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Should we take this offer - owner financing?

Posted by margaret_garfield (My Page) on
Wed, Sep 3, 08 at 11:32

We have received an offer to buy our land. They want us to do owner financing. (We have paid off the land, so we can.) They are offering full price (of our rock bottom, below assessment price), with 11.4% down and want 5.25% financing - with a payoff date of about 18 months in the future.

This APR seems kind of low. I haven't seen a credit report yet.

I also wonder how/when taxes (county ~1.5%) and commissions are paid?

I like the pay off date and am "okay" with the down. I suspect they think the value will go up in a year and a half, and they will be able to refinance, but what if it doesn't? How hard is it to foreclose on owner financing if they don't pay?

If I wanted to have company collect the payments and deal with the buyers (ie. late payments, foreclosures), how would I find such a company? Would that be a bank or the escrow company?

This contract would be secured with a promissory note and a deed of trust.

We don't normally use lawyers in real estate transactions in this area (Pacific Northwest), so I don't currently have one to talk to; but I will probably get one. I just want to have some info so I know what questions to ask.

-Margaret


Follow-Up Postings:

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RE: Should we take this offer - owner financing?

The interest rate does seem low but then it is for such a short term I don't know that it should matter much. I don't think anyone would lend them money to build on the land without a release from you and you should make it absolutely clear in the contract that you will not sign a release. Is there timber on the land? If so, then I wouldn't sell to them.


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RE: Should we take this offer - owner financing?

That sounds like a low rate. If you have the money to fund, then it's ok, but it seems like a huge risk to take. Sounds like this deal would benefit them the most with all the risk to you.

How long has it been on the market?


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RE: Should we take this offer - owner financing?

There is timber but not much. It is only 2.2 acres and partly cleared already. I think the timber would be worth about the same as the down payment, so not much profit in logging it and walking away :-)

I wouldn't want them to build on it until it is paid off. That would make a foreclosure so much more complicated, I would think.

It has been on the market about 15 months. This is our seventh offer. Two that we accepted fell through due to financing troubles, one was lowball and yet had all the normal "outs" (I mean contingencies) for the buyer, one was FHA and DPA, and two were from the same buyer but he wanted side deals with the neighbors (don't ask!).

-Margaret


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RE: Should we take this offer - owner financing?

Well standard from the small local banks in my area (which have the best deals/rates/closing costs) are minimum 15% down, some requires 20% and a rate of Wall Street Journals published one (can't remember what they call it) +1%.

The rate sounds very low to me. Land with no improvements usually have a higher rate than a mortgage with a house as banks consider it higher risk.

What are they suggesting the payments be? Are they asking you to carry this for 18 months and have the payments amortized over a certain time with a baloon payment at 18 months or are they asking to amortize the full amount over 18 months and then it is paid in full. If the latter the 5.25% might not be so bad.

I would definetly raise the rate on them to around 8% if it means they want to amortize over a longer time and have a baloon payment after 18 months. I'm saying this since you're having to deal with the risk and any potential costs. I would also find an attorney to help you with drawing up the documents.


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RE: Should we take this offer - owner financing?

You most definitely need a lawyer to draw up the sale and the financing agreements and terms, but I'm perplexed by anyone thinking that you are bearing the bulk of the risk.

After all, the buyer cannot take off with the land and disappear, the land stays where it's at. If they default, and you foreclose, you get to keep the land *and* any monies they have payed you. The land reverts back to you.

Granted, having to go to foreclosure would be a hassele on your time and energy, and you may want to sell the land (with the buyer obtaining conventional financing) and be done with it once and for all. But if you are financially able to wait 18 months for the payout, then I see no reason not to do it. the risk is on the buyer, not you (assuming a properly executed sales/financing agreement).

I'm not a lawyer, not even close.


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RE: Should we take this offer - owner financing?

Hi Margaret,

There are many ways to do this... and an outright sale with seller financing is probably not the best way for your interests, in my opinion.

