Rental to Owner Finance?

[USAFpj]

Great responses, gents. Thank you, again.

 

[ultrarunner]

The bottom line is it sounds like a fantastic opportunity for your renters.

Worst case is you get the property back which financially does not have to be a bad thing.

Generally with owner financing there is a reason... either property does not meet underwriting or buyers don't meet underwriting which generally comes with premium price/interest if buyers don't otherwise qualify.

Many believe inflation will continue so no real advantage locking yourself into long term lending at today's low rates and this is where a 30 year due in 3 or 5 years gives you an out.

If everything goes well you can always extend the terms at that point...

In California lawyers are rare for residential sales... but as this is new to you it could be the best money spent...

 

[dstig1]

Perhaps I misread it but it looked like you had a thought to increase the rent and eventually use some of that to sell the house to them while you keep the mortgage on it. Sounds like a handshake deal. If I were them I would run screaming from that deal as it sounds like there is nothing to support them in the event you get hit by a bus. "We had an agreement to buy the house using that money" "Sure you did. Where is the legal paperwork?" No matter if you hold the paper or do some other sort of deal for them to purchase, it needs to be written up by a knowledgeable real estate attorney. And they will steer you away from doing something that is potentially illegal, even if you have good intentions.

My father did owner financing on 2 rentals that he sold to the renters, much like you are proposing. They drew up a mortgage with attorneys and it was no different than paying a bank, except you didn't have to fight with a bank to do it as my father knew the renters for years and they were both good risks. He had lots of places calling him to buy out the mortgage at some massive discount on the hopes that he needed the cash, but he did not and told them all no thanks (he was too nice to say what I would...).

There are lots of ways you can structure this so you can both be generous and not financially hurt yourself. Find that attorney and pay him to ask questions and get advice for an hour or two. Then you will have a good idea what you can and cannot do and can move forward with good peace of mind on both sides.

Good luck.
-Dave

 

[plowhog]

The rent ($1400) does not meet the mortgage ($1600),.... Their offer is $5,000 cash, and a monthly sum of $2150 for 15 years, ... This equates to a total sale of $392K for the house.

Q- do you intend to "keep" your existing mortgage, collect $2,150 from them per month, and while doing so continue to pay your $1,600/mo mortgage? (Called a "wrap" mortgage.)

If so:

1. You are likely committing loan fraud. Most residential mortgages (like yours) have an acceleration clause that requires the loan be paid in full upon sale.

2. You can't "sell it" to them (wink, wink) but "not sell" in the eyes of your existing mortgage loan provider. Trying to treat it one way for your tenants and the other way for your lender is fraud.

3. Your numbers of "$392k for the house" are wrong if you will continue to pay on your existing mortgage. You are not getting the beneficial use of their $2,150 per month each month. You have to subtract your $1,600/mo mortgage payment from their $2,150 "mortgage" payment. You would realize very little of the homes value this way-- only $550/mo while "they" own it.

Beware that if you "gift" them an amount, such as $150k in forgiven equity, you are very likely subject to federal gift tax. Its the "giver" who is responsible for the tax, not the receiver.

Have you considered the insurance angle? Suppose you are several years into your idea when the house burns down. Who has paid the fire insurance, who is the beneficiary of any claims, and who makes the rebuild decisions and carries that responsibility?

Instead, have you considered selling it to them at market value, and offering to co-sign on their loan application? (You could even sell it $16,000 below market and not trigger federal gift tax as of year 2022.) If you are motivated to be helpful .... this might be a cleaner approach. But, of course, it also carries long term risks to your finances and your sanity.

 

[dodge man]

Dave, these numbers are important, like you said. Plus, how are my Dodge projects going to get finalized without cash flow?

An old WW2 Dodge truck? I see the nose of a Ram in the background also.

 

[Bill Guenthner]

I have a second home (mortgaged) that I have rented to the same couple since 2014. They are Church-friends of ours, always pay on time, and I have not kicked in more than $100 for repairs since then. The rent ($1400) does not meet the mortgage ($1600), and the wife and I are ready to sell. The market, like everywhere else, is crazy- I owe $200k on it, but it currently appraises (Zillow) for $456k.

The renters have made an offer to purchase the house, but do not/can not afford the down payment and bank fees. We want them to stay in the home as well, and we also would like to avoid realtor fees, capital gains, and maintenance. We do not need a lump sum profit.

Their offer is $5,000 cash, and a monthly sum of $2150 for 15 years, perhaps even paying the total sum early. This equates to a total sale of $392K for the house. We are content with that.

Aside from the numbers, has anyone run into this scenario before? A real estate lawyer is a MUST for me, but others state that them increasing the payment for the house is just a better idea than our current rent set-up. I believe a contract is needed to protect them, as a lot of life's problems can get in the way in fifteen years- new HVAC, roof, appliances, etc...

Thanks for any insight.

If they can’t afford it they can’t afford it. Why would you want to take on more risk than a bank is willing to take on?

 

[plowhog]

Why would you want to take on more risk than a bank is willing to take on?

1. Good judgment comes from experience.
2. Experience comes from bad judgment.

Answer: He's at step 2.

 

[Hoodoo]

I would either a) leave this alone, or b) all of you go talk to a RE attorney. You are setting yourself up for a lot of nightmares and you will end up being the bad guy even if they default due to their own negligence. Getting an Attorney involved will put everything in legal terms that are clear ands simple.

 

[ultrarunner]

If they can’t afford it they can’t afford it. Why would you want to take on more risk than a bank is willing to take on?

Banks only wanted to lend me money when I didn't need...

Absolutely zero credit issue as to payment, credit score, etc.

Been paying into Social Security since age 12 and saving every penny.

Thing is at 20 I did not have two years with same employer or three years in same line of work.

The only way to buy was either cash or cash with owner financing which almost exclusively limited me to property needing work which owner was not willing to pay for.

Bankers, even more so today, use a checklist of qualifications with zero wiggle room so they say to protect from lawsuits.

 

[oosik]

As owner of our cabin and five acres in Alaska - I held the contract for the folks I sold it to. Worked out fine. But, then again, they were descent people and nobody was out to screw anybody.