Owner Financing - I am the owner selling - HELP

General Real Estate Investing
1

Hello -

I am a newbie. I am in a situation where I would like to get a property off my hands. House purchased @ 112K, current balance on mortage $100k…but house is probably worth 85 to 90k. Its a Florida property.

The house needs roof repair and some basic fixing and I dont have the money to fix it. Had a section 8 tenant in there for a few years but she’s gone and Im a long distance homeowner. Sec 8 didn’t pay enough to cover my monthly mortgage payments.

Because I have no money to fix roof and currently I am broke since ive been paying mortgage plus my own rent in NY I would like to get rid of it.

I responded to one of those ads ‘we buy houses any condition.’ The investor came to see it and told me the roof definitely needed to be redone…he was willing to ‘take over’ my mortgage payments but i’d still have to pay him $250 a month b/c he felt he would be at a loss in the beginning since it was likely he wouldn’t be able to rent it for the amount of the mortgage payment. His plan was to do a ‘lease to own’ agreement with a potential buyer and once he gets them approved for a mortgage he’ll do the close and with that $ payoff my mortgage and he’ll keep whatever profit there is.

Currently mortgage balance is $100K, mortgage payments $865/mo.

I know a lot of you here do this type of deal, but is it common that you as a buyer make the seller pay you some $?
I know me paying $250 versus $865 is better but why should I pay him $250, that to me defeats the purpose.

I don’t know if I am getting screwed here. I have not signed any documents yet b/c he hasn’t sent them to me. But today I checked his site and he already listed my property as a ‘lease to own’ property and he is charging $885 a month, which would cover the monthly payment to mortgage. So why should I pay him $250.

He explained that the deal would be done by transfering title to a land trust or something. I am not familiar with this.

Since you all do this type of deal a lot I am just curious to understand if I am okay dealing with this guy.

Thank you.

2

He is charging you due to the fact that that the income will not cover the out go to be frank.

3

nextdeal,

It appears that there is a $20 positive spread. How is the income not covering the outflow? This property could be a condo with a condo fee that makes this a negative income property for the investor, but we can’t know that from the facts given.

I can see that there is not much potential for a profit here with a $100K mortgage balance. If current market value is only $85 then a realistic option price on a 24 month option is most likely $103 at best. The only sure revenue source here is a seller contribution. $250 per month for two years will give the investor $6K profit while just breaking even on the lease option to a tenant buyer.

bonafidelatina,

Since there is no equity in the deal for the investor, he needs to create his profit with your monthly contribution. On the surface, the $6K you are paying the investor over 24 months would be about the same amount you would pay in commssion for a real estate agent to sell your property at a price less than your mortgage payoff. In addition, you would need to make up the difference between the sale price and your mortgage balance out of pocket or get a short sale approved by your lender.

One drawback for you in the Subject To deal is that the investor could quit making the mortgage payments. The resulting foreclosure would affect your credit report (not the investor’s) because the loan is still in your name. You might be able to protect yourself by placing a performance mortgage on the property. If the investor quits making the mortgage payments, you foreclose on the property and then try to sell it once again.

As I see it, the investor’s proposal is really no different from renting out the property yourself. Even if you use a professional property management company and have no worse than a $250 monthly negative cash flow, you are in the same position that you would be with the investor. The advantage to you is that you would get to reap the tax benefits of rental property ownership. The tax savings might offset quite a bit of that negative cash flow.

The best solution for you is to get your lender to agree to consider accepting a short sale as full payment for your mortgage loan balance. If you have income and other assets the lender may not accept a short sale unless you agree to make up the deficiency. Never hurts to ask.

The next best solution is to keep the property and put a tenant in place until the market conditions are more favorable to selling the property. If you can’t get a market rent to cover your monthly payments, can you refinance for a lower mortgage payment?

The third best solution is to lease option the property to a tenant buyer. Set the rent to cover your mortgage payment and set the option price at $100K to cover your mortgage loan payoff. Once again, if the market rent is too low, consider refinancing if it will lower your monthly mortgage payment.

The fourth best solution is to sell Subject To.

I am not a Subject To pro, only playing devil’s advocate. Just how I see it.

4

Dave T -

Thank you so much for your info.

To give you some more details. Its is a 1 family, 3bedroom 1bathroom property.

The guy has not contacted me since we last met and I have NOT signed anything yet. We met on Monday. He said it would take a week or two for him to get all the papers ready.

But he already posted the property on his website and craig’s list as follows:

$885 per month
$3,000 Down Payment
$115,000 Price of House

Mortgage Balance to date is about $100K
Original Mortgage was $106K
And purchase price of house was $112K

With these details above…is it really necessary that I pay him $250/month? He is the one that is going to be making a profit I dont feel comfortable paying him $250.

Also, if I haven’t signed anything yet if I want I can call him and tell him I am not interested anymore, correct?

Thank you for all your advice it is really helpful. You are right I could hire a property manager and pay them $250 fee to get tenant and at least I’ll have tax deductions…but let me know if you have anything else to say in your opinion w. the new info i provided above.

Have a good day.

5

If you are not a distressed seller, if the property is not pending foreclosure, and if you can afford to continue paying the mortgage until another alternative presents itself, then this investor’s offer is not the best for you.

If the investor can get someone into the property at $115K, then why couldn’t you?

Sell on Contract for Deed. You could even sell for what you owe on the property and come out ahead. Just for sake of this example, let’s say that your monthly mortgage payment of $865 includes escrows for taxes and insurance. If we take $200 off the top for the escrows, you have $665 per month for the principal and interest payment. I am guessing that your interest rate is 6% fixed for 30 years.

For the terms of your sale, offer this property on seven year contract for deed at $100K, $5K downpayment, 8.5% fixed, amortized over 30 years, with a balloon at the end of seven years. You will collect $5K up front, $730.47 in monthly payments, and then enough in the balloon payment to pay off the mortgage.

You pocket the difference between your loan payment amount and your buyers payment each month for 84 months, for a total of $22260. You also collected $5K up front, and you will get a little more at the end of the contract because you will have paid your mortgage down below $100K. Let’s round up and say you can get $30K out of this property by selling for what you owe on it today. During the contract term, your buyer is the owner with all the responsibilities of home ownership to include the property taxes and homeowner’s insurance.

If you are up to seller financing, this is the way I would go if there is a market for your property at $100K with owner financing.

6

Keep in mind that the one proposal is just that. Just like the sale of any existing property, you can always counter the buyer. I am more concerned that he is advertising your property already, but saying that it takes 2-3 weeks to get the paperwork ready. He could have the paperwork prepared in a day or two. The only thing taht takes longer than a day is a preliminary title search and verifying mortgage information, and if you haven’t signed anything, he isn’t doing either of those things. He is trying to fill the home before he becomes reponsible for the payments.

That is either very smart, or somewhat scary. That would lead me to believe that the buyer doesn’t have a great reserve of cash to endure any type of vacancy. With your credit on the line, that is something that you want to establish right up front.

If it takes him a couple of weeks to get back with you, I would bet that he has a tenant/owner to fill the home. That might be a good time to counter the monthly amount. If there is a buyer that the investor has signed a lease option contract with, there might be some incentive for him to take less each month. If you can cut the amount of the montly payment, is should make the deal more palatable to you. Good luck.