Q: I’ve got an investment property that the renter is interested in buying. They are not able to get a typical mortgage because they don’t have conventional credit. However, they pay their rent on time monthly.
I am considering offering them owner financing, but am not sure where to get the documents written up. Also, the house has a mortgage in my name. If I do sell them the house, what will my lender do? What do you recommend?
A: There are several important legal issues that you need to address before you actually go to the closing, and you’re going to need the help of a good real estate attorney. So find one now, even before you start talking about the sales price with your tenants.
Most likely you’re going to end up selling the property to these buyers on an installment basis. That means, they’re buying the house over time, almost like lay-a-way.
The buyers will start by paying you 5 to 10 percent of the sales price. The property remains in your name, and you – not your buyers – will make the monthly mortgage payments on your mortgage, insurance and real estate taxes. This ensures that the necessary payments are made.
The installment contract with your buyer will include certain provisions that will pay you “interest” on the amount owed by them along with payments for all of your costs associated with the ownership of the home.
When the time comes to transfer title to the home to the buyer, they will pay off whatever remains on the installment contract. You’ll use part of the cash they pay you to payoff your current mortgage.
Installment purchases sound easy, but there are some risks. Again, you need a good real estate attorney to draft up these contracts and make sure you’re protected, so find one with experience with installment sales contracts.
Published: Apr 9, 2004