by Hope
I need to preface this post. This all happened before the housing decision was finalized, but I am anxious to hear this esteemed audiences perspective on this proposal I sent in so I can learn for the future if this opportunity every presents itself again. We are staying in our apartment until April 30th. After that, the world is our oyster!
With that preface, a few weeks back as I was searching for rental homes I stumbled upon a very unique house sale at least in my mind. It was a brand new modular home on 1.5 acres about 30 minutes from where we live ie what should be a cheaper area to live. Here’s the kicker…it was new in 2008 and had never been lived in and had been on the market for over a year. And on top of that, the ad said the owner was willing to do owner financing.
So I sent an inquiry, the agent called me back almost immediately. We went to see it the next morning. 3 bedrooms/2 1/2 baths with 650 square foot of unfinished 2nd floor space. Perfect for us. It was definitely new on the inside with a stock kitchen and definitely 8 years old and neglected on the outside. A power wash and gutter cleaning would have done it good and the two wood porch/patios definitely needed to be treated before they rotted away. And from that you can imagine the yard and rock driveway condition.
You get the picture…it was listed at $260,000. Whoa! If you are paying for location…well, the location definitely left a bit to be desired…in the middle of nowhere, unpaved road and surrounded by unkempt mobile homes and tiny old shoebox homes. (Not judging, just trying to paint a picture.)
When the real estate agent spoke to the owner he said he was willing to be creative with owner financing. I saw that as a positive sign. I went home and decided to give it a shot. I certainly wasn’t willing to pay $260K since that was what we paid for our last house it and it in a MUCH better location, upgraded in many ways and only slightly smaller. So here are numbers I put together of what I was willing to do.
| Payment | Balance | Rent to Own Pymt | Finance Charge to You | Total Finance Charge to You | Purchase Price | Amt to Down Pymt | Balance of Down Pymt | Date | Annual Interest Rate | |||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1 | 175,000.00 | 1,000.00 | 200.00 | 200.00 | 174,000.00 | 800.00 | 800.00 | 10/15/15 | ||||||
| 2 | 180,525.00 | 1,000.00 | 200.00 | 400.00 | 179,525.00 | 800.00 | 1,600.00 | 11/15/15 | 3.75% | |||||
| 3 | 179,525.00 | 1,000.00 | 200.00 | 600.00 | 178,525.00 | 800.00 | 2,400.00 | 12/15/15 | ||||||
| 4 | 178,525.00 | 1,000.00 | 200.00 | 800.00 | 177,525.00 | 800.00 | 3,200.00 | 01/15/16 | ||||||
| 5 | 177,525.00 | 1,000.00 | 200.00 | 1,000.00 | 176,525.00 | 800.00 | 4,000.00 | 02/15/16 | ||||||
| 6 | 176,525.00 | 1,000.00 | 200.00 | 1,200.00 | 175,525.00 | 800.00 | 4,800.00 | 03/15/16 | ||||||
| 7 | 175,525.00 | 1,000.00 | 200.00 | 1,400.00 | 174,525.00 | 800.00 | 5,600.00 | 04/15/16 | ||||||
| 8 | 174,525.00 | 1,000.00 | 200.00 | 1,600.00 | 173,525.00 | 800.00 | 6,400.00 | 05/15/16 | ||||||
| 9 | 173,525.00 | 1,000.00 | 200.00 | 1,800.00 | 172,525.00 | 800.00 | 7,200.00 | 06/15/16 | ||||||
| 10 | 172,525.00 | 1,000.00 | 200.00 | 2,000.00 | 171,525.00 | 800.00 | 8,000.00 | 07/15/16 | ||||||
| 11 | 171,525.00 | 1,000.00 | 200.00 | 2,200.00 | 170,525.00 | 800.00 | 8,800.00 | 08/15/16 | ||||||
