Owner-carry property

[moldy]

I need someone to tell me about this in plain English. I have a house for sale and I haven't had much interest (small town, multiple lay-offs in this county, etc). I am looking at doing an owner-carry type of contract, but know very little about this. I know that essentially it's like a rent-to-own with real estate. Could someone please tell me more details? I know the folks I am thinking of arranging this with - no issues with financing or how they will treat the property (I've know them about 5 years). Of course, it also is kinda like loaning money to friends - I think I want a layer between them and me, just so I don't have to be the bad guy should something happen. I have no idea even who to contact to help me set this up.

[Janis Sauncy]

I bought my place with owner financing.

No lawyer; we did everything through a title company. They drew up the contract according to our agreement (payment amount, rate of interest, length of "loan") and filed everything with the county.

Of course, a title search was part of the process.

One thing that I (as the "borrower") initiated was finding a local bank to make my payments to rather than paying directly to the seller. For a one-time fee of $100.00 and a small monthly fee on top of my payment, my payment is recorded on the day it is received, a check is then sent to the seller, and each of us gets a year-end statement (for tax purposes). I also get a monthly statement; I assume the seller does, too.

That way, there is no question about my check being "lost in the mail."

Anyway, you could contact a title company and ask them what services they provide.

Others here might have other suggestions.

Janis

[Yvonne's hubby]

As a realtor I strongly urge you to have an attorney familiar with real estate law draw up your contract. It prevents problems later down the road and even though most states allow parties to the contract to write it, there are just too many small details that can be overlooked. I use a lease option contract with a good deal of success, but its a fill in the blank thing prepared by my attorney several years ago. He charged me $50 bucks or so, but its the best money I ever spent. Just put your deal together verbally and have the attorney write it up, all parties sign it and have it notarized, yer all set.

[Common Tator]

I have bought with owner financing, and sold with owner financing. Have a real estate attorney draw up the mortgage, and be sure that they are required to carry enough homeowners insurance to replace the dwelling and structures to current building code. Have verbiage added that ensures that in a foreclosure you are #1 in line. If they get a second mortgage through a mortgage company or bank, they will try to assume the #1 position in case of default. You need this to be properly done to ensure that your place is properly secured. Ask the attorney about the steps that would be necessary to foreclose. Have late fees built in as an encouragement for them to pay on time. Be sure to keep on top of the payments. When I sold using owner financing, I was on the phone with the buyer if the payment was 5 days late.

When Mom sold using owner financing, the guy really took advantage of her. HE wouldn't pay and she really has a conflict avoidance type personality. So she sicked me on him. I couldn't compel him to pay, so mom had to hire a lawyer. Just before court date (because he contested the foreclosure) he finally got paid up to date.

A few months later, he defaulted again, and eventually, Mom had to take him back to court. One of the provisions of the mortgage was that he had to keep the structures in good repair. He tore down the structure and never said a word. The property is hundreds of miles away from Mom, and thousands of miles away from me. Finally I got someone to go by and take pictures, and the hotel that once stood there was gone! He finally eventually paid up, but not until Mom had at least 25% of the value of the mortgage paid out in attorney fees. He only paid up because he was going to lose the property in court.

My experience was better, and I believe it was because my buyer was a better man to begin with, and because I was diligent in my communications and calling (and charging a late fee) if The payment was late.

Read more here:

http://homebuying.about.com/od/finan...7_OwnFinan.htm

[Common Tator]

Janice made a very good suggestion. The account she mentioned is an escrow account. It protects you, the seller in that you have independent verification if a payment is not made. It protects the seller, if they really did make the payment.

