We're looking to sell our home in the mid-cities are in NW Fort Worth. It's an acre and a half and has a house built in the 50s that could use some work.

Our neighbor, who has been a great neighbor, wants to buy it from us and we're trying to find a good deal and the thought about owner financing came up between me and my spouse. We don't have a real estate agent yet and my FIL is a real estate broker so we could get the deal done without a real estate agent. We are giving our neighbors the first chance to buy since they have been so good to us.

We've already bought our other home and plan on moving in January so we don't need the cash from this sell to close on the new house.

Owner financing intrigues me but I have a couple of hang ups.

1. We still have a mortgage on the home so I think I would have to technically do a "lease to own". Is this correct?

2. My neighbor should be good for the money. He's always doing stuff around his house and buys everything new and in cash money (tractor, F250, new driveway etc…), but if push comes to shove how complicated is it to repossess the land/house on missed payments.

3. Tax implications? If I sold this house normally, I'd get my proceeds tax free since we've lived in the last 3 years. If I owner finance, do I count the principal part of the payments as just getting the price of the home and that be tax free and the interest as income or do I count the whole payment as income? Does that change once I no longer live in the house for 2 of the past 5 years if I do a 5+ year plan? I will ask my cpa of course but this board is super knowledgeable so I thought I'd learn from y'all too.


If anybody would recommend their insight or a good lawyer to contact in Fort Worth for this, I'd appreciate it. If you're interested in the property, PM me or email at i m a h i l l b i l l y h i c k <at> gmail (yes it's really my email) and I'll give you the previous Zillow listing.

First and foremost, hire an agent.

You listed your concerns, but what intrigues you about it?

You imply your FIL is a broker yet you could get it done without an agent in the same breath…I assume you will consult with him on completing the deal?

What is the property worth? It sounds like the neighbor has plenty of funds to purchase traditionally, so why not just do that?

I never really appreciated a realtor's job until I came across a great one. They are worth their weight in gold…hire an agent.

this should cure this idea

https://texags.com/forums/59/topics/3325773

You say the guy is good for the money. Let him borrow it somewhere and you're done with it.

Aggiepaintrain beat me to it but that is exhibit A of the risks with owner financing. What interest rate where you contemplating in offering them? Is that rate enough for you to forego investing it in another vehicle where the gain can be higher/safer? Is it high enough for it to make it worth your time in managing the note/any unforeseen issues?

If they can qualify why not just go through the traditional lending route, sounds like they got cash so qualifying shouldn't be an issue. Just because it seems like they pay everything with cash it's posible that's not necessarily true. You won't really have a great insight into the true financial health of the individual.

I know you mentioned your dad is a broker. Not sure if your dad is local to North Texas but if you need a local agent I'll throw my name in the ring. Contact info is in my profile.

There could be a number of reasons someone might want to owner finance a property and your situation is a pretty good example of one that can usually work out just fine. I'm assuming you like the neighbor and that's why your're willing to work with him. The details of the sale would need to be finalized just like any other transaction: price, closing costs, title policy, etc. You would also need to work out the details of the note/deed of trust: interest rate; term; insurance; etc. As this likely won't be the buyer's homestead, you avoid some other potential issues.

The one risk when you have a current mortgage in place that is not being paid off on the sale is the likelihood of an alienation/due on sale clause hanging out there. The mortgage company could call the note due if you sold/owner financed the house. In reality, in all my years of real estate sales, real estate law, and real estate transactions, I've never dealt with a mortgage company enforcing a due on sale clause as long as the note is being paid. The mortgage company really just wants the taxes, insurance, and mortgage payments made on time.

With mortgage rates in the mid 6% range on a 30 year, I would want to be about 3 points higher to carry the note.

The tax questions are best for a cpa. Good luck with the sale.

I'm going to answer all questions that I can, but it might take a while. This is truly one of the boards on this site that has a ton of real world knowledge so am grateful for you guys who have responded. It's always a forum I read

_lefraud_ said:

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First and foremost, hire an agent.

You listed your concerns, but what intrigues you about it?

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I think what intrigues me is that Id be able to make a good amount of additional income with what I assume (rightly or wrongly) is minimal effort and risk. It's a great property, would have somebody who likely won't default and if they do, I believe I'd be able to get the property back and easily find another buyer.

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You imply your FIL is a broker yet you could get it done without an agent in the same breath…I assume you will consult with him on completing the deal?

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Absolutely will consult with him on completing the deal. He'll be able to complete the deal but is currently working out of state so wouldn't actually be able to be a selling agent and show the property the way it should be shown. If we go to market, would likely get a separate real estate agent.

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What is the property worth? It sounds like the neighbor has plenty of funds to purchase traditionally, so why not just do that?

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This is a dynamic question I feel like with the changing market. The value is in the lot (1.6 acres) which I would put at 480,000 at least. It could be subdivided easily into 3 lots (maybe four) but one would have to rezone since it's R1S which requires 1+ acres and you can have chickens, horses, cows etc… on it. You'd have to respond to Residential which can be done and several in our neighborhood have gotten it done. No HOA which is a huge bonus.

The house has some issues. We're living in it fine right now but it's a 3/2 and about 2800 sq ft built in the 50s, so it's an old house. I love the lot and am fine with the house but I have four kids and my wife is tired of living in a old house, so we're moving to a bigger house. I'd value the house at $150,000 ish depending on what inspection would find.