| 12 | 170,525.00 | 1,000.00 | 200.00 | 2,400.00 | 169,525.00 | 800.00 | 9,600.00 | 09/15/16 | ||||||
| 13 | 176,221.24 | 1,200.00 | 250.00 | 2,650.00 | 175,021.24 | 950.00 | 10,550.00 | 10/15/16 | 3.95% | |||||
| 14 | 175,021.24 | 1,200.00 | 250.00 | 2,900.00 | 173,821.24 | 950.00 | 11,500.00 | 11/15/16 | ||||||
| 15 | 173,821.24 | 1,200.00 | 250.00 | 3,150.00 | 172,621.24 | 950.00 | 12,450.00 | 12/15/16 | ||||||
| 16 | 172,621.24 | 1,200.00 | 250.00 | 3,400.00 | 171,421.24 | 950.00 | 13,400.00 | 01/15/17 | ||||||
| 17 | 171,421.24 | 1,200.00 | 250.00 | 3,650.00 | 170,221.24 | 950.00 | 14,350.00 | 02/15/17 | ||||||
| 18 | 170,221.24 | 1,200.00 | 250.00 | 3,900.00 | 169,021.24 | 950.00 | 15,300.00 | 03/15/17 | ||||||
| 19 | 169,021.24 | 1,200.00 | 250.00 | 4,150.00 | 167,821.24 | 950.00 | 16,250.00 | 04/15/17 | ||||||
| 20 | 167,821.24 | 1,200.00 | 250.00 | 4,400.00 | 166,621.24 | 950.00 | 17,200.00 | 05/15/17 | ||||||
| 21 | 166,621.24 | 1,200.00 | 250.00 | 4,650.00 | 165,421.24 | 950.00 | 18,150.00 | 06/15/17 | ||||||
| 22 | 165,421.24 | 1,200.00 | 250.00 | 4,900.00 | 164,221.24 | 950.00 | 19,100.00 | 07/15/17 | ||||||
| 23 | 164,221.24 | 1,200.00 | 250.00 | 5,150.00 | 163,021.24 | 950.00 | 20,050.00 | 08/15/17 | ||||||
| 24 | 163,021.24 | 1,200.00 | 250.00 | 5,400.00 | 161,821.24 | 950.00 | 21,000.00 | 09/15/17 | ||||||
| 25 | 168,294.09 | 1,300.00 | 275.00 | 5,675.00 | 166,994.09 | 1,025.00 | 22,025.00 | 10/15/17 | 4.00% | |||||
| 26 | 166,994.09 | 1,300.00 | 275.00 | 5,950.00 | 165,694.09 | 1,025.00 | 23,050.00 | 11/15/17 | ||||||
| 27 | 165,694.09 | 1,300.00 | 275.00 | 6,225.00 | 164,394.09 | 1,025.00 | 24,075.00 | 12/15/17 | ||||||
| 28 | 164,394.09 | 1,300.00 | 275.00 | 6,500.00 | 163,094.09 | 1,025.00 | 25,100.00 | 01/15/18 | ||||||
| 29 | 163,094.09 | 1,300.00 | 275.00 | 6,775.00 | 161,794.09 | 1,025.00 | 26,125.00 | 02/15/18 | ||||||
| 30 | 161,794.09 | 1,300.00 | 275.00 | 7,050.00 | 160,494.09 | 1,025.00 | 27,150.00 | 03/15/18 | ||||||
| 31 | 160,494.09 | 1,300.00 | 275.00 | 7,325.00 | 159,194.09 | 1,025.00 | 28,175.00 | 04/15/18 | ||||||
| 32 | 159,194.09 | 1,300.00 | 275.00 | 7,600.00 | 157,894.09 | 1,025.00 | 29,200.00 | 05/15/18 | ||||||
| 33 | 157,894.09 | 1,300.00 | 275.00 | 7,875.00 | 156,594.09 | 1,025.00 | 30,225.00 | 06/15/18 | ||||||
| 34 | 156,594.09 | 1,300.00 | 275.00 | 8,150.00 | 155,294.09 | 1,025.00 | 31,250.00 | 07/15/18 | ||||||
| 35 | 155,294.09 | 1,300.00 | 275.00 | 8,425.00 | 153,994.09 | 1,025.00 | 32,275.00 | 08/15/18 | ||||||
| 36 | 153,994.09 | 1,300.00 | 275.00 | 8,700.00 | 152,694.09 | 1,025.00 | 33,300.00 | 09/15/18 |
As I saw it, at the end of three years, I would have paid him a total of $194,694 for the house including interest on the balance, a courtesy fee for financing and principal payments to be applied as down payment when I went to finance it through a traditional mortgage.
I want to caveat the “lease” payment and how it was broken up as courtesy fee to him and application to down payment was based on a conversation with my dad. Evidently he sold a home many, many years ago in a similar fashion in a similar situation as far as it being on the market for a long time…and he said he was forced to pretty much go with what they offered as far as how much was offered towards the principal. I don’t know if that still applies today but figured it was worth a shot…the worst they can do is say no right?!
