Sold my only rental on my own paper, and the first payment came four days late

I'd rather be on the lending side than the owning side, and this was how I got there without buying anybody else's note. I sold the one rental I owned and kept the loan.

The property was a 3 bed 1 bath, roughly 1,000 square feet, on a decent street in a small midwest town. Owned it nine years, free and clear, no mortgage. Rents were fine and the tenant turnover was not. Listed it thinking cash, got two offers under 140, then a couple who'd been pre approved and then un approved when the wife's business income got looked at properly asked if I'd carry.

What we signed: price 152,000, down payment 30,400 which is 20%, note of 121,600 at 7.25% on a 30 year amortization with a 7 year balloon. Principal and interest is 829.65, plus 291 a month escrow for taxes and insurance, plus a 38 dollar servicing fee they pay. So 1,158 a month comes to the servicer and 829.65 comes to me. I got the 30,400 at closing and a note yielding more than anything I could find in a CD.

The part that nearly broke it. I underwrote them like a lender would, which meant two years of business returns, three months of bank statements, and a credit pull they authorized. Their income was actually fine. What was thin was the cash. 12,000 of the down payment was a gift from her father, and it hadn't moved yet when we were four days from closing. Title wouldn't schedule without funds. I gave them a week and told them I'd relist if the wire wasn't in, and it landed on day four. If that gift had fallen apart I'd have been looking at 18,400 down on a 152,000 house, which is 12%, and I'd have said no. Not because 12% is a magic line, but because their reserves after closing would have been about 1,900 and the water heater in that house is original.

Also, the title company would not draft the note or the deed of trust. I paid a real estate attorney 1,400 to do it and to tell me what the foreclosure process actually looks like in that state if it comes to that. Best 1,400 in the deal.

What I'd keep. Underwriting them myself, all of it, before I got emotionally attached to being done with the house. Escrow through a servicer so I never wonder about taxes. And asking where every dollar of the down payment was sitting, in writing, three weeks out instead of four days out.

My CPA structured the gain as an installment sale so it spreads over the years I collect, which is its own conversation and one to have with your own professional rather than with me. Fourteen payments in, all on time.

7 replies

3priya_n21PO1C

This is close to what I want, income without a second job. How much of your month does it actually take now? I'm assuming the answer is close to zero but the last guy who told me that also mentioned a lawsuit in paragraph nine.

2nicole_adeyemiPassivePRO5

The 7 year balloon is the part I'd want to look at hard. In year seven they owe roughly 111k and they have to find a bank willing to refinance a self employed borrower who couldn't get one in year zero. What's your plan if that door is still closed? Extending is fine if you want to extend, and awful if you needed the cash on that date.

2raj_mehta14CapitalPRO6

Still mostly confused about notes so bear with me. If you decide in year three that you want the lump sum after all, can you? Or is your money locked in that house for seven years whether you like it or not.

1tylerbrooks9PassivePRO5

What breaks in year three though. Everybody's note looks great at payment fourteen. I want the boring failure mode, is it the roof, is it a divorce, is it the business income going away.

1jessreyes12AU1APRO8

I kept wondering why anybody would pay you 7.25% when they could get a bank loan. Then I reread the part where they got un approved. They can't. That's the whole answer, isn't it, and it means your buyer pool is people banks said no to, which is exactly why tender read the bank statements himself.

2carlos_nunezActive

Run the bad case for me. They stop paying in month 20. You're into a foreclosure that takes however long it takes in that state, you're paying the attorney, taxes and insurance are now yours again, and the house comes back with whatever they did or didn't do to it for two years. Against that you've collected maybe 16,600 of interest and you're holding 30,400 of their cash. I think you still come out fine on that math, which is the actual argument for the 20% down, not the credit score.

3wendy_park48CapitalPRO7

I want the clauses, since the numbers are the easy part. Does the note have a late fee and after how many days, is there an acceleration clause that names failure to pay taxes or let insurance lapse as an event of default, is there a due on sale clause so they can't hand the house to a cousin and keep your terms, and did you put in a prepayment provision either way? Also whether the deed of trust got recorded and whether that state records the assignment if you ever sell the note, which differs by state. quarry's bad case is entirely governed by which of those the attorney put in for your 1,400.

Sold my only rental on my own paper, and the first payment came four days late

7 replies