Part 3 – Other Factors

There are a few other items to look for when you consider owner financing the sale of a piece of property.

There are two events in people’s lives that cause more credit problems than everything else combined … medical problems and divorces. As for divorce, there’s no way to predict it, nor to avoid the problems that happen if your buyers decide to divorce. However, medical problem fallout is something that you can help protect yourself by verifying if your buyer has medical insurance. A medical emergency in a buyer’s life is always a tremendous financial burden, as the cost of even moderate hospitalization and outpatient care is huge. Most Credit Applications ask for the name of the buyers health insurance company. If the applicant has no insurance, proceed with proper caution. (I must admit that I have never verified whether or not a buyer has health insurance. If they say the do, I accept it.) Chances are high that your payments will be interrupted if there is an accident or other medical emergency in the buyers family. You’ll have to decide if that is a risk you are willing to take. (EDITORS NOTE: in Capital Creations LLC’s portfolio, medical problems are the cause of about 80% of the late payments, delinquencies, and repossessions)

Another important question is: “What is the maximum monthly payment that you are comfortable with?” This question can help you figure out whether the house is in the buyers price range. If the buyer’s payment comfort level is much less than about 1% of the amount you are going finance, they probably can’t afford the property. For example, if your buyer is comfortable with a payment of $500.00 per month and that amount is within the ratios mentioned in the previous article, then the balance of the contract (the sale price minus the down payment) should not be much more than $50,000. $55,000 would be OK, but $70,000 would be too much.

The application also asks where the buyer’s down payment is coming from. If it is “cash on hand”, then the buyer has more to lose by walking away from the property. If all or part of the down payment is borrowed, the buyer has less commitment to stay. If the borrowed part of the down payment is from a relative, that’s better than if they are taking a cash draw from a credit card. The “quality” of the down payment is important as is the “quantity”. You would be well advised to ask for a much bigger down payment if it is borrowed because the safety in such an arrangement is in the “quantity”, not the quality … the quality comes from cash that the buyer has in her/his own pocket.

This article and the two that preceded it are an attempt to understand how much risk you are about to step into. As mentioned in the first article, you should try to set the terms according to the risk you are taking. The next article will address the terms, given what you know about the buyer.