Seller financing sounds like a great idea, but is it?
A few things to think about and look at.
First the Seller:
Before the Seller can take back a note or Finance the sale of the home, they must OWN IT OUT RIGHT and not have any mortgage on that home. Why? In most cases it is called the “due-on-sale” clause. What this is if the owner of a home has a mortgage he can SELL that home home unless he pays off HIS mortgage.
When the OWNER or Seller does not have a mortgage on the property and has clear title, then they can sell it as they wish. and YES Seller Financing or Owner Financing.
Selling financing sounds like a wonderful idea. It can be too. This past 3-4 years I have talked a dozen or so seller financed opportunities. Each seller wanted $10,000+ as down payment. For most ppl that is just not possible. no matter what the terms of loan are. Not to mentioned the agreed value or what the seller wanted to sell the house for was WAY over priced.
Lease Option or Rent to Own:
Again sounds like a wonderful opportunity for a buyer. Low down payment and a portion of the monthly rent goes to the down payment of the home. Or so the theory goes.
Here are the challenges: 1) the rent must be fair market value for rent in that area and in a separate check. Not one check and a portion goes to the down payment. When the renter goes to applies for a loan, an appraisal will be done to determine the value of the home. If the Rental value is not fair market the the appraiser may say that additional money that was thought to go to down payment May have to go to rent payment. And if the payment was in ONE check, all of that amount may have to be credited to the rental payment as there was no way to separate the rental portion from the down payment portion of the amount paid.
2) The loan Appraiser will determine the value of the home based on several criteria and if the value is less then what the seller and renter agreed upon, the appeaser wins. SO the seller will have to adjust is sales price so the renter / buy can get a loan. In most cases Seller Finance homes or Lease Option homes are way over priced.
This does not mean that a FSBO and Seller financing can’t work out for the buyer. However, our over 15 year experience has shown us this is not the case. Single family homes, the buyer can do better through conventional purchase and finance.
Land, farms and commercial properties are many time sold through Seller financing.
We have great opportunities for buyers. from New Home communities with great financing too 100% financing for homes upto $220,000. ( Of course pre-qualifications are needed)
However if you are looking for an “Owner financed / Lease with Option to purchase” may I suggest the following:
1. Ask the owner if they own the home? If they are the so called Partner of the owner, walk away as the offer may be a scam. A Lic Realtor conducting the offer for the Owner is a BIG PLUS.
2. Is there a mortgage on that home?
3. Agree on a price for the home and understand that price could go up or down at the time you buy.
4. Never go longer then 12 to 18 months before you buy.
5. Understand that you need two checks each month; 1 for the fair market value of rent and 2 for the down payment
6. Get your credit in order. Clean up any deficiencies. To get a bank loan one will need 12 months of three clean lines of credit.
1. Give BIG down payments.
2. Talk to anyone other then the owner or the Realtor. Talking to “Partners” is a RED flag
3. Mortgage and Contract assignments MAY be illegal ( Clause 14 or the due on sale clause ) BIG RED FLAG. Run do not walk away
Contact us for more information. We will be happy to help