But first, some specifics. I want buyers to have some skin in the game. I want it to hurt them if they do not do what they say they are going to do. I want them to move Heaven and Earth to do what they need to so they do not risk their deposit. I don’t want to take their deposit money from them; I just want them to make the payments the way we agree upon. It costs money and time to foreclose. While I am prepared to take that step if need be, I always want to do anything I can to avoid that step in the first place.
Owner terms are a very good selling point with many buyers and I like to be able to offer it when I can. Usually owners don’t consider this or their lawyer warns them off. The lawyer’s job is to protect their client and many are more willing to see their client take longer to sell or to accept a lower price than they are have them hold terms. Buyers often like owner terms: it is quick, more sure, and it may be cheaper. Lots of advantages to them and they may be willing to pay more than they otherwise would in order to get any given property. The disavantage to a buyer is primarily one - if they need money in the future, they can’t get it from the old owner. They can get it from a bank, but the bank will want a mortgage to protect their investment - which means you might get paid off far quicker than either of you riginally expected. There may be signifcant tax advantages to you to offer terms, so be sure to involve your accountant in the discussion. I am alway willing to meet with you and anyone on your team of advisors.
With $400000 down as an example, that is an amount no one is likely to just walk away from if things start to go wrong. You can expect they’ll do whatever they need to do to protect that investment. Also, anyone with that much money cannot be too stupid or lazy or naive. You have to have something on the ball to get that much together. Look also for some icing on the cake: anything that gives a buyer additional repayment capability.
Be sure if you offer terms that you like the person and feel comfortable with them as you will have just entered into a business relationship with them, one that will last some years.
How can you have your cake and eat it too? You may not be able to do that, but here are ideas. Remember, the buyer has to go along with them too.
- You can keep the title in your name, which means there is no foreclosure if things go wrong. But it’s not that simple, as the buyer will have gained an “equity stake” in the property. Lawyers differ on how they view that. Regardless, you will still have to pay the real estate taxes as it will still be in your name. Maybe you can get reimbursement from the buyer. Also, maybe the tax bill will be higher this way.
- At the closing, you can get a deed back to you from the buyer. This would be kept in escrow by your attorney and filed only if the buyer defaulted. So if he defaults (and we define that so there is no question), he suddenly no longer owns it, you do. You still have to evict him if he does not go quietly, but that is far cheaper and far quicker than foreclosure, no comparison. You may find that lawyers differ on the effectiveness of this strategy.
- You may have several components to the sale: real estate (perhaps mulltiple parcels), livestock (milkiing age, bred heifers, and so on down), machinery, and feed. The down payment could be used to purchase some or all of these, giving the buyer full ownership of them, and giving you less down on the real estate and also less headaches worrying about why might happen to the livestock or the machinery. Regardless of how this is handled, I would not recommend a long term owner-held mortgage on items that are more transient (chattels and feed). On real estate, I don’t have such a problem and will feel more confidant on a long term loan.
- Remember, it’s got to work for both parties. You have to have enough down to protect your investment and to enable you to pay your bills and do what you need with the proceeds. The buyer has to be able to make the payments even when things go wrong and have enough left over to meet their family needs and hopefully grow the business.
- If you are asked to contribute work or consulting, that can take away from time you might spend doing something else you’d rather do, but it also ensures that you know what is going on and you can take steps earlier to protect your continued investment.