Getting a loan from a bank is getting harder and harder these days, especially jumbo loans of over $450,000. By selling your home with owner financing, you can not only achieve a quicker sale but you increase the buyer pool by 40%.
Rent to own is a great option and works by letting the potential buyer rent out the house for a certain period of time as outlined in a contract. The tenant pays rent al usual, but a certain percentage is marked as credit toward the purchase of the home. If at the end of the contracted period the renter decides to purchase the house, this credit is deducted from the house price.
If the renter decides not to buy the property, all the rent money simply goes to the homeowner.
If you're going to draw up a contract to owner finance the sale of your house have an experienced real estate attorney look it over. It might cost you $400 or $500 (maybe more, maybe less depending on what state you are in) but it might save you a lot of heart ache in the end if the buyer stops making payments, they make unauthorized modifications to the house, which might still be in your name, or there is some other unforeseen event (you know there will be).
A competent real estate lawyer who specializes in these contracts can help you. Well worth the money.
If you are going to sell your some with owner financing you have the option of selling the loan to an investor looking for a cash flow investment.
Guidelines to make your loan more attractive to an investor and command a higher price:
• Make it a 30 year interest + principle loan.
• Fixed Interest Rate of 7.5 - 8.5% (higher if possible).
• Payments affordable for borrower.
• Buyer has credit score of 620 or higher. **
(Careful of waiting to sell the note. Buyer might start racking up credit card debt buying appliances, furniture, landscaping, etc. and lower their credit score.)
• Sell property at full market value if possible.
• Get at least 10% cash down payment.
(You can do 5% but that lower down payment will be reflected in the price you are offered for the note.)
• 3, 5 or 7 year balloon
** If you can't get their credit score, have them pull their own from one of the 3 credit reporting agencies (Equifax, Experian, and TransUnion), which they can do once a year for free at www.annualcreditreport.com.
Of course, there are lots of variables that work into a price offer including type of property, location, age of house, equity, is the buyer making the monthly payments, etc. Use the above list to make the loan more attractive to an investor.
Here are some Rent To Own advantages and disadvantages for both the buyer and seller:
THE BUYER ADVANTAGES
1. It will give you time to improve your credit.
Borrowers will have the time to increase their credit score, pay off debt and put some money towards the down payment. All of which will help them towards a more traditional loan.
2. Put money toward the down payment.
You can put a certain amount of rent each month towards the down payment. If for 3 years, $300 if put aside for the down payment you'd have a $10,800 credit toward the sale.
3. You could start building equity in the house.
If you sign a contract for a certain sell price and the home increases in value before it's time to pay it off, you have gained equity.
4. You get to "test drive" the home.
By living in the home for a year of two before you buy you get the chance to check out the neiborhood and the home.
THE BUYER DISADVANTAGES
1. You never know what is going to happen.
As Gilda Radner's Rosanne Rosanna Danna would say from Saturday Night Live, "It's always something. If it's not this, it's that."
2. The value of the home could go down.
You could experience the opposite problem from above. You sign a contract to buy the house for a certain price and the value of the property and home goes down.
THE SELLER ADVANTAGES
1. The house isn't empty.
The house could be occupied instead of sitting empty. There will be someone in the house to watch over it.
2. Renters might not buy.
Rent to own is great option to have a monthly income during a soft market with someone who may potentially buy the property. If 3 years later they decide not to buy, you keep all the rent and hopefully the market has stablized.
3. No real estate agent commission.
Only if you have used an agent to find the renters, or the renters used one to find you will a commission be involved.
4. You will increase your buyer pool.
First time home-buyers are finding it harder to get traditional lending. By offering a rent to own contract you increase your buyer pool by 40%
5. Monthly cash flow.
If the monthly rent matches or exceeds your mortgage payments you win.
THE SELLER DISADVANTAGES
1. It's still your house.
You want to be done with the house now but it's still yours. But this might be a good thing at tax time.
2. The buyer could back out.
You may not be able to close the deal. There can be many changes in two or three years, including, losing or changing jobs, having a family, divorce or still not being able to qualify for a loan.
3. You are locked into a price but home value goes up.