I know this is quite a bit lower than he is asking. So aside from my starting number of $175,000, what are your thoughts on this proposal? I am sincerely interested in hearing constructive criticism on this type of arrangement and proposal.
And here is the email I sent with it…although I am not certain the real estate agent would have passed this on.
I chose the original purchase price based on comparable sales in the area of modular homes on similarly sized acreage, tax records, the condition of the home and the surrounding area. I am open to any counter offers, of course.
The lower payment during the first year would allow us to bring the outside up to standards, professionally finish out the attic for the needed 4th bedroom in for our family, install an Invisible Fence for our animals and install what is going to be a higher priced high speed internet system (traditional cable and dsl is not an option at this time based on my research.)
You will note that in addition to an annual finance charge, I am willing to pay an additional portion of each month’s rent to the owner for the great blessing this would be to our family. The remaining lease payment as detailed in the spreadsheet would be applied toward the down payment at the end of the lease term.
The goal, of course, would be to purchase the home outright via traditional financing as soon as possible; however, I have included details for up to 3 years of this lease purchase agreement. All of this would be pending a home inspection, well/water testing, septic inspection, termite inspection, etc. of course.
Since this would be a lease purchase…a little about us. I am a single mom who has been self-employed for right at 10 years now. I have very steady income and am happy to provide proof of that as well as business references. In addition, I am a foster/adoptive mom. Over the last 6 years, I have had 9 foster children in my care. Two years ago, this October, I finalized the adoption of 15 year old twins who were placed with me when they were 12. It was at this point that we outgrew our old home in James City County.
We have 3 dogs, 1 cat and volunteer/train dogs at the Heritage Humane Society twice weekly so there are times we have an extra dog for a day or two as we get them started. I know animals scare people as far as leases go, but I can provide numerous references for our animals, and the home we leased for 4 years (with the animals) sold in 4 days after we moved out. All that to say is that we take care of our home.
Just a side note, our home is inspected annually and sometimes monthly if there are foster kids in the home by the social services staff. I am happy to provide references to that end as well.
The real estate agent called me the next day and simply said “the owner is not even interested in countering” which was fine. I was at peace with giving it a shot and seeing what happened. But I am interested if this opportunity presented itself again, what I could have done differently or better.
Hope is a creative, solutions-focused business manager helping clients grow their business and work more efficiently by leveraging expertise in project management, digital marketing, & tech solutions. She’s recently become an empty nester as her 5 foster/adoptive kids have spread their wings. She lives with her 5 dogs in a small town in NE Georgia and prefers the mountains to the beaches any day. She struggles with the travel bug and is doing her best to help each of her kids as their finish schooling and become independent (but it’s hard!) She has run her own consulting company for almost twenty years! Hope began sharing her journey with the BAD community in the Spring of 2015 and feels like she has finally in a place to really focus on making wise financial decisions.
You did owner financing with your Dad on the last house and it didn’t end well. I wouldn’t consider it in a million years.
Actually, that was NEVER owner financing…what I was paying him was rent and I have the lease agreements to prove it. It was agreed that I could purchase the property from him at any time for the balance remaining plus the down payment he had put down at the time of purchase…but there was no owner financing or purchase agreement ever in place.
okay- I still think a unique financing scenario is not a good idea for you.You should check to see if you qualify as a first time home buyer. I am not sure if you have owned a home ever. But after several years (somewhere between 3-7) of not owning a home you qualify as a first time home buyer. Obviously check with a lender in your state.
I am an attorney who deals with landlord/tenant law and this is NOT legal advice by any means but I’m just prefacing my comment so you know the context. I would NOT do owner financing. By April you will be in such a better financial position and your credit score should greatly improve. I would definitely try to purchase with a traditional home loan (or FHA, etc.) that offers protections versus owner financing. I’ve seen many lease-to-own/owner financing deals go awry in my business, and it’s very messy.
Also, just as to your lower offer, I think saying that you have to make improvements on the property (due to the neglect) is completely fine, but I would not include that you need to add a 4th bedroom, install an invisible fence or quicker internet. The seller does not care about those issues and they are not the seller’s problem. You have a better shot an only sticking to the relevant facts, and improvements necessary for the property to get up to code is extremely relevant to the purchase price.
I second Christine’s thoughts as well. As I have shared in the past, I too am an attorney that specializes in business law and consumer bankruptcy. I have seen many clients end up in bankruptcy (on both sides) as a result of this type of contractual relationship. You name, I have seen it. One of the biggest issues is if the current owner has a mortgage and then doesn’t use your payments to pay that mortgage. The bank still retains the right of foreclosure and you have little recourse to get your money back, even if there is a breach of contract, because the owner has squandered the money away. Tread lightly!
