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Old 02-21-2009, 11:24 AM
 
2 posts, read 5,354 times
Reputation: 10

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Hey gang, I've been looking at this forum for a while and it seems there are a lot of helpful and knowledgable folks posting here. I have a couple of questions that I hope you can help me with. First I'll give you as much information as I can and the questions are at the end. Sorry for the length, but more information is usually better.

I've found a home that I want to purchase and the seller is open to financing the purchase. The sales price is currently at $190k, the house started at $230k three years ago. The house is currently rented, the tenants lease is up in August. Current interest rates for a 30 year fixed in this market are around 5.125% for a 30 year fixed.

I'm self employed with a credit score in the low 600s, my wife works for a major institution with a credit score in the low 500s. I have absolutely no debt, so even though my credit score is low in the 600s, it's a very clean report. My wife has about $13,000 in debt which includes $11,000 on her car. Our low scores are haunting us from mistakes 4-8 years back. We have about $10,000 to work with as a down payment. In this current credit market seller financing seems to work very well for us.

I made the following offer:
$180k
$10k down
6% interest
5 year balloon
The tenants can stay until their lease is up in August.

I've provided the seller with my wife's W2s for the last two years but my income is harder to show being self employed. I've provided copies of all my invoices to my clients for the last two years and bank statements that show those amounts deposited in my account. Our income is MORE than sufficient to be able to afford this home. In fact it's cheaper than our current rent.

The seller is now asking for copies of our tax returns for the last two years. I'm not comfortable providing those as there is information on investment income and itemized information related to my business.

Questions:
1) Is it reasonable for the seller to ask for my tax returns given the amount of information I've provided and my $10,000 down payment?

2) For a house that's been on the market for three years does this seem like a reasonable offer? Even more reasonable because the seller will collect 6 months of rent before we take possession?

3) The seller has suggested a seller financed mortgage with a 5 year promissory note as opposed to a land contract. As a buyer what should I be aware of with the differences between the two?

Any help would be greatly appreciated!
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Old 10-29-2011, 08:57 AM
 
Location: The Triad (NC)
26,829 posts, read 57,830,396 times
Reputation: 29215
Quote:
Originally Posted by richwho View Post
I'm self employed with a credit score in the low 600s
This is known as a big damned red flag
my wife works for a major institution with a credit score in the low 500s.
This doesn't help any.

offer: $180k; $10k down; 6% interest; 5 year balloon.
Our income is MORE than sufficient to be able to afford this home.
In fact it's cheaper than our current rent.
OK. That's probably the only reason why he's still talking to you.

The seller is now asking for copies of our tax returns for the last two years. I'm not comfortable providing those as there is information on investment income and itemized information related to my business.

Questions:
1) Is it reasonable for the seller to ask for my tax returns...

Yes. The 1040's (I'd want to go back longer) are ALL that matters.
The other material is "supporting documents"

2) For a house that's been on the market for three years does this seem like a reasonable offer?
Local issues... no idea.
Quote:
The seller has suggested a seller financed mortgage with a 5 year promissory note...
Good. That is the correct way.

...as opposed to a land contract.
As a buyer what should I be aware of with the differences between the two?
Now you're moving the goal posts; or someone is.
All the above is for a "straight sale" of a property without any liens.

Anything other than such... yer on yer own.
But I'd never advise anyone to do anything other than a straight sale.

hth
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Old 10-29-2011, 10:18 AM
 
192 posts, read 720,439 times
Reputation: 213
1. As you'd be an investment, if he's smart your seller should check everything a bank would check. If there's a reason that a bank would not loan money to you, why would a seller turn a blind eye to why the banks wouldn't? He has to assess you as a risk the same way a bank would. It's somewhat unreasonable to ask someone to extend you credit but then say "I don't want you seeing what I have." He has to know you are worth the risk and aren't just a deadbeat.

2. I don't know where you're located, what the house is, what size it is, etc. It's hard to say if it's a good deal. You are paying a premium for not being able to qualify for a regular loan. Granted it's not a huge premium, and few sellers offer carryback and usually want a higher interest rate, but if the seller was having a hard time selling, it can mutually benefit you both. You do have to realize that with the balloon payment in 5 years, if you haven't saved up enough to pay off the loan in full, or are unable to refinance, or your situation gets worse...you could lose everything. The seller will foreclose on you, take the house back, and you'll be out everything you put into it up to then.

Who collects the rent depends on how you draw up the offer and who holds title.

3. I might be wrong and someone can correct me here if I am. Land installment means that the seller still owns the property until you pay him off in full, whether in payments, refinancing, or the balloon payment in 5 years. With a promissory note the seller is actually acting like the bank; you'll receive the title to the property and be the owner. YOU will collect the rent from the tenants, not him. He is probably suggesting this because he wants to know you are serious plus he wants the house and tenants out of his hair. If you own the house, you're responsible for taxes, insurance, maintaining the home, dealing with the tenants, dealing with returning security deposits and making fixes after they leave, making sure they pay you each month, etc. It's much easier just to sit back and collect money and give you the responsibility of the house. With the installment, you're more like a renter...more of a lease to own kind of thing. If you don't pay him each month, he can't foreclose on you, but he can evict you. Since an eviction is less damaging than a foreclosure, you may be more of a risk because if the house prices keep dropping or something goes wrong with the house or the tenants, you can just walk and take the eviction. An eviction's not going to help you, but it's going to hurt a lot less than a foreclosure.

For me, I probably wouldn't enter a land installment contract. I'd just rent somewhere cheaper and save my money until I could buy a house I wanted with a regular loan. That extra premium you're paying in interest would probably make up the difference in rent.
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Old 10-29-2011, 11:15 AM
 
Location: Mostly in my head
19,631 posts, read 53,468,042 times
Reputation: 18533
Whatever way you buy, you can't kick out tenants who have a valid lease (unless your state has some mighty peculiar laws).
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Old 11-01-2011, 03:00 PM
 
2 posts, read 5,354 times
Reputation: 10
Thanks for the reply all, in the nearly three years since I posted this, I've had an education in seller financing.

I found a seller who was willing to work with me and it's paid off well for both if us. I found a property that I'm in love with and he took a risk and has made a bunch of money from financing this property with me. I've also made enough early payments that the property is now 60% paid off.

For the statement about a seller looking at this the exact way a bank does, I disagree totally. Land contracts, lease options, etc. are typically for those who can't finance the property in a normal way. If a buyer can pull a 4.5% mortgage, why would they pay land contract rates of 7% or 8%?

Seems like most of the answers are from a pretty risk averse group, and that's okay, but luckily I'm not risk averse and neither is the gentleman who's made some decent interest while I've been paying for this house.
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