Re: owner financing - Posted by B.V. Hughes
Posted by B.V. Hughes on October 31, 1998 at 17:54:43:
Don’t sell to this guy unless you get significant money up front and a contract that really protects you. Also, be sure to charge an interest rate that is much higher than the current rate of mortgages.
In selling on contract, you still can get the property back if he walks, but it’s a real pain to go through.
I have some experience in contract sales, both through my employment and personal deals. I sold a property on contract to a person who was a professional investor, with a balloon payoff due in 5 years. It was a good deal: I had cash flow, no maintenance and a down payment of 15% of the purchase price. We signed the contract.
The following year my buyer went through a divorce and he filed chapter 11 bankruptcy. He was permitted to stop paying me until he appeared in bankruptcy court, so I lost cash flow for a while and I had to hire a lawyer to represent me in his bankruptcy hearing. I gave the lawyer instructions to get the property back so I could resell it, but my buyer elected to honor this contract and said he would start making payments. I was forced to go along with this. He didn’t make the payment on time, so I had to get really hard-ball with him to get the payments started back on a regular basis, but he never caught up the two back payments.
So I kept careful records and track of the interest. He was already behind two payments, so interest accrued upon interest. He was responsible for my legal expenses, so all legal fees were added to the principal balance. (I saved legal fees by keeping track of the payments and interest calculations myself.) To make this long story short, at the end of the 5 years, he tried to get me to agree to another balloon. I said no, I wanted paid off. We negotiated a win-win deal whereby he assumed the existing mortgage and and I got all the the money owed me, complete with reimbursement of all back interest and legal expenses.
What did I learn from this? People who are good risks today may be in bankruptcy next year. All things are negotiable and try to make every deal a win-win. As a result of my experience, I offer the following hints:
In selling property on a contract basis be sure to satisfy the following:
#1 Seller automatically gets the property back if buyer defaults and all legal expenses resulting from buyer’s default are reimbursed as part of the settlement;
#2 There are clauses in the contract that protects seller in case buyer decides to trash the place;
#3 There is a good down-payment;
#4 There is enough interest income to give seller the incentive to carry the buyer’s credit and service his payments because in essence, the seller is a bank lending money to the buyer to buy his property.
I hope this lengthy explanation helps.