Home Buying in Charlotte>Question Details

amerjan, Real Estate Pro in Charlotte, NC

What is the price premium, if any, typically charged on an owner financed property ?

Asked by amerjan, Charlotte, NC Fri Jan 18, 2013

I have a small portfolio of rental properties in Charlotte and have found a property being offered with seller financing. The property is being appraised and I would like to get an idea of how much of a premium should I pay above the appraised value. I have excellent credit but the fully understand that the seller needs to be compensated for the risk of taking the additional risk.

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Usually people offering Owner Financing, own the the real estate Free & Clear of a Mortgage, It is also an indication that the owner is not hurting for money at this time. As a real estate agent, I have been involved with hundreds of owner financing deals, of which none of them included an asking price that was above current market value. When a seller agrees to owner financing, they are acting as the bank and assuming the risk, therefore they should be entitled to charge a higher interest rate, and a smart seller will also require a down payment of at least 10%. Keep in mind the seller has to worry about damage to his property as well as the possibility of foreclosure. In addition, as an investment property, the seller is also taking even a bigger risk, because the renters typically will not take care of the property the same as one would if the house was for their own use.
If the seller of this house is not requiring a down payment and you can get him to sell for market value or below, then I would proceed with the purchase, because without a down payment, you are controlling a property for nothing more than a monthly payment which of course is what is known as good leverage! Do not pay a premium on the price, and do not allow him to charge any more than around 6%-7%, Other than very high risk investments, the seller cannot find any other place to put his money today that will pay him 6%-7%. Therefore, this would be a good deal for you and him. The seller will do very well on this deal, because if you look at an amortization table, you will see that by the end of the 5 year balloon period, the principal payment due will be very close to the original price paid for the property. In essence, this could be a good deal for both parties, as long as you are not paying above market value. Make sure you have an attorney create the documents and have it recorded.
3 votes Thank Flag Link Fri Jan 18, 2013
Amerjan:
Here is a summary of all activity in Kingstree from the last 12 months. http://goo.gl/gvxKv and details of the same properties http://goo.gl/hB8kl An appraiser would likely pull comparable sales from these homes. I have seen distressed sales used as comparable sales. Not all appraisals are equal, and not all appraisers will choose the same comparable properties to establish value. Whomever is in disagreement with the value should get an appraisal. If you both disagree on value, maybe you split the cost. (I can recommend someone who will get it right) If you appreciate an answer, please give thumbs up. For the most helpful answer, please say thanks with a best answer click.
1 vote Thank Flag Link Sat Jan 19, 2013
You should not pay more for the property than its appraised value. Should you pay a premium, you are starting out "in the hole". What if your circumstances change and you need to sell? You will be under water and stuck. Generally, the "premium" one pays with owner financing is an above-market interest rate, not an above-market purchase price. Negotiate a mutually agreeable interest rate with your seller, but do not overpay for the property! Best of luck, Kathleen Turner
1 vote Thank Flag Link Fri Jan 18, 2013
please give me a call or provide your email... have questions 803 741 4240, thanks
0 votes Thank Flag Link Tue Mar 12, 2013
Why would you want to pay more than appraised value in this market? The premium if you will, will be in the interest rate the seller charges usualy more than double the rate obtainable by regular means and the amount of money the seller wants up front as a dwn payment.
0 votes Thank Flag Link Sat Jan 19, 2013
Price and terms. Two important parts of the equation. Would you pay more if you didn't have to start making payments for 48 months? Would you expect to pay less if you gave the seller 50% down at closing? Terms matter.

You, amerjan, should just go out and get a regular loan. Even if you had to pay PMI, rates are incredibly low.
0 votes Thank Flag Link Fri Jan 18, 2013
It is really up to the owner that is financing the property. I read your comments below and see what you are trying to do, I believe it is up to you to decide if you like the deal the owner is offering. You seem like a smart person that knows what they are doing. Trust your instincts and the math if it works for you it is probably a good deal even if you pay a little of a premium,
0 votes Thank Flag Link Fri Jan 18, 2013
Amerjan, You should not pay anything above appraised value for a home, even if the seller is offering financing. Rental properties should be purchased at a discount. Even though we are now seeing mutlitple offers on a lot of under valued homes, you can still purchase below market value. I have bought several rental properties and used private investors to finance them for me. I am paying 8 to 10% interest and the good thing is I put no money down. I know of several sellers who have done seller financing and they are charging 7 to 8% interest. The seller should be making his or her money on the interest rate, not the sales price. There is really very little risk to the seller as the seller can foreclose if you do not pay. It cost a few thousans dollars but that is it. I hope this helps you!

April Crowder
Coldwell Banker United, REALTORS
0 votes Thank Flag Link Fri Jan 18, 2013
Your scenario regarding the # of properties you have makes sense; your logic about paying above the appraised value for a property....not so much, EXCEPT when you figure that you already have up to 10 financed properties insured by FNMA with no more than 4 per lender in their portfolio?

A traditional FNMA loan could require you to verify 6 months reserves for all properties as well as verification of LTVs with appraisals on each property.

Without know the cost of the property and the value of any others you own there's no real way to quantify the premium.

In my opinion, Interest rates aren't going any lower and if you want to build or expand your business and portfolio now- I recommend restructuring or consolidating so that you can lock in the best long term rates before you expand and grow. Stepping outside of the "marketable" financing options is too risky and you can ruin your future easily if you get into a bind which could be right around the corner if you don't have enough reserves.

There will be plenty of great deals in NC for years to come.
0 votes Thank Flag Link Fri Jan 18, 2013
Janet / Larry;

Thanks for your feedback. Let me just add his - I do have excellent credit but my I do not have the typical 25%- 30% that traditional lenders want. Additionally, the approval process is extremely frustrating and time consuming.

I was attracted to this property because of the location etc., plus it already has a tenant, the loan will be a 5 year balloon using 30 year amortization. The lender that I typically work with has a limit on the number of bank financed properties that a borrower can have and it seems I'm approaching that limit. This would allow me to purchase the property and not have it counted towards that limit. If this all makes sense....
0 votes Thank Flag Link Fri Jan 18, 2013
I agree with Larry on this. It would be best to go with a mortgage loan that seller financing unless you do not have the downpayment, typically 30%, for the property.
0 votes Thank Flag Link Fri Jan 18, 2013
No premium should be paid, other than possibly a slightly higher interest rate than market rate. Personally if you've got good credit and can get a loan, I'd probably not work with Seller financing.

I'd limit my offer to appraised value at the most.
0 votes Thank Flag Link Fri Jan 18, 2013
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