Selling your house but carrying the mortgage?

[Farmer17]

My wife's sister has 12 rent houses and no debt and has started selling them to her good renters and is carrying the mortgage. She does a 30 year loan and gets a down payment, a higher monthly payment than rent, and is totally detached from any issues or problems with rentals. There is an early payoff penalty and if they ever defalt on payments she gets the house back. We are in our early 60s and considering doing this with some of our rental houses, does anyone have any thoughts or experience doing this?

 

[CAJUNLAWYER]

Have you ever gone through a foreclosure as a seizing creditor? Very expensive process for an average non business creditor-all of which is paid up front. Me, I'd rather get the renters to just buy them outright and get their mortgages from a third party. Remember this: if they are not credit worthy enough to get a third party mortgage, what makes you think they are credit worthy enough for you to give them a mortgage? Bad idea all around-looks good on paper, but remember people will trash a house facing foreclosure worse than a rent house facing eviction. I don't care how "good" the people are. Leave the money lending to the pros. If you want to get out of he rental business-sell the houses and get out.
This based on 40 years of doing this kind of stuff.

 

[mtgianni]

Lets say you finance at 5% for 30 years. That currently is a mid to low performing portfolio with a good financial advisor.

 

[Onomea]

I'm no financial whiz, but wouldn't it be better to sell the rental houses outright, either to the renters or other buyers, invest the cash, and let the house buyers be on the hook for mortgages/loans?

My thinking is I would rather be totally free of the houses rather than take repossession if one of my house buyers could not keep up payments. (Would not want to listen to "woe is me" stories or go through the hassle of fixing the place up and marketing it, etc.)

Let banks take the risk.

Edited to add: We seem to be building a consensus here.

 

[NYlakesider]

Carrying the mortgage is rather common up here. That is mostly done on camps, AKA second homes. That falls in the category of discretionary income. Most that I have seen work out OK.

They are normally done in under a 10 year period..

Not for me, when I sell my year around house I want to be paid in full!

 

[taz666]

How is the wifes' sister handling the property taxes if the new owners don't pay them?

 

[DWalt]

Unless the seller is a bank or S&L, it's too risky. Not that it can't be done, but I would rather not tote the note. Doing an eviction and foreclosure is not easy nor fun, and is to be avoided, especially if it involves bankruptcy. It's a little easier process in some states which allow non-judicial foreclosure as the seller holds a Deed of Trust instead of a mortgage. But there are still a lot of rules that must be followed.
This explains the required foreclosure procedures in Texas which does use Deeds of Trust. Texas Foreclosure Process | Nolo And many things can and do go wrong. I speak from experience.

 

[lkabug]

Sounds likes an easy way of handling things. But.....first downside in the economy, job loss, divorce, what happens? Very expensive to evict someone. Require the buyers get a commercial mortgage. Save yourself headaches and money.

 

[THE PILGRIM]

Here in NM we have a Seller Carry Back which has the unfortunate name-
Real Estate Contract (REC)
It is a a conditional sale full title does no pass until the note is satisfied.
They allow non -judicial foreclosure in 30 days after the appropriate Demand Letter is sent.
When executed correctly and third party escrowed, they work fine!
Limitation is the obvious, the Buyer!
Old GI Saying - People No Damn Good GI!
I have been involved in hundreds of them, mostly on vacant land.
Have bought -sold, originated, fore-closed, resold, swapped, etc.
Just one Tale.
Had a Mobile Home lot in Edgewood, NM. MH lots very desirable in these parts. Folks kept buying, not paying, I’m taking it back.
Some of my Buddies thought that so funny!
Kept asking, what’s wrong with that lot?
Nothing! It’s an excellent lot! It’s got water, electric, Nat gas, telephone, and septic-leech. 1/4 mile from pavement, 1 mile from Walmart.
But as already posted, you are usually selling to buyers of limited financial capacity with bad credit.

 

[llowry61]

Caj and others are spot on here.

I spent 30 plus years in banking and lending with many of those in the Recovery end of the business.

The red tape with foreclosure will undo any and all profits made, plus people get froggy when you are doing legal recovery of their assets. She already has the eviction headaches since she is a landlord, but foreclosure takes time effort and money.

 

[delcrossv]

MIL did that. Borrower tried to get a bank loan afterwards and the bank wanted to be first payee. Rejected that .

Mortgagee defaulted and we took possession of the building .

Kinda a pain but not too big a hassle as we held the deed.

 

[THE PILGRIM]

Bought a Second Mortgage on a nice house.
Idiot buyer decided he didn’t need to pay me.
So my Lawyer initiated a foreclosure.
We were about a week from Deputy Sheriff Time.
Then his Mother called me! How can we fix this!
You got a Lawyer? Yes, I have a Lawyer.
Have your Lawyer call my Lawyer and talk that Lawyer Talk.
Called my Attorney, I want to be made whole.
Principal, interest, late fees, filing fees, your fees, anything else you think of.
A while later a Cashier Check arrived.
That’s the closest I ever got to a formal Mortgage Foreclosure.

