Owner Finance Scenario - Need options


I bought a property last year, got caught in the middle of the mortgage meltdown which forced me to refinance it eating up a bunch of equity, but managed to get it lease optioned and cover expenses. The tenant can’t get a mortgage and has asked for owner financing. He’s got plenty of cash but can’t or won’t document it. How should I structure this or should I look for a new tenant?

Existing deal with tenant:
Sale price $419,900
option paid $5,000
rent credit $1,000/month = $12,000
rent $2,990

My mortgage:
$373,500 @ 7.375% Interest-only till 8/1/2017, 20yr amortization after that.
Interest: $2,295.47
Insurance escrow: $88
PMI: $264.56
Tax escrow: $334.24
Payment: $2982.27

I’ve contacted my realtor to run comps. Prices in this neighborhood are level or appreciated slightly from last year so MV should be $420k or higher.

The tenant wants to pay off the property using this owner financing so it not looking for a balloon payment but a fully amortized loan e.g. 30 yr fixed. But, I might be dead by then so would want to structure it such that I could sell the note if I chose to.

I’ll be crediting him with $5,000 paid but rent credits are gone once current option agreement expires.

What interest rate should I charge? 9%?? Terms (with 10% down, with less down)? Land contract, wrap, other? Property in North Carolina. How should I protect myself if tenant gets into trouble with IRS? I’ll be using an attorney to draw up all paperwork. PMI, taxes and insurance will be passed along to tenant buyer.

I’m also reading the OWC e-book – thanks for that advice! I started REI before finding this forum and hope to structure this deal to correct my previous mistakes and produce positive cash flow. I could probably Lease/Option for $430-440K with similar terms but it’ll take at least a month vacancy before filling this size property. A personal financial issue last fall (hospitalization, out of work few months, kid started college and more) used up my cash reserves so I’m nervous about kicking out a tenant who can come up with $3-4K a month but can’t get a mortgage.

A- If he has plenty of cash why are you giving him a rent credit from the option money.
B- he wants a 30 yr. mortgage and your’s is 20, no no.
C- Base the int. rate on the downpayment, credit report, everything in e-book.
D- You’ll need at least a 80% LTV to sell the note, looks like he’ll need to put 10% down just to get in range.
E- its a great book, read it again.
Good Luck, herbster

PS if you are giving him a rent credit from the option money then he doesn’t have any cash.
Line up a new buyer before the option runs out.


The rent credit is in the existing lease/option contract that I have with him. I meant to say that if I did owner financing, I’d tell the tenant that rent credit no longer applies – we would have to come up with a new deal and the rent credit is gone.

B - not sure what you mean. Don’t do a 20 yr mortgage?

C - He has poor credit. Is 9% - 9.25% appropriate for someone in this situation?

D - I probably won’t be able to sell the note due to C above. So I have to decide if I want a long term relationship with this guy. I’ll raise the sale price if necessary to get $800/month minimum cash flow. Still I gotta consider that if I have to foreclose, that’ll wipe out over a years worth of my cash flow.

The existing lease/option expires June 30th. That’s a good time of year to find a new tenant. So, I have some time to investigate more and make a decision. Thank you for your advice.

Hello again,
B- I mean don’t do a 30 yr. while your doing a 20.
C- Whats his score, you’ll need at least a 625+. 9-9.25% isn’t to off for bad credit buyer.
If he wont pay that high then lower the rate and up the price. Keep in mind though that a Note Buyer will quote you a price on a appraised value not an overpriced property.

If this doesn’t work for you then keep renting to him, month by month until you have a new buyer. If he can make rent.

His option agreement will expire soon, and the option consideration will be forfeited.

Why not just offer a new option agreement for another year. Same option price, same monthly rent, no more rent credits.

Collect another $5K option premium for the new option. If you want to sweeten the offer, you can still let rent credit earned during the first option term carry over to the second option term but do not give further rent credits.

If he can’t or won’t document all this cash, how do you know?


When a tenant’s option expires and we want them to stay, we offer another years contract with no rent credit, additional option fee negotiable depending upon tenant. This guy doesn’t want that. He wants something showing that he’s buying the house and paying down principle.

I’m thinking of offering owner financing for 3 years with a balloon payment. He has no credit history. With no credit history we won’t to be able to sell his note and we don’t want to deal with him for 15-30 years. We’ll advise him it’s his responsibility to clean up his act to get a mortgage in 3 years.

I’ll let everyone knows how this plays out…


I just wanted to follow up with everyone that helped discuss this with me back in April…

The tenant has come to the realization that he will never obtain financing unless he changes his ways which he is not willing to do. He’s too much of a risk to offer owner financing. So, we’ve offered a straight lease on the property to him starting July 1. He said he’d get back to us in a week but I think he’ll accept.

Thanks all for your help and suggestions.

which book is this?

Its the Owner Will Carry book in the free books,audios in the left column, By Greg Winfield. You can also get a bigger version from Eddie Speed at ColonialFundingGroup.com

Sorry, I am coming in late here, but this is something I don’t understand.

If the buyer is asking you to finance the purchase when he exercises his option, why wouldn’t the buyer still get the rent credits? Isn’t he still entitled to them?

Dave T. –

At the time I wrote that, the tenant could not obtain financing to purchase the property and the existing contract would expire. My partner and I considered owner financing as a new contract, but not as a way for the tenant to exercise his option. We would honor the rent credits if the tenant purchased the property according to the existing lease/option but felt that if we were to take the risk to owner finance, the rent credits would not be considered in a new owner-financed contract. Basically, we weren’t going to going to owner-finance so that he could exercise his option. If he wants the rent credits, he’s gotta come up with his own financing.

Since that time we decided that the tenant is too much of a risk to offer owner financing and he is not interested in an extension or another lease/option. So, we offered the tenant a 12-month lease on the property and am waiting for his response. His current lease expires July 1st.


How is your option contract written so that your tenant buyer is required to bring third party financing to the table to exercise his option to purchase? If you did agree to owner finance before the option expires, how would the buyer NOT be entitled to the rent credits?

Just wondering if you could have had a potential breach of contract issue here? Let us know what your attorney says.

We never got to the stage of writing a contract since we decided not to do owner financing. Hypothetically, we could have waited until the option expired to avoid any breach of contract.

one more thing you might want to consider is the due on sale clause that your mortgage more than likely has. I may be wrong, but I believe your mortgage becomes due in full if a transfer of deed takes place. Just a thought.

No the mortgage does not automatically become due in full in the event of a transfer without the lender’s approval. The lender has the right to “call” the loan in full, but the loan is not automatically due.