Sep
6
Foreclosures, Owner Financing, Short Sales, and Other Fun Stuff
September 6, 2007 |
Not a lot of good news in the data coming out so far this month, as far as anyone clinging to the hope that the worst is behind us in the struggling US housing market. The numbers for total pending listings in July released yesterday were pretty terrible, dropping to levels not seen since 9/11/2001, and the foreclosures numbers released today set another record high.
The only silver linings there is that July should be chalked up to a pretty large anomaly, due to the largely unsubstantiated complete freak-out that occured in the general markets at large and the lending industry in particular, and the rising foreclosures story continues to be pretty schizophrenic. Subprime borrowers continue to default like crazy, while prime borrowers continue to largely be good to go, with only a very slight rise in foreclosures by prime borrowers. Which is sort of good news, but not the best of news, as there still is likely a large overhang of dodgy subprime loans to work through, especially as ARMs reset.
As far as what that means to the real estate investor, well, who knows. Some people claim that the recent real estate bubble is the mother of all bubbles, and that we’re just at the beginning of a prolonged five to ten year slide, that will result in home values being roughly halved, across the board. Property values skyrocketed while interest rates were near historic lows, creating an unsustainable situation. To resolve it and return to equilibirium, interest rates have to climb dramatically (which the Fed seems very disinclined to do) or housing prices have to fall dramatically.
I just don’t buy that argument, though. Maybe it’s my relative inexperience and lack of having lived through such a thing firsthand, but housing seems to me to be a slightly different sort of commodity beast, much different from tulip bulbs or shares of stock in Koop.com. But, again, who knows.
As far as profiting from all this, the more I poke around, the more I’m intrigued by the idea of owner financing, after buying and rehabbing. The basic drill would be to pay cash for the property, complete your rehab, then get a loan based on the FMV of the rehabbed property (typically you can get a loan for 75-80% of the FMV in that situation).
Offer owner financing with a 5% down payment and an interest rate higher than your own (and possibly a 2-3 year balloon payment due to encourage the buyer to refinance.) Use the funds from the loan you received to purchase the next property with cash, pocket the 5% down payment, collect positive cash flow each month due to the difference in interest rates, and realize the bulk of your profits on the back end when they refinance.
In theory, you could basically rinse, lather, and repeat that same process infinitely, paying essentially no money down and 100% financing. The real upside, though, is that you’d be solving two of the major problems facing investors/rehabbers right now, not only finding a buyer to unlock your profits, but also securing financing for them.
Would that make up for the potential headaches of going the owner financed route? Quite possibly, especially if it remains difficult for some potential buyers to secure financing in coming months and/or years. That seems to be the biggest hurdle in my mind, more so than more and more inventory piling into the market as foreclosures continue to pile up.
Comments
4 Comments so far
I am looking to buy a house in the next six months, as a sub-prime borrower (made some mistakes, all 5-7 years ago, but I make $80k a year, have paid $1100 in rent for a year, etc. etc. and consider myself a pretty solid risk). I am probably going to have trouble getting a traditional mortgage, but have been intrigued by owner financing. Do you know of any resources for that from a buyer’s point of view, or have any advice on what to look out for? Sorry I realize it’s a little off topic from the main point of your site, but I couldn’t resist asking after this post.
JD,
I’m just poking around in the area of seller financing/owner financing myself (and mostly from the point of view of the owner/investor), so I’m pretty far from an expert. Here’s a few nuggets, though, as far as general expectations:
1) I don’t know of any resources specifically geared towards the buyer, as far as owner financing. In general, you should expect to pay a higher interest rate, and I’ve seen figures from 8-10% thrown around, as far as interest rates offered to buyers via owner financing. In many cases a balloon payment is also due after 2-3 years.
Most sellers really want you to refinance the loan when your credit improves, as the seller gets paid off in full when that happens. So they’ll usually structure the deal to encourage that, usually with high interest rates and balloon payments.
2) Stepping back a bit, if your credit issues really were 5-7 years back and you’ve been good since then, your credit might be good enough for a traditional mortgage. A couple of years of good behavior is usually sufficient to wipe a lot of credit problems off your record. So check your credit score first, as a traditional mortgage will almost always offer you a better interest rate than an owner financing deal.
3) The down payment you should expect to pay really depends on the seller. They typically require at least 5-10% down (and sometimes as much as 20%), as they need some cushion in case you trash the place and stop making mortgage payments, leaving them no choice but to foreclose on you, sitting back at square one (except with a trashed house).
Depending on how desperate the seller is, your down payment will likely slide up or down. Investors who do such deals regularly will likely stick to their guns, but if you find an owner who can’t make payments on their house anymore and just wants to get out from underneath it, you might be able to pay little down and get a fairly competitive interest rate.
Thanks Seth, that is all good info. I’ve been doing a lot of poking around on Craigslist where I’m looking to buy, it seems like there’s a decent amount of owner financing activity there. I do think I could probably get a traditional mortgage if I can get just a couple of things cleaned up, but I’ll have to see. Actually have a broker sending me my credit report this week with things highlighted that he thinks I should fix.
Anyway, I love the site, thanks again for the response.
Hi I have bought several homes with owner
financing.It is a win-win. The seller usually gets 8%-9%, Of course as rates go up so will the owner finance rates.I have never had a ballon due.Yes the sellers wanted me to refinance–I never did because it wasnt in my best interest.I gave 5-10% down.I would put an owner occupied clause in so the person who
buys the house has to live there in less you dont care. I always kept & improved the property. I finished paying off 1 property &
I am working on another.I am also about to purhase another owner finance house.Also most
sellers also add 10,000.-20,000. on to a purchase price when they go to owner finance.
But think about it if you had 80,000. dollars were else could you get 8%-10% ???Its a great deal for everyone!!!!!!