Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Hi- Im new here and have enjoyed reading all the posts. I have a question that Im looking for advice on regarding an income property that I own. I currently have a tenant who wants to buy the property but wants me to hold the mortgage...any thoughts? If I understand correctly if they dont pay then I get the title of the house back. Is this something I should consider or turn and run in the oppostie direction? thanks ahead of time for input-
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The few key things to me would be;
1) How large of a down payment do they have? A 50% down payment would leave you a pretty good margin of safety.
2) What interest rate do they want the mortgage to be at? If a lender will not give them a 4% mortgage then the rate should be significantly higher than that.
3) How expensive is the house? If you are talking a $50K house in the Midwest then paying a lawyer thousands of dollars to draw up all the paperwork would make the deal unworkable.
4) What is the financial impact to you if you sell the house? If you will have to pay a lot of capital gains taxes then that could make selling the house undesirable. If you have been depreciating the house on your taxes then you could have capital gains even if you do not get a high price for the house.
5) The worst case isn't that they don't pay the mortgage and you have to foreclose. It can be a lot more difficult for you if they die and the house goes into probate for the next year and a half and you have to pay a lot in legal fees while not receiving any payments.
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Do you want to sell?
If you were to sell, what would you do with the equity?
What your tenant wants to do is a "wraparound mortgage." Does your existing mortgage allow this or would it trigger a due-on-sale or acceleration clause?
Why does your tenant want to do this? Does your tenant have shoddy credit and would not be able to finance the property himself?
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If you had a portfolio of mortgages at higher rates and one defaulted, that would be one thing; if it is your only one that defaults, good luck!
There could be death, loss of job, divorce, etc.
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If you want to sell and don't like the idea of signing title over to the tenant at time of sale, you could do a land sale contract where you hold title to the property until the tenant (buyer) pays off the mortgage completely. In the event of default, you still have to take some steps to reclaim your property, but it's a little more secure than foreclosing to recover title. I don't know what state you're in, check with a local attorney on the particulars. Good luck.
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When I sold my previous house, I got an offer from someone who wanted me to hold the mortgage. I didn't even consider it. Why would I want that headache? If their credit isn't good enough for a financial institution, it seems to me that there is almost a guarantee that this would result in a big mess.
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I sold my home with a "mortgage in lieu of foreclosure". Yes, I became the bank and held the mortgage; if the buyer missed a payment, I could have the house back without going through lengthy expensive legal processes. I only requested 10% down and got an interest rate of 8%. It has gone very smoothly.
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In today's low interest rate environment, only reason for you to hold mortgage is because borrower has crappy credit and can't get a bank mortgage which means real likelihood of default. From a purely financial perspective, the deal may make sense, however requires your willingness to foreclose if buyer can't pay as agreed.
I can't imagine the potential hassle, legal costs and ill-will being worth it.
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leroyzona wrote:Hi- Im new here and have enjoyed reading all the posts. I have a question that Im looking for advice on regarding an income property that I own. I currently have a tenant who wants to buy the property but wants me to hold the mortgage...any thoughts? If I understand correctly if they dont pay then I get the title of the house back. Is this something I should consider or turn and run in the oppostie direction? thanks ahead of time for input-
How long have they been your tenants?? Did they pay rent on time?? If you decide to sell get at least 25% down so they have a vested interest in paying for the property.
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There are variables that enter into your decision but generally only do this with a substantial down payment (20%+) and excellent credit of the buyer.
Taking a property back by foreclosure is a time consuming and expensive process. In addition the property will be most likely be degraded from when you sold it. What is to prevent the buyer from renting it out after purchase and then it gets trashed?
This could be an option if you just want to dump the property to escape and don't care what happens to it afterward.
Emotionally you want to get out. This is a tempting solution to your problem but most likely unwise.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
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- Location: New Jersey USA
If your tenant is a good risk and you are wanting to sell, it can be a win-win. I would not try to screw the tenant. Make a fair deal for yourself and them.
If they are a bad risk, don't do it. They may tear up the property, stop paying you and it is a hassle to get the property back.
I'm assuming the mortgage is paid off. If you are wanting a stream of income, I would not overcharge them on interest rates. Because, they may refinance at a lower rate and pay you off earlier than you would like. 4.5% would be a good interest rate for both you and the tenant.
I would get a down payment. It could be 5% more or less. Enough that they have a vested interest in not walking. Enough to pay court costs if you have to foreclose.
You might do a 30-year-note with a 10 year balloon. By the tenth year the tenant should be able to get another loan and pay you off. Or, you might want to adjust the interest rate and keep the note. Consider a clause in the contract that would keep them from refinancing before the 10th year.
Whatever depreciation you've taken on the house, you have to pay this back. Plus, you will owe taxes on capital gains, if there is any. And, interest payments are taxed. You pay these taxes each year on the mortgage payments.
People on bogleheads tend not to like real-estate. It's not a particularly good place to get real-estate investment answers.
the best decision many times is the hardest to do
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Some very good posts here. Let me add another comment/option.
I suspect (check tenant's credit) that the tenant may want you to hold the mortgage because there is some reason he/she is unable to get a mortgage elsewhere. That may (and probably does) mean you are at increased risk.
If you do want to sell and, to you, this tenant appears to be a good risk, why not enter into a rent-to-own contract so that a portion of the agreed-to rent will be applied, as a down payment, to the future purchase. This "agreed-to-rent" amount would probably be higher than what you are receiving now.
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This is a risk event.
You, if you are knowlegeable, can expectantly get compensated for this risk.
Since it is a one off type of localized thing, you can even get outsized compensation for this risk, if you are knowlegeable.
The converse is also true.
You can have loss associated with this.
1)Do you have knowledge? get a good deal, be able to cut loss/evict rapidly, etc. etc.
if no, then no, do not do it.
If yes, then
2)How much risk do you want to bear? Its more a job than an investment to some degree, though if you do it right, and get lucky, you can have little problems and enjoy the income stream.
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