Financing in Orem South>Question Details

Scarli, Home Buyer in Orem South, Orem, UT

If I finance a foreclosure property for a friend who has bad credit and 0 down, can I charge a higher interest rate?

Asked by Scarli, Orem South, Orem, UT Wed Feb 1, 2012

For my protection, I will be working through a loan maintenance service at my local bank. The current low 30 year conventional rate doesn't allow me to recoup my investment for 17 years. I don't want to wait that long.

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The simple answer is yes you can charge whatever you want but I STRONGLY DISCOURAGE THIS SCENARIO AND WANT TO REMAIN FRIENDS.

Lending money or buying things - cars and real estate is one of the worst financial decisions you can make. I have seen more friendships and family dinners awkward - just imagine if they lost their job, can't pay you and you don't have the heart to evict them. The rental or seller finance market is a business - you've hear the old adage - don't mix friends and business...

Do buy the property only if it is and only if it is (1) a good investment (talk to an expert to give you the actual cash flow and return on investment rate - this is how you will know - don't look at it from how long to just get your money back there are other things the novice investor doesn't think about - aka that's part of the reason we have had this real estate bubble) and (2) And you have the reserves to do so, which sounds like you do.

If you do decide to move forward you should choose whether to lease option or rent the property to him - there are pros and cons for both. Call me to review your situation - I am happy to give you my 18+ years experience.

Derek M. Seal Real Estate Expert - Broker/Owner
NRBA, CRS, CRB, CDPE, CIAS, CLHMS, NAHREP
REALTY EXECUTIVES Utah Experts
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1 vote Thank Flag Link Wed Feb 1, 2012
Good answer from Derek. (I suggest you give him the "Best Answer" award.)

His caution about lending to friends is particularly pertinent.

However, if you did decide to proceed--of course you can charge a higher rate. There may be usury laws in Utah (they go state by state) that cap the amount you can charge, but it's likely to be well above what you'd consider.

What would an investor do? Rates for quality borrowers are around 4% for 30 year loans, closer to 3% for 15 year loans. So an investor might charge 7% or so for a 15 year loan. Maybe 9% for a 30 year loan. You can play around with those rates, but there should be a decent spread. (If you friend can find cheaper money elsewhere, then let him.) Even then, an investor wouldn't do 0 down. Your friend ought to be putting up something. If he absolutely doesn't have it, and you decided to go ahead, then build it into his early payments. Example: Let's say his monthly payments work out to $800 a month. And let's say you want $4,800 down. Charge him an extra $200 for the first 24 months.

Derek's advise regarding other options--such as renting the property to him or doing a lease-option--is also excellent. If you're really buying the house, then keep it in your name. That way, you can evict him if he defaults. Otherwise--if you're selling it to him, you'd have to go through a foreclosure to reclaim the house. Another technique is to use a land trust to accomplish the same thing. The technique is a bit complicated, but it'd protect you even more than a lease-option. More info: http://www.landtrust.net

So, you've got a few different ways to go. Protect yourself first.

Hope that helps.
1 vote Thank Flag Link Wed Feb 1, 2012
Don Tepper, Real Estate Pro in Burke, VA
MVP'08
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Let me get this right. Your friend has bad credit and absolutely no money to put down and you are going to finance them. Sorry to be blunt, but you are a complete idiot if you go forward with this. How do you think they got bad credit? NO PAYMENTS
0 votes Thank Flag Link Tue May 21, 2013
Hello,

Both answers below are excellent advice. I have a neighbor who used to give hard money loans to investors. She'd do 10% interest with $$ down payment. She has not done this though for the past couple of years. It's up to you to decide what percent to charge but the same as the others I'd use caution when dealing with friends and relatives when lending money especially the amount of money needed to buy a home.

It may be better to have this friend build up his credit and save for a down payment. It may take them some time but then they'd have a reason to work toward these two things, improving credit and saving vs. having someone just hand it to them. You say it'd take you 17 yrs to recoup your investment but it should not take them that long to improve their own situation.

I hope this all turns out well for you and for them too.
0 votes Thank Flag Link Wed Feb 1, 2012
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