Owner Financing and Estate

Depending upon your area there are typically interest rate caps, prepayment penalty caps, limitations, etc. That frankly does not make it worthwhile.

Now if you do this against my advice, here’s some tips:

1) You charge a higher than market rate for the higher risk (i.e. the buyer can not qualify for a normal mortgage), I would say several points higher!

2) You never do a note for the entire term, you do a balloon option, means they pay based upon 20/30 years but the balance of the loan is due in 3/5/7 years. I wouldn’t go longer. The idea is that they get a mortgage or sell by then. Interest earned is the greatest in the beginning, take it then run. (Look at an amortization schedule)

3) Get a sizeable down payment to cover what you need, worst case damages, legal costs, etc. I would say 20/25% minimum.

4) Sell for a premium price given the risk involved.

So what is the risk?

1) Buyer doesn’t pay you and you need to do a foreclosure (think Covid and extra cushion that courts give non payers)

2) Buyer does illegal activities, your name is still on the property until the loan is paid off. Usually the deed is not transacted/recorded until payment is made in full. Rather a memo of the Seller financing is recorded with the county.

3) Neighbors still likely to complain to you about issues.

4) Buyer can claim repairs that you knew about even after the transaction (depends on your area).

5) Buyer can not afford repairs. It’s still your asset.

6) Buyer doesn’t pay water, taxes or insurance, followed by some loss or legal claim (slip and fall). You would not be immune, can not say hey I sold this not my problem.

Now even if one dies, the contract is alive and payments would go to heirs, in theory.

Market is hot right now, interest rates are slowing their increase, buyers know that and are coming back. So if the home needs repairs you should address that and get it listed, sell it, cash only, wash your hands so you don’t have this becoming a possible job/issue for your family in the future.
 
Just bought a a place with private financing and almost closed on another that was seller financing but I backed out...was surprised how straight forward everything was being unfamiliar with both and how readily available both were, Title company set up everything for both parties just as is if was a traditional mortgage.

In your case, buyer just makes the payments to the trust...easy peasy. Properly setting up the trust and how funds are dispersed after mom passes is the critical part, but that is a trust and estate planning lawyer question, not an escrow or title company question.

I tend to agree with others...unless you have a property that is more difficult to secure traditional financing like land, a development deal, or off grid property not sure there is a big upside to offering seller financing. Even through rates are high, there are just as many cash buyers out there at the moment that are offsetting buyers that may be sitting tight due to rates. That may change but might want to test the waters first with a solid realtor before going through the headache of setting up disbursements.

mandm said:
So what is the risk?

1) Buyer doesn’t pay you and you need to do a foreclosure (think Covid and extra cushion that courts give non payers)

2) Buyer does illegal activities, your name is still on the property until the loan is paid off. Usually the deed is not transacted/recorded until payment is made in full. Rather a memo of the Seller financing is recorded with the county.

3) Neighbors still likely to complain to you about issues.

4) Buyer can claim repairs that you knew about even after the transaction (depends on your area).

5) Buyer can not afford repairs. It’s still your asset.

6) Buyer doesn’t pay water, taxes or insurance, followed by some loss or legal claim (slip and fall). You would not be immune, can not say hey I sold this not my problem.
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Those risks may be true for a rent-to-own type contract...but not seller financing which is deeded and treated just the same as a traditional bank mortgage loan...only your are the bank. Property is no longer in your name, you are just the lein holder on the deed until paid off, but it gets recorded in the buyer's name. You can't sue Wells Fargo in a slip and fall case simply because they hold the mortgage.
 
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Shawn said:
Just bought a a place with private financing and almost closed on another that was seller financing but I backed out...was surprised how straight forward everything was being unfamiliar with both and how readily available both were, Title company set up everything for both parties just as is if was a traditional mortgage.

In your case, buyer just makes the payments to the trust...easy peasy. Properly setting up the trust and how funds are dispersed after mom passes is the critical part, but that is a trust and estate planning lawyer question, not an escrow or title company question.

I tend to agree with others...unless you have a property that is more difficult to secure traditional financing like land, a development deal, or off grid property not sure there is a big upside to offering seller financing. Even through rates are high, there are just as many cash buyers out there at the moment that are offsetting buyers that may be sitting tight due to rates. That may change but might want to test the waters first with a solid realtor before going through the headache of setting up disbursements.



