Financing - Owner vs Bank

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innovermyhead

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Hi!
We have been looking - lost a property in Wa state. Very disappointing but almost immediately found one that is ultimately better for us (although I love the Pac NW). We have been talking to three banks about financing. One turned us down flat - no real industry exp. The other two seem to think it will work and are fiddling with terms, exact down payment amounts etc. But they are happy with the price, cash flow and are finding our resources acceptable. The current owners will realize a tax benefit if we close the sale by year end. Thought that would happen via the bank but I'm no longer positive that that's realistic. The owner's have come to us offering to finance the loan. They need a bigger down payment but offer a fixed rate and no fees.
Obviously we need to make the best financial decision but I'm wondering more about the "softer" side of this kind of arrangement. It feels a little like borrowing money from my parents - something I've never done by the way! Wondering if anyone has experience with owner financing - positive or negative?
Thanks for any insight!
 

domestique

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Hi IOMH,
We are in a similar situation. We made an offer on a distressed property that was a short sale and it was rejected by the bank-after about a 6 month wait.
Now we have a "motivated" seller of an existing B & B interested in a deal. We have also run into issues with financing by the banks. It seems that in today's climate, lenders do not want to get involved in a deal with an existing B & B, no matter the numbers they post-at least in the geographic area we are looking at.
We are also now contemplating a CFD with this owner. They are also pressing for a Jan. 1 date. It's like the wild west out there.
Don't have any advice, just know how you feel and wish you luck!
 

bbinnsitters

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You might want to put this under "B&B buying and selling" instead of "aspiring" - just a thought. I'd answer your question if I had any idea, but I don't! Good luck to both of you in finding that perfect property and closing the sale!
 

Scott

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Seller financing can be a great advantage for both buyer and seller. The seller has greater risk, as they usually do not have the ability to evaluate the buyer's financial standing as well as a bank can, or take appropriate precautions.
During the California real estate booms, busts, and high inflation of the 1980's seller financing became somewhat common, but with the credit market as it has been since then, it hasn't been popular (basically not needed as often) until recently, with credit tightening again.
From the buyer's point of view, the loan from the seller should look pretty much like a bank loan - monthly payments, normal requirements of carrying insurance, paying taxes, due date, etc. From the seller's point of view, the financing provides a nice monthly income - often during retirement.
There is a good overview of the subject at http://homebuying.about.com/od/financingadvice/qt/091007_OwnFinan.htm
 

innovermyhead

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Thanks for the placement suggestion Suellen. Don't know why I didn't think of that! Good luck to you as well Domestique!
Thank you for the article link!
 

EmptyNest

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Don't do anything hurriedly. Talk with a lawyer. I know someone who did owner financing and she lost everything because the place went belly up. Different circumstances. Another I know has done a "land contract" twice and again...purchaser couldn't make a living doing it so lost everything and moved on. Owner financing may sound good, but is this the right way to go? Only you can determine that. Sorry I don't have any other advice except proceed cautiously.
How long has this place been on the market? Have you seen their income tax records? Are you sure of the cash flow they have?
 

toddburme

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Owner financing is great. i have been on both sides of it many times. The big bugaboo is the term. Owners rarely want to go 30 years. So don't let them talk you into a 3 year term or something like that. You need 7-10 years minimum in my opinion. 5 years used to be common but this climate could drag on and then what would you do? What if inflation and interest rates spike next year? will you be able to finance it and still be ok? better to have some years to get things worked out.
 

JBloggs

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Financing a B&B has always been unfavorable with banks, esp if you are leaving current employment and taking on a new venture. If you had another source of income coming in, then they might consider it.
I feel the owner financing is the one taking the biggest risk, and they are doing it because they want to sell. I am not sure you can get financing any other way in this current economic climate, and even with a huge chunk o change down.
Bring it all to an attorney to have them look it over, the attorney will need to be in the state you are looking at buying in, so they are familiar with the laws of the land there.
Hope it all works out for you!
 

toddburme

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I would definitely agree with Joey that the risk is on the side of the seller. I have met a guy who used to sell on owner finacing and then repossess. He did this over and over with small properties but there were no furnishings or an existing business per se.
Hopefully this says something about the deal in that they are assuming you can make a go of it. No BnB owner would want to sell with the idea of getting back the place maybe without furniture, back owing bills and a bad rep in exchange for your down payment.
 

agoodman

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banks do not like financing B&B's and now less than ever,and although the local branch you are talking to may be "maybe" saying yes, they still have to go through several layers "up" to get approval
If there was a property I wanted, and knowing now what I didn't know back then, and I was offered owner financing, I would jump at it. None of us can give you better advice than your gut instinct right now, it sounds like you have done your homework - I always say "make the best decision you can at the time you make it" - it may not be the "right one" down the road, but you have to just remember that at the time you mad it, and weighing up your options at the time, it was the best decision. And don't have regrets later
 

domestique

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Thanks everyone for your thoughts. The advice is spot on, as usual!
 

Breakfast Diva

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In this economic time, if you are offered owner financing, go for it. You must go to a lawyer and have an iron clad agreement to protect yourself. The only negative stories I've heard are all on the seller's side. As a seller, I would I not encourage this at all. As a buyer, GO FOR IT!!!
 