So altogether I'd say 630k. There's 1 acre lots in my area for sale for 600k (overpriced though imo). There's a 1.9 acre lot done the street for sale for $549,000 which is probably appropriate and 18 months ago would have been snapped up quickly but has remained on the market for 4-5 months now.

I've thought about dividing it up myself and if I did put it at 3 lots, I'd probably be able to sell for $200k (0.4 acres), $220k (0.4 acres with a barn) and $450k (0.8 acres with the house. I'd lose some tax advantage subdividing it up (and probably some neighbors I would consider friends) but think I could come out on top, but that's a whole different conversation then what I've posted here.

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I never really appreciated a realtor's job until I came across a great one. They are worth their weight in gold…hire an agent.

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Absolutely.

aggiepaintrain said:

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this should cure this idea

https://texags.com/forums/59/topics/3325773

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Yep that's what I'm here for. I remember reading that when it came out but reading it again and not seeing how it ended makes me feel so bad for the op.

Agilaw said:

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There could be a number of reasons someone might want to owner finance a property and your situation is a pretty good example of one that can usually work out just fine. I'm assuming you like the neighbor and that's why your're willing to work with him. The details of the sale would need to be finalized just like any other transaction: price, closing costs, title policy, etc. You would also need to work out the details of the note/deed of trust: interest rate; term; insurance; etc. As this likely won't be the buyer's homestead, you avoid some other potential issues.

The one risk when you have a current mortgage in place that is not being paid off on the sale is the likelihood of an alienation/due on sale clause hanging out there. The mortgage company could call the note due if you sold/owner financed the house. In reality, in all my years of real estate sales, real estate law, and real estate transactions, I've never dealt with a mortgage company enforcing a due on sale clause as long as the note is being paid. The mortgage company really just wants the taxes, insurance, and mortgage payments made on time.

With mortgage rates in the mid 6% range on a 30 year, I would want to be about 3 points higher to carry the note.

The tax questions are best for a cpa. Good luck with the sale.

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Thank you for your response and the advice.

Red Pear Jack said:

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Aggiepaintrain beat me to it but that is exhibit A of the risks with owner financing. What interest rate where you contemplating in offering them? Is that rate enough for you to forego investing it in another vehicle where the gain can be higher/safer? Is it high enough for it to make it worth your time in managing the note/any unforeseen issues?

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I was thinking 8%, which for me, would be a great return. I'm classically conservative about investments so the idea of 8% on a investment that I could get back if he defaults, seems great to me and would help me forgo investing in another vehicle.

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If they can qualify why not just go through the traditional lending route, sounds like they got cash so qualifying shouldn't be an issue. Just because it seems like they pay everything with cash it's posible that's not necessarily true. You won't really have a great insight into the true financial health of the individual.

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And you've hit on something that gives me pause. Everything seems really well financially for them even during COVID (they own a restaurant). I was surprised when we first spoke to them about buying the property they were a little bit concerned about financing it traditionally but he would need to put 20-25% down which would probably be $120k - $160k depending on our final price, I do get it though that that's a lot of cash money that he hadn't expected to spend.

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I know you mentioned your dad is a broker. Not sure if your dad is local to North Texas but if you need a local agent I'll throw my name in the ring. Contact info is in my profile.

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If we decide to put it on the market, I'll give you a ring to talk to you.

Two things. The note rate of 8% would be great but not sure 6-7 would be realistic.

And if he is self employed he may have DTI issues adding a property. SEs are really hard to qualify right now.

One thing I realized you can do after going through what I am is to have the buyer sign a deed in lieu of foreclosure. The deed in lieu would only be executed if buyer was 31 days late.

Doing this will automatically forfeit the property back to you and you can try to sell again.

**Disclaimer: I am not a real estate lawyer, this is just something I hear you can put into the contract that could eliminate any issues like what I am going through. If they don't want to sign it then I wouldn't proceed with transaction.

I use contracts for deed on most of my owner financed properties. They spell out specific criteria about payments and what happens if they quite paying and how long you have to repossess it. It's not truly a foreclosure process but they do require certain legal notifications. It works well on non homestead properties. Note; I have never not have one pay me and have to follow through with the eviction process.

If neighbor is buying it, basically it is his prop. What keeps him from subdividing and selling off the parcels like you described then goes into default ? Just a thought

the property owner would need permission from the lender to subdivide

Diggity said:

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the property owner would need permission from the lender to subdivide

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Thanks

Gave you a ring Jack.


For everybody else. We couldn't get to agreeable terms with our neighbors. Our relationship is still good with them though and they're truly good people. It just didn't work.

If anybody following the thread is interested in the property, it's 6732 Little Ranch Road, North Richland Hills, Tx 76182. It's a 3/2 2360 sq ft 1.6 acres acres built in the 1950s.

Here's the link from when we bought it. The link not been updated

https://www.zillow.com/homedetails/6724-Little-Ranch-Rd-North-Richland-Hills-TX-76182/29038656_zpid/

I know it says "6724" in the link but there is some confusion from Zillow's part.

Still deciding on a price

Sent you an email, I'll give you a shout tomorrow.