Good point, Christina…I think my goal was that 1) this would get me the 20% down payment that is going to be touch for me to get to avoid PMI and 2) allow us to move more quickly. It was a long shot at the time, but I figured it was worth a try.
You are right about the more personal reasons, will definitely remember that for the next time. I just wanted him to know that we would be making marketable improvements to the property.
Hope, I agree with you about marketable improvements, but what you and I may seem as improvements, others might see as a deterrent.
I wouldn’t have put that you are open to counter offers – that just tells them to go ahead and come back with a higher price. I agree with the other 2 commenters – if you want to purchase, try to go the traditional route, so that you are protected and not subject to legal problems down the road.
Just out of curiosity since I am not familiar with that kind of financing (and it doesn’t seem to be common in my neck of the woods): How is owner financing beneficial to anyone? Is that something the owner is doing once he becomes desperate because his house isn’t selling? is that supposed to be a perk for the new owner since he doesn’t have to do it through a bank? How does it work once the two parties agree on a financing plan? do you just draft a contract yourself? or is that done by the realtor or an attorney?
Like Christine has said, I imagine those kind of arrangements often gets messy in the process.
I, too, would try to stay away from owner financing. Give it some time and wait until you are truly ready and there’s no obstacles preventing you from traditional financing. I think you would be much better off renting for the foreseeable future. The twins are getting older and will eventually move out too. Owning a 4 bedroom house is a huge long term commitment and expense. The last thing you want to be is “stuck”.
I’m not much of a fan of owner financing. In this case after 8 years, it makes me think that there is a problem with obtaining conventional financing on this property. If that’s the case, what happens when you are eventually ready to sell?
From what I understand, banks either can’t or won’t lend mortgages on modular homes, as they are not considered “real” property by the industry standards. I, too, would stay away from owner financing, especially on a modular home because of this reason. You likely wouldn’t be able to finance through a bank or mortgage company.
I could’ve sworn I heard that modular homes actually depreciate each year, similar to a mobile home. I might be wrong, but definitely something to look into if you planned on selling in the future.
I think owner financing gives too much power to the owner and not enough to the buyer….so from that standpoint I would stay away from it! You need to stay in control of your finances!
I’m not advocating owner financing but….
Your math looks really wonky to me. 180k mortgage at 3.75% would have only ~$275 to principal in the first month, yet you are proposing that he count it as $800 credit to you. It makes absolutely no sense! His carrying costs are likely much higher than you are proposing which is why he threw your offer out the window. I would expect that for owner financing you would propose to have less amount paid towards your downpayment than a standard loan. But that’s just my initial guess.
Yes, that was kind of my reason for asking to see if anyone had done this successfully or have some ideas of what to do differently.
Maybe a better option is to lease but have an option to buy. None of the money being put towards the purchase of the loan. Essentially renting with an agreed upon sales price if you decide to purchase. You could have a 3 year lease with annual opt outs. Since the owner is currently losing money in the property ( not generating revenue, not getting use from it), he may take below market rate for the lease. Offer $750 – $1000 per month and you can save for a down payment with the reduced rent. The trick is getting him to accept a purchase price nearly $100k less than he feels the house is worth.
I agree with the rental proposition. In order to make owner financing appealing, you would likely have to give them quite a premium on interest rate or payment acceleration. If I were in the owners shoes, I would be more likely to rent you a property for a set period of time and then re-discuss a purchase option at the end of the period. I would also not give credit for the payments made as rent.
I work for the United States Department of Agriculture and was wondering if you’ve ever contacted the Rural Development Agency, which falls under the USDA umbrella. Although I do not work for that agency, I know that they have low interest housing loans, based on a family’s income. You should google USDA Rural Development loan income limits or something similar. I believe the income limit varies by state. There should be an office near you or at least you can get a phone number and ask about their “single family” housing program.
Also if he gets sued and has a lien placed on his propertys , all the money you would have paid for years is gone
Unless you’re willing to hire an attorney and a CPA/financial advisor to go over any owner financing agreement I wouldn’t do it. There are too many potential Problems, and if you structure the deal wrong, or don’t have the right legal contract set up you could get very badly burned.
Don’t let the desire for homeownership blind you to potential pitfalls, or cause you to jump at the chance without protecting you and your children.