Those risks may be true for a rent-to-own type contract...but not seller financing which is deeded and treated just the same as a traditional bank mortgage loan...only your are the bank. Property is no longer in your name, you are just the lein holder on the deed until paid off, but it gets recorded in the buyer's name. You can't sue Wells Fargo in a slip and fall case simply because they hold the mortgage.
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It may depend upon your area but in my experience you don’t receive the deed like you would with a mortgage rather the title company files a Memorandum of the contract with the county. Only after you pay off the contract is a warranty deed issued and signed by the Seller.
 
mandm said:
It may depend upon your area but in my experience you don’t receive the deed like you would with a mortgage rather the title company files a Memorandum of the contract with the county. Only after you pay off the contract is a warranty deed issued and signed by the Seller.
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Here that's called a contract for deed.
 
luvflyin said:
Putting my moms house up for sale. Mortgage rates are going to make it hard to sell for what we think should be a good price. Thinking about owner financing. She's old and won't outlive the Note. 3 Heirs. So we're thinking of some kind of Escrowy type thing that collects the Payments, disburses to her, until death, then to the Heirs per instructions. Probably be thirds. Then to the Heirs Heirs per their instructions should any of us not outlive the Note.. Is this feasible?
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How long will it take to find buyer who is willing to pay more than the market value (the price we think it is worth) to obtain a loan below the current market interest rates?

Sell the house for market value and put the proceeds in multi year guaranteed annuities paying 5.65% for seven years and allow a annual withdrawal. Talk to your broker about it.
 
Guaranteed annuities are taxed as regular income. You might want to talk to your accountant too. But I have to agree with the sentiment. Don't discount the opportunity cost of waiting vs. what you might earn on the getting the lump sum and investing it wisely now.
 
Shawn said:
Just bought a a place with private financing and almost closed on another that was seller financing but I backed out...was surprised how straight forward everything was being unfamiliar with both and how readily available both were, Title company set up everything for both parties just as is if was a traditional mortgage.

In your case, buyer just makes the payments to the trust...easy peasy. Properly setting up the trust and how funds are dispersed after mom passes is the critical part, but that is a trust and estate planning lawyer question, not an escrow or title company question.

I tend to agree with others...unless you have a property that is more difficult to secure traditional financing like land, a development deal, or off grid property not sure there is a big upside to offering seller financing. Even through rates are high, there are just as many cash buyers out there at the moment that are offsetting buyers that may be sitting tight due to rates. That may change but might want to test the waters first with a solid realtor before going through the headache of setting up disbursements.



Those risks may be true for a rent-to-own type contract...but not seller financing which is deeded and treated just the same as a traditional bank mortgage loan...only your are the bank. Property is no longer in your name, you are just the lein holder on the deed until paid off, but it gets recorded in the buyer's name. You can't sue Wells Fargo in a slip and fall case simply because they hold the mortgage.
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They’ve been listed with a broker. Hope we find cash buyers who don’t have to worry about obtaining loans. We aren’t marketing it as ‘owner financing available.’ We’d do that on a case by case basis.
 
Clip4 said:
How long will it take to find buyer who is willing to pay more than the market value (the price we think it is worth) to obtain a loan below the current market interest rates?

Sell the house for market value and put the proceeds in multi year guaranteed annuities paying 5.65% for seven years and allow an annual withdrawal. Talk to your broker about it.
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Hmm. 5.65% guaranteed. Something to look into.
 
mandm said:
It may depend upon your area but in my experience you don’t receive the deed like you would with a mortgage rather the title company files a Memorandum of the contract with the county. Only after you pay off the contract is a warranty deed issued and signed by the Seller.
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Contract Sale, Trust Deed and Mortgages(not in the generic sense but actual deed of mortgage) have their pros and cons. I’ve done them all as either buyer or seller. You don’t get the Deed that gives you final unencumbered ownership until the loan is paid off. In the Contract Sale deals I’ve been involved in, Statutory Warranty Deeds are executed at time of sale and held in Escrow to be delivered to buyer for recording when final payment is made.
 
Zeldman said:
May I suggest....


danger-tipped-red-gasoline-can-spilling-with-fire-near.jpg


no, no....of course not.... I was just showing what bad gas looks like...:D
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If I go off the reservation, do it and get caught, you are going down to for inciting me.:fingerwag:
 
Lindberg said:
If it's already in a trust, you might not need to do anything else, depending on the trust's terms. But you're going to want to have a good real-estate lawyer involved in this.

You're not going to have to manage a rental (which third parties will do) but you are going to have to manage the mortgage. Are you going to require an escrow for insurance and tax payments? How will you ensure they're taken care of?
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If we did it yeah, it would be an impound account with a Note Servicing Company to handle Tax and Insurance.
 
Why do you think it will be hard to sell because of mortgage rates? Is that what realtors are telling you for your area? So many of the sales are all cash offers, especially on the west coast. My niece is a realtor in Austin, and she says almost all her buyers are all cash offers over the asking price, and they are still losing the bidding war.
 
