How much down before the down payment stops being a real cushion?

Question

I'm walking through the math on selling one of my smaller buildings on my own paper in a year or two, and the down payment is the piece I can't settle.

Argument for wanting a big number, 20 or 25 percent: it's the only thing standing between me and a buyer who mails back the keys the first time a roof needs money. If they've put real cash in, walking away costs them something. And if it does go bad, the equity gives me room to eat foreclosure costs and still come out whole.

Argument for taking less, 5 or 10 percent: the whole reason owner financing sells a property is that the buyer pool who can write a 25 percent check is small, and most of those people can just go to a bank. If I insist on a bank-sized down payment I've given up the wider buyer pool that made carrying attractive. I can price the accommodation instead, higher rate, higher price, tighter payment terms.

So which is doing the actual protecting, the cash at closing or the terms in the note? Poll below, and I'd like to hear the number you'd hold to.

joe_delgado5 · Answer

Ten percent, and I'd rather have proof of where it came from than a bigger number I can't trace. I've seen down payments that were a gift from a relative and a credit card cash advance, and neither of those people had any skin in anything. If a buyer saved 10 percent over three years out of their own income, that tells me more about whether month 40 gets paid than 25 percent borrowed from somewhere I can't see.

marcus_hale41 · Answer

@flint that's the right instinct but the cushion still matters separately from the motivation. Two different jobs. Skin in the game is behavioral, it's about whether they keep paying when it gets annoying. The cushion is arithmetic, it's about what you recover if they stop. Recovery costs money, and how much and how long varies a lot by state, so 10 percent equity in a judicial foreclosure state may not cover your costs even if the buyer was sincere the whole time. I'd want to know the actual local process before I picked the number, and that's an attorney conversation.

One more thing I look at: is the payment being made out of the property's own income or out of the buyer's paycheck? On a small multifamily where the rents cover the note with room, I've gotten comfortable with less down. On owner-occupant deals where a job loss stops the payments, I want more.

megan_doyle15 · Answer

New to all of this so tell me if this is dumb, but couldn't you take 10 percent and then just require them to escrow taxes and insurance with you? Seems like half the horror stories I've read are the seller finding out two years later that the property has back taxes on it, not the buyer skipping the note payment.

How much down before the down payment stops being a real cushion?

3 replies