[GREENCOUNTYPETE]

land contract
my grand father sold 3 building this way all multi unit appartment buildings 2 with store fronts

You are going to a layer to draw it up but simple terms like in the event they miss 3 payments they will be givin 30 days to make up the remittence and beging paying again or you take back full ownership of the building and they are server exiction.
that they may pay off the hole amount at any time at witch time they recive full ownership of the building , but they must carry cost of replacment insurance to gaurd agains liabiliaty claims and fire other damage , also that they must keep it up in appearece and to code.

also put in a trust statment that should you die that the property is places in trust with the remaineder of the payments going to your heirs via the trust

my grandfather used this as his retirment for years after 15 years both parties paid in full , really took it in takes that year , he had very much enjoyd getting payments for all thoise years in what amounted to a regular income and only paying the taxes for that year for what he recived that year.


when we bought our house the title company was a lawyer so yes basicaly the same thing they can both represent you.

[Alice In TX/MO]

Owner finance is NOT the same as rent to own, from the legal point of view.

You definitely want an attorney written Owner Finance contract and you need to make an amortization spreadsheet so you will be able to do your income taxes. The income on the interest is taxed differently than capital gains.

[Bonnie L]

Make sure the buyer can't have a lien put on the property. This happened to a neighbor who "sold" property to a ne'er-do-well. He managed to keep the taxes paid up - tho often late - but missed a lot of payments. Seller finally got fed up & buyer agreed to give back the property. But in the meantime, CSD had put several liens on the property because he didn't pay child support. The owner was trying to get that untangled when he died in a car accident. Now, between lawsuits from the people he hit & the liens, his widow can't do a thing. The family now renting wants to buy, but the whole mess could take years to resolve.

[partndn]

My first home was owner financed an called a lease purchase. I paid about $400 for attorney to draw papers that said:
I would be obligated to insure with homeowner policy
I would make payments (at the agreed interest rate for x years)
There would be a five day grace period for payment to be late
After late would be $25 more
after first 12 payments, deed would be recorded in my name
There would be no penalty for any prepayment or payoff of loan

It was very successful.

[Harry Chickpea]

Common Tator and I think similarly. Most states have a standard boilerplate mortgage contract that is used by any number of people. Certainly any large real estate company or local bank should have one or two available.

I took one of these as a basis and added a couple of clauses of my own.

First, if illegal drugs were used, made, or stored on the premises, the mortgage came due immediately and the property had to be vacated immediately.

Why this? Because if there is such a situation I want to do two things - make it plum easy for the police to evict even more quickly than normal, and keep the police from being able to lay claim to the property as proceeds from a drug bust. By stating that the mortgage is due immediately upon use of drugs, rather than upon discovery, the return of the property should legally occur PRIOR to the drug bust. Although the people buying could supposedly fight such a clause, it would never even get to a courtroom, due to their other problems.

The second "immediately due" was if ILLEGAL firearms were stored on the property. This property was in a city, and the neighborhood small enough that use of a firearm except in self-defense would have been outrageous.

Needless to say, a clause stating that the property must be properly insured with you as the owner of mortgage of record is needed.

I didn't consider someone tearing down a structure, but after CTs experience, I'd verify that was covered as well.

If you do an owner mortgage you have every right to charge a higher interest rate than a bank. Your exposure on a single mortgage is much greater. The mortgage should by all means be recorded in the county courthouse, and you will have to fill out some forms for Federal taxes.

[Wolf mom]

If you currently have a mortgage on the property and you try to carry a mortgage, the mtg. company can call it all due & payable NOW. That is called a Wrap or wraparound.

A rent to own or lease purchase is very different from you being the banker. If you have a free & clear house & you want to carry the mortgage, you want a Note & Deed of Trust not a mortgage. It is much easier to get the house back if the buyer defaults on Note & Deed of Trust than a mortgage.
You need to get a solid down payment. Decide what interest you want, then set the whole thing up through a title/escrow comapny. There needs to be a title search, etc. You want to have a clause in there about delinquent payments, inurance, etc. You want the paments to go through a title or escrow company as that protects both buyer and seller. In essence you do not own the house anymore. You just carry the paper. A land contract is a different animal altogether. People use them, but I would not.

A lease purchase is nothing more than a lease with a portion of the lease payment going towards a down payment Usually this is for a year only, but can go on as long as you both agree. Very easy for the "buyer" to get out of. Good for the seller as if it's written in the lease, he gets to keep the portion of the payent going to the down.

