Buyers Credit & Seller Financing
If a seller is considering providing the financing to make a deal happen it is almost certain the buyer has some dings on their credit. Lots of people do. Some of the problems may be trivial, others are deal killers. It can be VERY hard to tell which is which.
With the current recession in the housing industry this is likely to be an even bigger problem than normal (whatever that is). For example, buyers frequently need owner financing as a “bridge” while they wait to get their previous home sold. In the not so distant past, that sale and the anticipated price were reasonably predictable. In those cases the buyer and seller could create owner financing with a short term balloon and both feel comfortable about paying off as soon as the property sold.
That comfortable situation no longer exists. With the drop in home prices the buyer may no longer have any hope of selling their former home at a profit. In fact, they may owe significantly more than they paid.
One of the really painful facts which people have forgotten in good times is that losses on the sale of a home are NOT deductible. Everyone knows that profits from the sale of a home are tax free which has been wonderful for years. The other side of the coin is going to be a really ugly surprise.
In my experience, people with stable jobs and credit history are extremely poor judges of a potential buyers credit. They simply do not understand or appreciate how irresponsible, and irrational “buyers” can be. Nor do they know what clues to look for when (if) they check the buyers credit report.
{ 5 comments… read them below or add one }
I own my home outright, but owe on property that I would like to sell. Would it be advisable to borrow the money (against my home), and pay off the propery (that I want to sell) in order to owner finance.
I can’t/won’t tell you what to do, but here are some things you might want to think about. I assume the property has no improvements which the buyer could damage/steal.
Is the sale price you anticipate for the property greater than the loan amount? I ask because in these economic times there is lots of property “under water” in terms of realistic value. Before offering to pay off the property note you will want to see if you can negotiate a discount for early payoff. With the current events in the real estate and financial markets cash is king, so it might be possible to negotiate a sizable discount for early payoff. Of course, you have to get that set up before the person/institution you are paying knows you plan to pay them in any case.
If the buyer quit paying would you be in danger of loosing your home?
Would such a sale create any estate complications within your family? For example if one heir needs cash and another prefers income it can quickly lead to problems.
Are you certain you can get a home loan at acceptable rates?
New home loans come with a lot of closing costs and other expenses. Make sure you take a sharp pencil to all the costs and benefits to be sure the transactions work as well as you think they do.
Keep in mind that if you try and sell that note on the property you will most likely have to accept a LARGE discount (50% off the remaining balance would not be surprising.)
It could be a good deal, just make sure you have throught it through carefully; and involve an attorney when/if the time comes to actually take action.
Good luck
I owe $55,000 on a property that needs some work. Current condition could sell for approx $35-40K. Foreclosures in my area are really bad, pushing the prices of any house needing work down. To sell the house I will have to pull $20,000 out of my 401K.
I have a buyer that wants to assume the mortgage (18 years left on the note), but he probably will not qualify. The property needs some improvements which this buyer is planning on doing himself. However, I don’t know that the bank will approve him.
I am pondering pulling $55000 out of my 401K to pay off the loan and then carry the loan for the potential buyer. My plan is to repay my 401K with the payments over the next 18 years. A stable 8% over 18 years is a pretty good deal. If I wind up with the property back, I may just go through the whole process again.
Do you have thoughts on this?
What is the best way to evaluate the buyer? My ‘gut feel’ of this guy is pretty good, but that’s not good enough when I’m talking about my retirement.
Hello my name is ****** and i an on the other side i am a buyer i purchased through owner financing my only problem is i have already spent 6000 dollars n this house and i have only lived here for 1year. The work that need to be sone in this houseis over my budget i don’t want to hurt the own or myself but. At this point i really can afford to fix major problems and be a first time homeowner what should i do please help
That’s a hard situation to be in.
My sense of your situation from what you wrote above is that you can make the monthly payments, but not the additional cost of repairs. It also sounds like you really underestimated the cost of repairs.
I suggest you think about what the best solution would be for you and then talk to the owner to see if you can work something out. Here are some questions you should answer in your own mind before you start negotiations.
Do you want to stay in the house if you can make it affordable and get the repairs done in a reasonable time, or are you ready to move on?
Are the remaining repairs essential to prevent additional damage or nice to have’s?
Is the house worth what you paid for it or do you owe more than it is worth?
Is the owner in a financial position to reduce your payments or help with the repair costs?
Is the owner someone you think you can work with?
Can you rent/buy a different place for less money?
How easy will it be for the seller to find a different buyer?
Specific ideas would be for the owner to let you skip some payments as long as you show you spent the same amount on repairs. Perhaps the owner could pay for repairs and add it on to your loan.
I hope it works out well for you.
If you decide to try to work with the seller you need to put your agreement(s) in writing. If at any time during your negotiations with the owner you get the feeling you are being pressured, taken advantage of, or concerned about the commitment you are being asked to make you need to run, not walk, to some legal assistance. You can’t afford to not afford it.