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Tenants may go for owner finance - What if they go bankrupt?

Hi,
We are renting property, and the tenants want to purchase the property, with owner financing. We haven't checked their credit report yet...but was wondering, If they happen to bankrupt, would we lose the property, or could we take it back?
And...what is a good interest rate...the banks wanted 9.0% apparently their credit isnt the best....so just wondering what a good rate would be.
Thanks much.....
And we are getting a lawyer to write the agreement, but just wanting some information....thanks

sweeney's picture
sweeney | Joined: July 20, 2008 12:50 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

If your having credit concerns or concerns of their ability to pay, I would avoid the owner financing. Personally, I would avoid it anyway. I think you'd be putting yourself in a very risky position with a lot of potential headaches down the road.

Have them go get an FHA loan so you're out of the picture. Or have they already applied for a mortgage and been turned down?

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s.mckaybiz's picture
s.mckaybiz | Joined: April 24, 2008 08:05 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hello ibjoy1953, welcome to the forum. I would also agree that owner financing is not the best way to go. If they said they were offerred 9% than they have already begun the process of qualifying for a loan themselves.

Think of it as a gamble. You could act quickly and take a high risk at making some money(like most banks have done and are now paying for it!) or you could slow down and wait until the right opportunity presents itself without much risk involved.

By the way, I would really ask to see copies of their credit before continuing any further to possibly save yourself some time.

Either way you choose best of luck,

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ibjoy1953's picture
ibjoy1953 | Joined: August 5, 2008 02:43 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Thanks to both of you for your advise. They have tried for a loan, but they have to come up with a down payment that they dont have.
We wanted to help them, but at the same time....don't want to risk losing the property. We are going to get a credit report from both of them...and talk to a lawyer. We're not making any agreement until we have all of the facts...and if we dont like it...they we will not go forward with it.

Thanks again for your help....we are just trying to find out all we can...and get all of the advice we can before making a decision either way.
Joy

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Niicss's picture
Niicss | Joined: October 3, 2005 11:54 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Welcome back ibjoy.

Good to hear that you are consulting with a lawyer on this issue. You can help them to make the down payment only if they have good credit and if they have enough earnings to pay you off. So check their credit and income before you come forward to help them.

Let me know if you have any further queries.

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Jessica's picture
Jessica | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi ibjoy,

Welcome to our community forums.

I too feel as if owner financing wouldn't be the right choice here. They haven't been able to arrange for a down payment which is hardly 15-20% of the purchase price of a house.

Moreover, you said they may file bankruptcy. This means probably they have a lot of debts and possibly negative items on their credit reports. So, allowing for owner financing would have lot of risks. It's better that they arrange for financing from a bank or lender especially an FHA approved lender.

Regards,

Jessica.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

With seller financing, don't the seller's retain the deed until the home is paid for? If yes, I am just curious how the buyers could lose a home that they don't technically own yet.

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jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Welcome nyko,

It's true that the seller retains the deed in owner financing until the buyer pays it all. But what it implies is, the buyer cannot get ownership rights if he's not able to pay the entire price.

Thanks

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s.mckaybiz's picture
s.mckaybiz | Joined: April 24, 2008 08:05 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Another thing to consider Nyko is that if they get into this situation and the buyer ends up not keeping their end of the deal, then the owner might end up having to make two mortgage payments instead of one until they can find another buyer/renter.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Is it mean owner finance is not a good option to sell a property?

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gmakerley's picture
gmakerley | Joined: November 9, 2007 07:36 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

how does anyone figure that a seller would retain title to a property until the mortgage is paid off? that's not selling a house to anyone - it is holding a house as ransom! if you sell a house, you must sell it - you cannot continue to be the owner and collect mortgage payments on it.

wow, wow, a thousand times wow...i am aghast at some of the things i read that are written on here, but this could be the most outraged i've been.

any lawyer who would allow someone to "buy" a house that they can't take title to would need to be disbarred. any lawyer who would allow a seller of a house to perpetrate what is being discussed in this stream of conversation also ought to be disbarred.

please, someone, let's use some common sense here.

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gmakerley's picture
gmakerley | Joined: November 9, 2007 07:36 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

okay, now that i've had my tirade, let's talk about the owner financing angle.

the main question asked in the original post was "what happens if the borrowers file bankruptcy?" inasmuch as there would be a mortgage on the home being sold, that would constitute the documentation that there is collateral for the loan. if they not only filed bankruptcy but also neglected to pay the mortgage, then the sellers would need to begin an action to take back their collateral (the house).

the bottom line for the seller in what could be an ugly situation is this: foreclosing on real estate is not fun, retaking a home that was collateral for a mortgage is not fun, being nervous about receiving payments from a borrower is not fun. if all this lack of fun is sufficient to dissuade our original poster from making the mortgage that has been requested, so be it.
as for the potential borrowers' credit, i would suggest that you require them to obtain their own credit reports as quickly as possible so that you could put an end to all this speculation and get to the point of providing the loan you described or not providing it.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Ever hear of a land contract? I hope I don't run into you at a bank.... I'd have to go the other way... maybe you should do a little research.

