Hello again panda1-ga,
Firstly, thanks for directing this question to me :)
Before I get into the answer, I should re-iterate that as per the
Google Answers Terms of Service, none of the following should be
construed as professional advice. Seek the assistance of a financial
advisor for a professional opinion on this topic.
I've come across a resource that considers the logic behind owner
financing from the point of view of the seller of the home. It
provides a great basis for further analysis and is worth a read:
http://michaelbluejay.com/house/owner-financing.html
After reading through that article, the following should make sense to you:
1. It is not a good idea from the perspective of someone trying to
sell a property to agree to owner financing under typical
circumstances.
2. If you do find a situation where this is an option, two questions
should pop into your head:
(a) Why is the seller so eager to sell? It could be a valid personal
circumstance, but it could also indicate a problem with the property.
Tread carefully.
(b) How much is the seller asking for above and beyond the going rate
of a mortgage? Does that so-called 'investment' still make sense
relative to the cashflows you project for that property?
Now with all that said, let's assume you have found suitable
properties for purchase, done your due dilligence, and have come to a
satisfactory agreement with the owner on financing. Here is what is
likely to happen before a deal is struck:
1. Seller will perform a credit check on you - it is important to note
that the information they can obtain by doing this may not be the
exact same as the method a bank would use. This *could* be used to
your advantage.
2. Lawyers will need to get involved, as neither of you are likely to
have the ability to draw up a formal contract. Factor in legal fees.
3. You still need to pay the down payment with your own or already leverage funds.
4. When you take posession, you now pay the (assumably higher) monthly
payment to the previous owner. If you cannot make these payments,
legal action is likely. The owner reclaims the house and you lose your
deposit and any accumulated principal. Either that or the house is
sold and the proceeds are directed as per the courts.
The only 'slight' hole in this process that I believe could be used
for increased snowballing is the fact that the funds you have borrowed
from the previous owner may not be registered on your credit report
the same way as a loan or line or credit from a bank or financial
institution.
Whenver a financial institution lends you money or gives you a line of
credit, they report that back to the credit bureau. So the next lender
will know you have that amount of debt. A private lender probably
wouldn't do this (although some would), meaning that the credit report
that the next private lender sees may not contain an accurate
representation of your creditworthiness.
The point is that when you repeat this process, assuming you have
enough for a down payment each time, the next owner with whom you
arrange owner financing may not have the information on private debt
you have previously acquired.
I have to emphasize that this is a *DANGEROUS* strategy to undertake,
because there are so many things that could happen that are completely
out of your control and could bring the whole thing crumbling down.
Credit bureaus are in place to protect not only the lender, but also
the borrower (from himself).
Hopefully that gives you some insight into how owner financing works.
If any of the information above is unclear, post a clarification and I
will get to it promptly.
Thank you for using Google Answers :)
Cheers!
answerguru-ga |
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