following all codes that our builders and draftsman were aware of at the time. Our insurance company hasn't had any problem insuring the new addition. They told me they didn't care if it was permitted or not. Our preference, of course, is to sell to an all cash buyer. It'll make things simpler.