My wife and I wish to sell our home and retire to Arizona. We are in a position where 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 maybe 4-5% 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 at that time. Is this right?
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 I yearn for a warmer climate so I can wear shorts again! Please remember, I am not a financial adviser and will only be providing an opinion that is based on my experience over the years. 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, attorney, and/or accountant. If done correctly, this might be a wonderful addition to your retirement portfolio.
Money markets provide you with a high degree of liquidity that you will not receive if you do “owner financing” on the home you are going to sell. Prior to stepping into an owner financing option with your buyer, you should first consider how important liquidity is in your retirement plan.
First, you’ll need to decide on an interest rate that will work for you. As I am sure you are aware, current interest rates have spiked into the 6%-7% range and are still fairly volatile, so I would expect you to really get somewhere in the 6%-7% range…..maybe even 8%…..there are plenty of buyers out there who like “owner carry” terms as it can save them money on lending fees, lead to a quicker close of escrow and also keep their loan off credit bureau reports. You also need to decide if it will be an interest-only payment or if some of the monthly payment will go toward the principal amount owed. To make things cleaner, I would suggest an interest-only payment with a balloon on the full amount owed at the end of whatever term you set. 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 amortized over a 20-year payment schedule. 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 in this document is of vital importance and these details most likely involve give-and-take negotiating.
The last detail 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% at least). The down payment encourages the buyer to stay in the deal and gives you some cushion should things not work out as you anticipated. The down payment acts as your “insurance policy” in case of default by your buyer. Another option is to charge a higher interest rate with a lower down payment and this will provide you with a higher 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.
The Kimbrough Team