 

[Doug M.]

My parents sold their first house, then in which my siblings and me grew up in such a fashion. They wanted out and to move. It was a disaster and eventually they lost a ton. Not just no, but hell no.

 

[Bekeart]

Sold TWO houses without problems.

Sold on my own - did not pay anybody 6%.

#1 Sold to long term tenant. with a written contract.
Payment was slightly more than the rent had been.
We held a First Mortgage.
Payments were always on time.

#2 Sold a house with a Gentleman's Handshake.
I quoted a SELLING price.
Renter/Buyer would make a five figure down payment.
"When you pay the total amount. you get the deed."
The payments were same as the rent had been.
The Sale price was inflated to cover THE LACK OF INTEREST.
I understood, right or wrong, that charging interest would require filing additional paperwork.

#3 Sold farm land with a Gentleman's Handshake agreement.
The Buyer owned adjacent land.
CASH SALE.
NO 6% COMMISSION.
We both saved money.

#4 Buyer makes monthly payments on house..
Hand shake agreement for monthly payments.
Payment Amount calculated to be nearly same as conventional mortgage..
Have paid every month.

I had worse experiences with rental tenants with written leases.

Bekeart

Your mileage may vary.

 

[THE PILGRIM]

It’s been a while since I heard of Hand Shake Real Estate deals!
About 2 weeks ago a Title Co Lady called me.
Did I sell a lot to these folks? Their Son is selling it, Warranty Deed was never recorded.
Maybe, name sounds familiar.
Check my dead files. Yes, I sold it to them.
Since they weren’t Trauma- Drama folks, never saw or heard anything from them after the sale. They just paid.
When they paid off the note the got the docs in Escrow.
Warranty Deed and Special Warranty Deed.
They had the Special Warranty. The Warranty Deed which should have been recorded was MIA.
This is a Santa Fe County lot. Back then you took or sent the Deed to the County Recorder in Santa Fe. You can now online record.
So I signed a new Warranty Deed.
Then there’s the one where I paid a Surveyor with a Deed to an Arkansas Lot for a Survey here in Albuquerque.
The Arkansas deed turned out to be fraudulent!
Got it from a Texas Land Developer!

 

[SMSgt]

I don't understand that deal at all and would not touch it with someone else's money. Wouldn't the mortgage holder (Bank, etc.) demand full payment before any title change? What if I bought the house and she defaulted on the mortgage? Seems like a bad idea.

 

[arjay]

My father did it successfully with some of his properties,but it was a different era and he was an intimidating guy

 

[444 Magnum]

As a former lender and now a real estate professional, I agree with most of the above. The cost of foreclosure will vary from state to state because of differing laws. Non-judicial foreclosure states are the easiest until the bankruptcy courts get involved.

One thing that hasn't been addressed is the 30 year repayment period. On a 30 year loan, the amount of principal repaid after 10 years is approximately 16% of the original principal amount. The bulk of the repayment occurs in the final 10 years.

The risk to the mortgage holder is in taking the house back when there has been very little debt reduction. For instance, in ten years a house can significantly deteriorate without proper care and maintenance while the debt has been reduced very little leaving the mortgage holder underwater in a foreclosure situation.

Banks and mortgage companies build a risk premium in to their mortgage pricing to allow for this type of exposure. Also, like insurance policies, it's a matter of percentages of the masses. Other factors that limit the banks risk is the average lifespan of a mortgage is 7-8 years due to the mobility of the populace.

An individual mortgage holder doesn't have the protection offered by quantity. One bad experience can suck the profitability out of the whole portfolio.

If you still want to finance your own sales, I would suggest a 15 or 20 year amortization along with a 20% down payment.

Edit: Contracts for Deed (as mentioned above, where you hold the deed until the entire note is paid off) have been outlawed in some states and challenged in court in others. Best to have a lawyer draw out the paperwork for a formal mortgage note and deed so as to follow all the regulatory requirements. A smart tenant can take you to court and own your house if their "rights" are violated. Truth in lending laws and disclosures are sticky areas in today's world.

 

[glenwolde]

The ones I've seen have all had a large down payment, high interest rate, and inflated sale price. They seemed to be designed to be most profitable when foreclosed upon so the owner could resell under the same terms. Get another big down payment....wash, rinse, repeat. The seller made out like a bandit either way it worked out.

To me it reeked, like the rent-to-own stores and the payday loan (sharks).

 

[CH4]

Capital Gains Tax: Any advantage to carrying the paper instead of selling outright?