Should you grant an owner financed mortgage in a real estate transaction? We'll demystify
this topic in the following video. My name is Chris at Hauseit. Hauseit is the largest
For Sale By Owner and Buyer Agent Commission Rebate company based in New York City, established
2014.
The short answer is no. You should not and definitely not grant an owner financed mortgage
or any type of seller financing to a buyer because well, the buyer probably can't get
a mortgage from a bank and a traditional lender in the first place for good reason. Most likely
reason is because the buyer simply isn't financially qualified. Therefore, why do you think you
could do a better job vetting the financials of a potential buyer versus a bank who has
already rejected him for a traditional mortgage?
The most likely reason that the buyer can't get a regular mortgage is because he or she
simply doesn't make enough income to cover the anticipated housing expenses within an
acceptable margin of safety. As a result, through interviews with various lenders, mortgage
bankers and brokers throughout the city we've heard that owner financed transactions typically
default greater than 50% at a time and as high as 60% at the time on average. Therefore,
if and when a borrower in an owner financed transaction inevitably defaults you have to
deal with the time, expense and energy of the foreclosure process and also evicting
the tenant.
Keep in mind that rules and regulations around foreclosure and evictions vary greatly by
state. For example, there are many tenant protections in New York and evictions can
take months if not years. Furthermore, you should know that it is illegal to evict a
tenant without a court order or a sheriff to do it in many states including New York. So,
if the borrower simply stops paying you cannot simply just go kick him out or change the
locks. That would be illegal.
So, let's say that you're successfully able to foreclose and then evict the borrower.
Well, then you have yo spend significant time and resources and money to repair the home
to be able to market it again for sale or rent. Most likely, during the foreclosure
process the tenant or the borrower in this case has most likely not been too kind to
the property due to the lack of incentive to take care of it. As a result, many homes
that have been foreclosed on are usually in terrible condition, and moreover if you have
a poorly written loan document with the borrower and an owner financed transaction, the borrower
may even take your appliances and sell them for some extra cash.
So, where does that leave us? Let's say the tenant tore the place apart during the foreclosure
and eviction process but you've managed to make repairs and the property is back to its
former condition. Well, you're back at square one, and in fact with seller closing costs
as high as they are in places like New York, you probably have lost money even if you got
some interim cash flow from keeping the down payment of say 10% of the sale price, you're
probably still in the red. And of course, back at square one if you wish to sell again
considering how high seller closing costs are in many states such as New York, well,
you're going to probably face a more substantial loss if you do manage to find another buyer
and hopefully this time you won't do an owner financed transaction and you'll wait for substantially
qualified buyer who can actually get a mortgage on his or her own.
We hope you found this video helpful. If you did please hit like or subscribe. We do come
out with content on a regular basis and of course we help buyers and sellers save money
on broker commissions up to 6% when they sell or up to 2% when they buy. Check us out on
www.hauseit,com, spelling is below. Leave us a comment and we'll see you on the
next one.