JBloggs

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In this economic time, if you are offered owner financing, go for it. You must go to a lawyer and have an iron clad agreement to protect yourself. The only negative stories I've heard are all on the seller's side. As a seller, I would I not encourage this at all. As a buyer, GO FOR IT!!!.
Breakfast Diva said:
In this economic time, if you are offered owner financing, go for it. You must go to a lawyer and have an iron clad agreement to protect yourself. The only negative stories I've heard are all on the seller's side. As a seller, I would I not encourage this at all. As a buyer, GO FOR IT!!!
There are plenty of horror stories from the seller's side, left holding the bag. The only calls we have had here for sale are "Can we lease to own?" In other words, they have no decent down payment, or cannot get financing, it is too risky from the seller's side. I agree, as the buyer go for it! (after considerable contemplation of course) You won't find many inns willing to do owner financing.
 

innovermyhead

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Thank you for the input. We too are concerned that at the end of the day the local bank may not be able to come thru. The current owners are offering terms of 20 years at a fixed rate and while we need to increase the down payment we feel it's a very generous offer on their part. It would be a warranty deed with us as owners and them as mortgage holders. We will definitely have it all reviewed by the attorney prior to pulling the trigger but I think we're going to do it.
Excited and nervous - I guess it's not over til it's over but it's looking more and more real all the time.
 

Samster

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Thank you for the input. We too are concerned that at the end of the day the local bank may not be able to come thru. The current owners are offering terms of 20 years at a fixed rate and while we need to increase the down payment we feel it's a very generous offer on their part. It would be a warranty deed with us as owners and them as mortgage holders. We will definitely have it all reviewed by the attorney prior to pulling the trigger but I think we're going to do it.
Excited and nervous - I guess it's not over til it's over but it's looking more and more real all the time..
Best of luck with this. I would say from the buyer's standpoint if the term and rate are agreeable (along the lines of current mortgage rates for commercial properties or better) it could be a win-win situation if this is the place for you.
I had 2 people tell me today that they refinanced their residential loans at a much lower rate (4.75%) with NO FEES. I forgot to ask if they increased the loan term but I would bet that's the case. We have not been able to refinance our second house which we bought to have a larger inn and is a 30 year (we've paid 3 years) at 7.5% since it's viewed as "investment property" although residential. Our own mortgage has 7.5 years of a 15 year note left at 5.125% which we really can't beat. We're hoping that the market will pick up a bit after the first of the year and that second house will sell. For most properties, commercial or residential, it's a buyer's market.
 

Alibi Ike

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Thank you for the input. We too are concerned that at the end of the day the local bank may not be able to come thru. The current owners are offering terms of 20 years at a fixed rate and while we need to increase the down payment we feel it's a very generous offer on their part. It would be a warranty deed with us as owners and them as mortgage holders. We will definitely have it all reviewed by the attorney prior to pulling the trigger but I think we're going to do it.
Excited and nervous - I guess it's not over til it's over but it's looking more and more real all the time..
What sort of rate can you get with the owners? If you are trying to get a business loan at a bank you will be at the mercy of interest rate changes every year after your initial period is over. If you were going to get a home loan at the bank, that doesn't apply. But, if you can get a decent rate from the owners for 20 years, it might be perfect. I know I would rather not worry every year that my mortgage is going adjust upwards!
 

agoodman

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They do state owner is offering a fixed rate, and wtih banks, problem is - most banks will not finance a B&B "as a home" (residential), most will only do as commercial rate and 15 year - if they do it at all. Financing right now is in a holding pattern anyway, and I agree with the other posters here where they say in the case of owner finance, the owner is the one taking more risk.
(most banks will only finance as residential if its not a B&B "yet" and you don't tell them you plan on making it into one.
Also in the event things don't wolk out and they have to walk away in a couple of years, there is less risk of being reported to the credit agencies by an individual than by the banks .....
 

Alibi Ike

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They do state owner is offering a fixed rate, and wtih banks, problem is - most banks will not finance a B&B "as a home" (residential), most will only do as commercial rate and 15 year - if they do it at all. Financing right now is in a holding pattern anyway, and I agree with the other posters here where they say in the case of owner finance, the owner is the one taking more risk.
(most banks will only finance as residential if its not a B&B "yet" and you don't tell them you plan on making it into one.
Also in the event things don't wolk out and they have to walk away in a couple of years, there is less risk of being reported to the credit agencies by an individual than by the banks ......
agoodman said:
Also in the event things don't wolk out and they have to walk away in a couple of years, there is less risk of being reported to the credit agencies by an individual than by the banks .....
AG- you cannot be serious. 'Walk away' from a mortgage that a private indivdual is holding and that person isn't going to report their sorry asses? They screw the couple and they don't expect that there will be damage to their credit? The phone line here would be lit up like the proverbial Christmas tree if someone did that to me.
Absolutely no one should go into a mortgage with even a wisp of an idea they might bail on it. If there is a shadow of a doubt that it cannot be paid, walk now, not in a couple of years.
And before anyone starts in on all the eventualities that can go wrong, remember that I am actually in this business and I know what can go wrong. And I know how family responibilites can make it so you default and your property is repossessed by the bank. And how that thoroughly screws up your credit for a very long time while you live in a 1 bedroom apt with 2 kids and no one working fulltime and you still owe the bank $50k on a property you don't even live in.
 

agoodman

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I said there is LESS chance that an individual would report than a bank that would definately report - a lot of individuals who finance (and I am not talking about "professional individual financiers" have enough on their hands trying to sort out the mess from someone who could not pay without figuring out all the paperwork that has to be submitted to all 3 credit agencies .. didn't say it WON'T happen tho
 
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