Posted by Craig (IL) on February 04, 2002 at 07:07:40:
I am not an expert, but let me try. I?ll assume you don?t have a lot of experience with this, so I’ll give details. Subject-to purchases are an advantage to buyers because they don?t have to qualify with a lender and because closing costs are usually lower. The advantage for sellers is the speed of the sale; subject-to purchases can be done post haste. You as the seller, can help a qualified buyer because a year?s worth of timely payments to you, when property documented, goes a long way to showing lenders, who would give them a loan and cash you out, they can qualify for a loan.
At a minimum, you would want to check references and credit. Where has this buyer lived the past five years? Moved a lot? Why? Owned? Rented? Ever evicted? Bankruptcy? Late on payments of any kind? Work history. How have they maintained property in the past? You want to know the reason they want such a purchase. If they can?t qualify with a lender, why not? Just married–any reason to believe the marriage will survive? Etc. You want hard evidence that this person is going to make payments and eventually cash you out. If you don?t find it, don?t do it. The seller would need an income no less than three times the cost of a loan + home insurance + property taxes; a higher income if the property needs a lot of maintenance or if the buyer has other high or unusual expenses.
Regarding your first question, use a lawyer on this. Ask the lawyer to construct a land trust for you and the buyer. Ask if the lawyer will add provisions for returning the property to you for lack of payment. When shopping for a lawyer, ask qeustions. you want a real estate lawyer experinced with land trusts.
Regarding your second question instead of a subject to purchase, consider a ?land contract? or ?contract for deed? (whichever it is called in your area) instead. Such a purchase would allow you to control the deed until such a time the buyer cashes you out. The buyer should be able to refinance in one year and you?d be out of the deal. A lawyer can explain the details to you. There are some things you should know before doing this, but I won?t go into that.
Regarding down payment: Yes, of course there should be a down payment. If this buyer wants none you may want to forget it. Why hasn?t he/she saved any for it? If the buyer hasn?t saved any to this point, why will he be able to save any in the future? 3% , 5%, 10%, 20% are common down payments amounts. I think most posters on this board would counsel against the 3% figure. You would want to get enough to make this sort of deal worth your while and protect you financially if the buyer were to trash the place, walk away, etc. Also consider the buyers equity situation after the down payment. The lower their down payment the less equity they will have when it comes time to get a loan to cash you out.
Whatever you do, I think it is important to know your exit strategy. Determine how you?re going to get out of this deal in the end. Consider various scenarios based on what the buyer might do. You?d want to be able to answer these questions or don?t make the deal. Lastly, a common rule of thumb for sellers is to maybe give on price (i.e., lower the purchase price) or give on terms, such as your considering; but not both. If you are giving terms, then you should be getting a top-of-the-market purchase price for your home.