1st off, you are being under-compensated in the terms... undeveloped land financing requires 20-50% down, and has 9-12% interest rates with 2-8 points in closing, standard. HOWEVER, then again, you have a ready and willing counterparty (which could go away, and leave you with no counterparty for another many months, potentially...)

Eviction is generally much quicker, cheaper, and more painless for you than a foreclosure to execute... SO, I would suggest instead of an 18 month sale note, go with an 18 month lease with an option to purchase.

Make the lease, and the option contract, two seperate and unrelated agreements (actually the option can reference the lease, but do not have the lease contract reference the option at all. It is the difference between equity laws and landlord laws, and you want the lease contract to be enforceable without regard to the option agreement.)

You definitely want guidance on this if you haven't done it before, I would suggest. Find yourself an experienced real estate investor as a coach... check with your local real estate investor club for who comes recommended.

Luck!
Dave Donhoff
Leverage Planner


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RE: Should we take this offer - owner financing?

My MIL did a land contract like that. She got a lawyer and he handled everything, even the payments. Yes, he got compensated, BUT, I'll bet there were no late payments!
It was for 7 years with a balloon payment at the end. It worked well for her. There was a house on the property too.
Kathy G in MI


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RE: Should we take this offer - owner financing?

I like what Dave is suggesting with the lease/option to buy but make sure you cover your butt.

My dad leased his repair part of the gas station to someone. They decided not to come back one day, leaving all of their stuff. My dad spent years in court and had nothing to show for it since you can't get blood from a stone. My dad wasn't even allowed to use his repair bays until it was settled. I have a judgment worth $90,000 in my possession which is worthless since there is no way I'll ever see that money either.

You want to make sure there is some sort of clause that protects you if they stop paying. You don't want to have to wait the full term to be able to sell your own land.


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RE: Should we take this offer - owner financing?

Margaret,

The rate does seem low in today's market. Foreclosing on owner financing is no different than bank money if the deed of trust is recorded with a valid trustee. You can have a collection agency - there are several in the Pac NW, many affiliated with title companies - handle the payment processing, and often they will assist the trustee with the foreclosure. They can also handle tax payouts, but you must decide if the monthly payments will include an amount for those, if they will pay them in a lump or if you will. Same with insurance.
In most parts of the Pac NW Escrow Agents are able to draw up notes/trust deeds and the related docs so an attorney is not needed, but I would advise you to talk to one, as well as your CPA.

Good luck!


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RE: Should we take this offer - owner financing?

chapnc - After all, the buyer cannot take off with the land and disappear, the land stays where it's at. If they default, and you foreclose, you get to keep the land *and* any monies they have payed you. The land reverts back to you.

Granted, having to go to foreclosure would be a hassele on your time and energy, and you may want to sell the land (with the buyer obtaining conventional financing) and be done with it once and for all. But if you are financially able to wait 18 months for the payout, then I see no reason not to do it. the risk is on the buyer, not you (assuming a properly executed sales/financing agreement).

This is where I see the problem and the risk. The land has been on the market for 15 months with many crazy offers and deals falling through in a rapidly declining market.

Who knows if down the road, the buyer defaults and property values have gone down significantly? Sure, the seller has the money from the payments and she gets her land back, but at what loss if the payments are less than the drop in value of the land?

Margaret - OK, I won't ask, but I'd be lying if U said I'm not dying to know! lol


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RE: Should we take this offer - owner financing?

I am a real estate attorney in California so I have little personal knowledge of real estate law up there, but I cannot imagine this is an expensive piece of land. Take a down payment, carry the note for 18 months. A bank is not going to loan them a nickel to build on it if the land is encumbered by your lien. Of course you would go to talk with an attorney for an hour of time, pick an escrow to handle the paperwork and go for it. If the land is properly secured by a deed of trust and a note you can have a bank or the escrow company collect the money. Keep it simple. If they don't pay, you go to a foreclosure company; they foreclose, you keep the down payment.
Where you are I cannot imagine that there is a big rush to be buying lots that size and building on them when the rest of the country is having record foreclosures. so if you have a buyer, get some local legal advice and close your sale.


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