Hi - I would love to hear some pros and cons from investors with experience in both renting and owner financing on this situation:
Purchased SFH for $89,900 cash, no mortgage
Repairs $5,000
ARV - $130,000
Have rented for 1 year @ $850, just signed 2nd year @ $925
I am considering an owner financing sale after this lease with aproximately these terms:
Sale price: $130,000
$5,000 down
7% interest for 30 years
Specific questions are:
Does the buyer pay the property tax for the 30 year term?
Do I continue landlord duties for the 30 year term?
How difficult is the foreclosure if the buyer defaults?
Would you recomend that I continue to rent?
Thanks for you time!
'Frank
First, I personally would not owner finance at below market rate…but each to his own. Financing is a matter of Risk vs. Reward. Most of the folks that are wanting owner finance are higher risk (generally speaking!) and your reward should be higher.
If you sell with owner financing, you are selling the property, so:
Does the buyer pay the property tax for the 30 year term?
Yes, it’s his property!
Do I continue landlord duties for the 30 year term?
No, you’re not the landlord, you’re the bank".
How difficult is the foreclosure if the buyer defaults?
Depends on your state foreclosure laws.
Would you recomend that I continue to rent?
Do you mean, “Do I continue to rent this property out rather than selling?”? Or do you mean, “Do I continue to rent the property that I live in…?”?
Keith
Hi Keith - thanks for your thoughts on this -
If 7% is below market - then I could certainly make the terms better for me: 7.5 or even 8 depending on the market in a year.
And about continuing to rent, that question is about the same property - in your opinion - with the limited knowledge that you have from this post, would I be in a better situation owner financing, or continuing to rent this property.
Thanks again for your input.
I wouldn’t do owner financing in some states. It depends on how long foreclosure takes in the state. You want the downpayment to be big enough to cover the costs of foreclosure. That’d be your holding costs and attorney costs.
Also, you can charge much higher interest. They are doing owner financing because they can’t qualify for a normal mortgage. You can escrow property tax and insurance too. That way they don’t get a property tax lien on the property which could make things messy. There are companies out there that will manage the escrow for you for about $15/mo. You can be very hands off. They’ll even handle the foreclosure if required.
Marcus - thanks for the information about escrow - that is very helpful.
If you are confident that I can get a higher interest rate, then it seems like a good way to go.
So far:
Pros - collect down payment, no landlording, no property tax, high yeilding interest payable to me for many years, higher monthly payment than rent currently collected, no vacancies
Cons - time and expense of foreclosure
I would still love to hear from others that have specific experiences, thanks for the info.
'Frank
Big con: Your cash (almost $95K) is tied up!!!
Keith
True - but it’s tied up now, and I could sell the note if I really needed to right?
You can pull out some of your equity. Just because there’s a land contract on it with a buyer doesn’t mean you can’t borrow against the property. That’s one of the risks that the buyer takes.
Basically, you can take out an equity loan (low costs) with a fixed interest rate (so you don’t expose yourself to interest rate risk). Then pay it back at a rate so the term is the same as the land contract. You’re charging a higher interest rate so you make money off the spread.
The spread gets even better when it’s a rehab and you’ll selling at a higher cost. If you get a big enough price spread then you may even be able to pull out more equity than you originally paid and still make some money off the spread.
Oh, don’t forget you can charge closing costs too 
Most people shy away from the financing aspect of real estate. Banks make a boatload of money doing it though. I think it’s just something people don’t understand and they are too risk adverse. That’s where the proper downpayment hedges the risk. Some people also do a 3-5 year balloon payment in the contract which forces the buyer to refi and cash out the seller.
Also if you carry a note you can sell the whole note or you can sell a partial purchase as well. Here is what I usually see on these deals.
30 yr am, no lower than 8-8.5% interest rates, no balloons, 5% down, and credit over 575. This would be a decent rule of thumb if you thought about selling any of the payments. You have to make the note marketable to a note investor otherwise your discount would be to much to take. Food for thought,
Nate-WI
Thanks Nate - another great point.
One last question:
Does anyone know of any books only about owner financing?
Obviously, I’ll be doing a lot of research before deciding what to do on this deal. I’ll report back when I figure it out and hope that info will help others.
Thanks all.
'Frank
I’m not sure about books on it. If you find a good one post what it is I’ve searched around for online resources and I do know one guy that does it.
http://www.michiganlandcontracts.com/pricing.htm
That’ll give you an idea of what a buyer may expect to pay for a note and how they discount them. Michigan has a state law that caps the interest rate of a land contract at 11%.
I know there is a couple of folks out there. Donna Bauer and Michael Morrongiello. Google them and you will find them.
Nate-WI
There is a terrific book on Seller Financing. I call it the “BIBLE”. As a note buyer, I reference this to all those trying to create notes or take seller financing.
The book is called Streetwise Seller Financing. It is written by Eddie Speed.
I am not allowed to link to my own site, but you can download it free. Hmm. let me see here…
http://www.streetwisesellerfinancing.com
Click on HAVE CODE
Use code 2380.
Eddie will be in Chicago next weekend giving a presentation on seller financing.