This is probably one of the best times to buy a home and get your seller to provide “owner carry-back” financing. Of course to make it work, you must find a seller who:
- Has equity in the property
- Doesn’t need to invest all the equity into another property
Why Sellers Are Usually Hesitant to Extend Financing
They are afraid you’ll default on your loan. They don’t know how to foreclose and they are afraid of the process. If property values continue falling, they’ll also have to take property back at lower values.
Your job is to convince the seller that this will not happen. The best way to do that is to show her your credit report and demonstrate that you are a good risk. You can actually get your credit score for free without using a credit card these days. Pretty nifty. If your credit score isn’t that hot, you are going to have to be more thorough.
Open up the books and explain why you got into credit score hell and what you’ve done to correct the situation. Show the seller all you’ve done to correct the problems. Convince them of your ability to pay. If all this doesn’t help, get someone in your family to co-sign the loan. Provide a bigger down payment to reduce risk for the owner. Ask the seller what you have to do in order to allay their fears.
How to Find Sellers Who Will Carry Back
There are three ways to find real estate owners who will be willing to sell you their property and carry back a mortgage. First, ask friends and family if they know of anyone who wants to sell their property and are finding it difficult to do so. A personal introduction here will be invaluable because it will help sellers feel more comfortable carrying back your mortgage.
The next source is Craigslist. You’ll have to make lots of calls to qualify the seller (see the two points listed above), but it will be worth it.
The final way to find sellers willing to carry back mortgages is to network with realtors. They are very interested in getting properties sold, and if you can convince them you are a serious buyer, they’ll work on the owners to convince them of the wisdom of carrying back the mortgage.
You can certainly find sellers willing to carry back your mortgage. You may have to pay a little bit more for the property than you would really like to. Also, it will be more difficult for you to snag the perfect property. That’s OK. You’re not going to live in this home forever. And you can refinance your loan later on too.
This is a perfect time for you to buy a home and get your seller to finance the purchase. This is especially a good way to get into your first property.
Go for it. Over time, your equity will build up and you’ll find better and more conventional ways to finance real estate purchases.
Don’t hold out for the perfect home. If you are able to find this kind of financing, you’ll have to compromise, and if you’re clever you should be happy to do so.
Have you ever done a deal where the owner carried back your mortgage? Are you an owner who carried back a mortgage? How did it work out?
Douglas says
July 20, 2011 at 7:43 PMHi Neal,
As a current homeowner with no mortgage and planning to upgrade, I have (3) questions for you. 1) What is a reasonable interest rate to charge the buyer? 2) To protect my interest, what amount should I ask for the down payment? 3) Finally, since you mentioned about defaulting on the loan, what type of contract would you recommend?
Thank you!
Neal Frankle says
July 20, 2011 at 9:23 PMDouglas: If I were in our shoes I’d charge above market interest to compensate yourself for the risk you take. Your buyer is clearly unable to get conventional loans so he/she is higher risk. I would get a credit check and see if this is a person you want to loan money to at all.
The down payment should be as large as possible. I would try to go for 20% or more.
I would talk to an attorney to arrange the contract of sale.
Having said all this, your terms and conditions are going to be a function of how badly you want to sell and how difficult it may be to find another buyer. It’s going to come down to negotiations.