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gmakerley's picture
gmakerley | Joined: November 9, 2007 07:36 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

jack if you were to run from me, that'd be strictly your decision. feel free to do so.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

can a buyer claim the new $8,000. home buyer tax credit if she purchases a home in 2009 under 24 month owner financing. Will i be able to clim the credit next year or am I not legally allowed so until the seller recieves the final baloon payment afer holding the mortagage for 24 months?

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gmakerley's picture
gmakerley | Joined: November 9, 2007 07:36 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

call your tax advisor if you have one, or check with the irs directly. those are the two best sources of information for this question.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

In 99% of owner finace there is no credit check most that are purchacing this way already have challanges so the advisor of the get credit check should retract and know that this is why they are purchacing this way in order to clear up issues and yet have the ability to purchace a home.

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gmakerley's picture
gmakerley | Joined: November 9, 2007 07:36 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

brenda, my stance is that someone offering owner financing ought to know what kind of borrower he is dealing with. if i had the wherewithal to lend and was approached, i would absolutely insist that i be made aware of that potential borrower's credit record. it would be foolish not to do it.

and i recognize what you're saying about those who use this type of financing...i simply encourage owners contemplating offering these loans to be cautious.

i don't think urging caution is something i need to retract. but i won't anyway.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

You may be able to sell the mortgage to investors once it is created. There are investors that purchase owner financed mortgages. Selling the mortgage would completely take the burden off of you. You won't get the full price of the home, but in most cases, you get about only 10 - 15% less than that amount. A good place to sell a mortgage is enoteconnection.com. Hope I helped.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

can i file bankruptcy if i owner financed th house

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

As a seller offering owner financing, I would most certainly check credit history and require several pieces of proof that the mortgage payment is doable, ie., within 30-35% of gross income. There are people who have the down payment, but lack good credit standing and therefore, would not qualify for a traditional loan that would not charge an exorbitant interest rate. Also be sure the taxes are escrowed separately so that you can be sure the taxes are being paid or are paid up to date. This is one way to have a heads up on the financial condition of the buyer on a regular basis such that the seller could have an option to foreclose on the property before a bankruptcy is begun that would certainly tie up any and all assets of record.

Once a sale is recorded, the seller is the first creditor so the property is not lost if the buyer defaults on the loan. Also, buyers and sellers are able to make conditions of the sale and what may govern it as far as triggers for action. :?

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oswingrant's picture
oswingrant | Joined: March 13, 2010 02:16 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Personally, I would not do owner finance with them. They seem like to much of a risk and potential headache. I understand that they have had financial problems in the past that might be still lurking. If though you would still retain the deed until they pay it off, the likely hood of them paying you off completely is probably very slim. They should figure out some other way to try and get financing. They have credit problems for a reason.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I can understand peoples a,prehention. But I got my home through owner financing after a messy divorce. I could not get a loan to save my life. I paid off the loan in 5 years in full with interest. There are good people do your homework but don't shut the door on some of us that just needed a chance.

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gmakerley's picture
gmakerley | Joined: November 9, 2007 07:36 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Thanks for responding, "home." You're quite right in saying that many people deserve a chance. Financing, however, for those who've suffered credit problems in the past is high-risk, and it's generally something that a private individual would be wise to avoid.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

in the case agreement of deed,if the buyer defaut,the seller how to do?

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi le nguyen,

If the buyer defaults to fulfill the terms and conditions of the agreement, then the seller can take actions against the buyer as per the agreement. The seller may even foreclose the property.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

One thing you attorneys need to keep in mind is that some of us werent as priveledged to have parents put us in colledge to make alot of money to not worry so much about money! There is real circumstances out there where people arent as fortunate as others, so to act like people are stupid to owner finance to people who are less fortunate that cant get a loan from a bank is ludicrous on your part, it is so judgmental for you to tell people they are basically stupid to try to help a less fortunate person as yourself, I am glad you are so well off you dont have to worry about where you will have your kids gorw up!

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gmakerley's picture
gmakerley | Joined: November 9, 2007 07:36 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Alisa, I believe you'd agree that there's an inherent risk in lending to someone who has exhibited a habit of non-payment in the past. Thanks for calling me a "lawyer" by the way...if I had their money, I would be among the "more fortunate." I doubt (no time to re-read it all) that I ever said owner financing was a "stupid" thing to do, nor would I have called any person posting on here "stupid." And to say, as I did, that such a loan would be something "wise to avoid" is far from telling someone that they're "basically stupid."

There's an old saying - "stupid is as stupid does." Does it apply to folk who honestly don't know quite what to do going ahead and financing the purchase of a home with their hard-earned dollars for someone whose credit background is shaky? No, not necessarily.

It's just wise to find out all the details before jumping into something that one doesn't really understand to begin with. But I'm sure you'll say that's a ludicrous statement, so go ahead...my skin's reasonably thick.

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gmakerley's picture
gmakerley | Joined: November 9, 2007 07:36 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Wowie Zowie!! Lookie there, folks - it's ONE/ONE/ONE/ONE/ONE! And don't you know I'm about to spoil it by making the last one a 2!

I guess I've had nothing else to do in the last 3 years or so except try to help people and suffer fools gladly.

Oh yeah...please look it up before you rant and rave.

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