Lindberg said:
The OP said "much lower" and a thousand dollars a month. That suggests to me a lot more than .5%. but it ain't my money.
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Here’s the numbers I’m bouncing around in my head for starters. For perspective I don’t want to get involved in the Stock Market or other non FDIC guaranteed things. So. Fed Funds rate is at 4.75. Mortgages are hovering around 7.75. 3 point difference. So I was thinking, go as low 4.75 if needed. We’d be talking about a $525,000 Note, give or take. Difference in monthly payment is in the thousand bucks a month range. I haven’t done bottom line calculations yet about how interest income will affect Income Taxes. Given the range between the Fed Rate and Savings/CD/Tbill and other guaranteed instruments, 4.75 is probably a little low to offer for the Loan Rate.
 
lsaway said:
Why do you think it will be hard to sell because of mortgage rates? Is that what realtors are telling you for your area? So many of the sales are all cash offers, especially on the west coast. My niece is a realtor in Austin, and she says almost all her buyers are all cash offers over the asking price, and they are still losing the bidding war.
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Hope that’s the case. But this is Portland, OR. Not Austin, TX. Google Portland for perspective.
 
luvflyin said:
For perspective I don’t want to get involved in the Stock Market or other non FDIC guaranteed things.
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If you are looking for a virtually risk free approach then be sure to list all the risks associated with the "Owner Financing" option to make sure this really is an apples to apples comparison.
 
Mongoose Aviator said:
If you are looking for a virtually risk free approach then be sure to list all the risks associated with the "Owner Financing" option to make sure this really is an apples to apples comparison.
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I have. It’s the buyer defaulting thing and we end up with the property again and have to start all over is the major con to doing it. More I read of all the input here, most likely not going to do it. But still thinking about it.
 
Don't forget in your tax calcs that nearly 100% of the payment stream is interest for quite some time. Though not FDIC, you can ladder some AAA bonds, get nearly 5% and capital return if you hold to maturity. If rates drop sometime in the future, you have the opportunity for capital appreciation. Depending on your tax status, tax free muni's might work for you too.

Having been through the seller financed thing, it says easier than it does. Wouldn't do it again, I'd rather just have the working capital.
 
luvflyin said:
I have. It’s the buyer defaulting thing and we end up with the property again and have to start all over is the major con to doing it. More I read of all the input here, most likely not going to do it. But still thinking about it.
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Are you on the side that believes Real Estate is going to continue to decline, or on the side that the correction has already hit bottom? The sales price today of owner financed property is only an unrealized number on paper. If housing values drop considerably while you are still holding the note, there is a good chance the buyer will default. Then you will be stuck with the property at a reduced value. If you believe real estate is going to rise in value, then lease it out instead of selling.
 
lsaway said:
Are you on the side that believes Real Estate is going to continue to decline, or on the side that the correction has already hit bottom? The sales price today of owner financed property is only an unrealized number on paper. If housing values drop considerably while you are still holding the note, there is a good chance the buyer will default. Then you will be stuck with the property at a reduced value. If you believe real estate is going to rise in value, then lease it out instead of selling.
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Good points. Values go up and down. Bubbles get blown and bubbles burst. As far as the short range goes I don’t expect things to go back up to where they were a year or so go anytime in the near future. On the whole. Different localities will have variations.
 
One other point I forgot to mention. If you are going to use a realtor, they typically base their commission on the sales price. All your closing cost will be based on the high sales price, not the down payment. A large down payment can get eaten up real fast. Maybe something you can try and negotiate with realtor ahead of time.
 
Chip Sylverne said:
Guaranteed annuities are taxed as regular income. You might want to talk to your accountant too. But I have to agree with the sentiment. Don't discount the opportunity cost of waiting vs. what you might earn on the getting the lump sum and investing it wisely now.
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They are also tax deferred until you draw them or they mature.
 
Clip4 said:
They are also tax deferred until you draw them or they mature.
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Yes, but...the IIRC, OP wanted to make some provision for inheritance. Annuities don't get a step-up basis on death, so tax consequences can hurt heirs.
 
Chip Sylverne said:
Yes, but...the IIRC, OP wanted to make some provision for inheritance. Annuities don't get a step-up basis on death, so tax consequences can hurt heirs.
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Yes but, he also wanted some funds dispersed to his mother on a regular basis, which multi year annuities allow an annual withdraw cap.
 
Clip4 said:
Yes but, he also wanted some funds dispersed to his mother on a regular basis, which multi year annuities allow an annual withdraw cap.
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If Mom is in good health and still buying green bananas it could be a workable strategy, We're kind of in the same position with my MIL, but she's 96. Good health, so she could go on 5 years or more, or she could fall and go tomorrow. We're keeping things short-term with 11 month CD's and T-bill rollovers. Taxable at the Fed level, but not state or local.
 
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