If you’re planning to sell your home to a family member, you need to evaluate your options before using seller or owner financing options.
Q: A few months ago, I purchased a Fannie Mae HomePath home at a great value which I am renting to my daughter and her husband. I am able to rent to them at a price that helps their cash flow and credit repair process as they pay down other debt. And, I make a little more interest on my investment (I paid cash for the home) than today’s money market rates.
I want to sell my daughter and her husband the house at a very modest profit. But they are probably a good year away from getting their credit score up to an acceptable level.
I am not opposed to acting as the bank and doing an owner or seller financing, and I am wondering if there is a company that can handle payment receipts, manage the escrow accounts and disburse tax payments, HOA fees etc., and report their progress to the credit bureaus. I’d prefer not to deal with that.
I look forward to your insight and expertise.
A: There are two parts to your question. First, you have to decide whether you are better off as the owner of the home, or as the contract seller, or as a lender of the home.
Those are your three options. However, whether you lease the home or have an arrangement in which your daughter buys the home over time, you can make arrangements for your daughter to take care of all of the payments relating to the home.
If your daughter and her husband aren’t very good at handling their finances, I wonder whether their ownership of the home should be in the cards for now. You might want to continue to lease the home to them until they get their act in order.
However, if they are credit savvy and can handle the affairs of the home, perhaps now is the time to see if they can handle making all of the payments associated with homeownership. In their case, they would pay you rent, but the rental amount would be reduced so that they have money to pay the real estate taxes, home owner association dues, repairs to the home and other like expenses.
It would be up to your daughter and her husband to make sure those payments got made on time and they could build up their credit history.
On a separate note, there are companies out there that would allow your daughter and her husband to keep track of all payments that go under the radar screen of most credit reporting bureaus. Since homeowner association dues, some utility company payments and rent payments aren’t ordinarily reported to the credit reporting bureaus, people like your daughter and son and law might have a hard time building their credit.
Recent changes to the federal law now require lenders to consider alternative forms of credit in addition to a full credit reporting produced by Equifax, Experian, or Trans-Union. Consumers can build an alternative credit history consisting of information on how frequently they pay their rent or car payments or auto insurance. One of these companies is eCredable.com. (Full disclosure: Ilyce recently became a member of the eCredable advisory board.)
Ecredable will allow a consumer to provide the company information about bills they pay on a recurring basis. If these bills are not ordinarily reported to the credit reporting bureaus, you can still create an alternative credit report using these bills. If these monthly or routine bills are paid on time, the consumer can create an alternative credit report. Ecredable can create an AMP Score. This AMP Score can then be used with other companies to evaluate whether to extend credit to his consumer.
This company, along with a couple of other companies in the alternative credit reporting space, is trying to give consumers an alternative method of building their credit during these economic hard times.
Generally, credit card payments, mortgage payments, and other elements go into a standard credit history and are monitored by the large credit reporting bureaus. However, as more people remain unemployed, lose their credit cards and homes, or are young individuals that have moved into the credit world, there are fewer opportunities for them to build their credit in the traditional credit reporting world.
Newer credit reporting companies work to change the algorithm by allowing payments to utility companies, phone and internet companies, landlords, or other recurring monthly payments, even if those payments go to family members, to be used to create a picture of a consumer that might be missed by traditional methods.
But if your daughter and her husband are trying to improve their credit history, it will be up to them to take the steps necessary to make the payments from their own accounts. You won’t and shouldn’t be able to do it for them. If they are to make their own credit history, they have to do it themselves.
Should you lease or sell the home to them? From their perspective, it may not matter if they buy or rent the home from you as long as they handle the financial affairs relating to the home.
From your perspective, you can have them direct deposit the payment due you from their account on a monthly basis and you can keep track of those payments so that when you are asked to verify their payment history, you can do that and can evidence each payment that was made and that each payment was actually also made on time.
If you really don’t want to deal with the paperwork, you can set it up so that pay a title company or, there are other companies that will handle the payments as well.
Finally, if you decide to sell them the home under a contract for sale for deed arrangement, make sure you hire an attorney to help you out. You’ll want to be sure that you are protected no matter what happens.