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My wife and I wish to sell our home and retire to Arizona. We are in a position that we would  consider doing “owner financing” when we decide to sell. Our money market investments are a lousy return and doing owner financing with the sale of our home appears to us as an opportunity to earn 4% – 6% with minimal to moderate risk. The way we look at it, if the buyer fails to make the payments, we simply get the house back and reassess our options. Is this right? What experiences, good or bad, have you had with sellers who have done an “owner carry” with the sale of their homes? Any advice would be appreciated, Merry Christmas.

Jim and Marybell, Grand Junction

Jim and Marybell,

Great question! The move to Arizona sounds like an excellent idea, as we near the dog days of winter. Please remember, I am not a financial adviser and will only be providing an opinion that is based on my personal experience. Should you decide to move forward with an owner carry on the sale of your home, I would urge you to discuss any ramifications with your financial adviser or accountant. If done correctly, this can be a wonderful addition to your retirement portfolio.

There is no doubt money markets are not a high yield investment, actually they are a terrible rate of return at this point in time, but they are very safe, with virtually no risk. Money markets also provide you a high degree of liquidity that you will not receive if you do “owner financing”. Prior to stepping into an owner financing option with your buyer, you should first consider how important liquidity is in your retirement plans. Also, consider the fact that you will still have a home in an out of state location and this can prove difficult and burdensome, even under the best of circumstances. Let’s assume that you decide this is the route for you, then I can say the success of your owner carry sale is determined by the terms set up at the time of sale.

You need to decide on an interest rate that will work for you. As I am sure you are aware, current interest rates are hovering around 3.25%, so I would expect it to realistically get somewhere in the 5% – 6% range. You also need to decide if it will be an interest only payment or if some of the monthly payment will go towards the principle amount owed. To make things cleaner, I would suggest an interest only payment with a balloon on the full amount owed.  After coming to terms on the interest rate, you need to decide what length the loan will be, more often than not I see a 3-5 year balloon. You can get your attorney to help you work up the note and deed of trust that will spell out the exact terms of the loan and where the payments will be made, what happens in the case of default, etc. Accuracy on this document is of vital importance.

The last detail, but the most important, is the down payment. The owner carry deals I have seen be successful are the ones where the buyer puts some “skin in the game”, meaning that they bring a substantial amount of down payment money (10-20%). The down payment encourages the buyer to stay in the deal and gives you some cushion should things not work out as anticipated. The down payment acts as your insurance policy. Another option is to charge a higher interest rate with lower down payment and this will provide you with more monthly income, if the highest rate of return is your primary goal. With this tactic there is more risk, but you get a greater rate of return. In the back of your mind, always be prepared and understand what will need to be done should your new buyer fail to perform at some point down the road. Prepare for the worst and pray for the best! : )

All things being equal, owner carry terms can prove to be a wonderful vehicle for income and quite possibly could fit in perfectly to your retirement plans. Set it up right and it should provide a good source of revenue! 

Dave Kimbrough
The Kimbrough Team



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