You really need guidance, especially in this market. No matter how good friends you are.

[Freya]

Question.... if you do this and the buyer is required to carry homeowners insurance but fails to and everything burns down... what happens?


How does anything get replaced?

[TheMartianChick]

Originally Posted by Freya

Question.... if you do this and the buyer is required to carry homeowners insurance but fails to and everything burns down... what happens?


How does anything get replaced?

It doesn't.

It would be wise to do what banks and mortgage companies do. Banks are notified when a homeowners policy lapses.The bank will pay for a force-placed insurance policy to cover the amount of the note. This policy is usually very expensive and does not cover anything beyond the remaining value on the note. They will then include the cost of the policy in the mortgage payment.

[Yvonne's hubby]

Originally Posted by Freya

Question.... if you do this and the buyer is required to carry homeowners insurance but fails to and everything burns down... what happens?


How does anything get replaced?

The way I handle that is to carry the insurance myself, and have my buyers reimburse me in the form of adding enough to the monthly payment to cover it. Same thing with the taxes. But then I NEVER grant deed to a property and hold a mortgage, I use the lease option method. Its fair all around, and I am much better protected if things go awry.

[Yvonne's hubby]

Originally Posted by Bonnie L

Make sure the buyer can't have a lien put on the property. This happened to a neighbor who "sold" property to a ne'er-do-well. He managed to keep the taxes paid up - tho often late - but missed a lot of payments. Seller finally got fed up & buyer agreed to give back the property. But in the meantime, CSD had put several liens on the property because he didn't pay child support. The owner was trying to get that untangled when he died in a car accident. Now, between lawsuits from the people he hit & the liens, his widow can't do a thing. The family now renting wants to buy, but the whole mess could take years to resolve.

The only way to protect yourself from something like that is with a lease option arrangement. Even then liens can be put on your property but it reduces the likelihood greatly. I refuse to sell any property in any form that grants the buyer a deed prior to payoff of the entire balance. It works well for me and the only liens that can be placed on my property are materialmans liens in the event the buyer has had work done to the place and didnt pay the people doing the work.

[fordy]

............Your income reporting of this transaction will have (3) components.....(1)Gross profit percentage ratio(GPP) , Ex.-you sell at 100,000 and you paid 50,000 , you made a 50% profit , So 50 cents of every dollar you receive is profit and 50 cents is return of your investment , and NOT taxable . (2) Of the 50% profit part , a determination must be made as to whether it is longterm capital gain or short term capital gain . That is decided by how long you've owned the property . , (3) the interest you receive each year is fully taxable just as if you had received it from a CD in a bank . , fordy

[ronbre]

PUt your house on craigslist with lots and lots of photos..good ones..and also with very long detailed descriptions..post it daily or at least weekly updates..new photos from other directions..change the title description..we sold MIL's in a few days..after 2 agencies failed us.

[highlands]

I've bought two places with owner financing. It worked great both times for both seller and buyer. No real estate agent involved, no bank involved, we did use a lawyer ($500 or so) to make sure the contract was right and did do a title search. This all saved a lot of money and time.

[KIT.S]

About taxes, if this was your principle residence for 2 of the last 5 years, the principal portion is not taxable, but the interest is taxable. There would be no capital gains tax on a principle residence.

However, if you do a "rent-to-own" the entire amount of the rental is taxable in the year in which you receive it. Again, it's not capital gains, though.

If it has not been your residence, you're back to capital gains, which can be less than your regular tax rate. Again, though, if you rent it, it's rental income, Schedule E, and the proceeds are completely taxable. Only the buy-out at the end would be capital gains, and if the rental agreement was longer than 3 years, it would not be your residence, and you would pay taxes on the entire profit (sales price less basis).

Check with your tax accountant. Your attorney won't necessarily know this, and the tax consequences may override other factors when you choose between outright selling and rent-to-own.

Kit, long time bookkeeper in CPA offices
Oregon

[MN Gardener]

I would be calling a real estate attorney and an accountant to get advice. You could also make the buyers pay for it. It might not cost as much as you think.