Carrying a note on a property?

[nubiwan]

Can someone give me the pros and cons of carrying a note on a property worth $340K, when I have an underlying mortgage of $240K



My mortgage payment is $1250 taxes are $150 and Insurance $150 - so $1550 total.



Where the house is located, I might just break even on rent at $1500 per month, perhaps a little better.



Considering two other options for moving the property.



First - negotiate a private note on it at around 7%. Buyer gives me 5% down, takes care of taxes and insurance, and pays me $2380 on the $320K note. Buys the note out in 2-3 years. My cashflow is over $1100 per month, but I have no benefits of appreciation. What is typical cost of private notes like this?



Second - Lease to own at $2200 per month, rent credit of $400 per month, option deposit of $5000, and buyer buys the house in 24-36 months at appreicated price of $360-370K. Taxes and insurance covered in the lease payment. My cashflow is $650 per month.



I am thinking the second option works better in terms of appreciation, but I am wanting to know if I am missing an opportunity with the note option. Figured smarter financial minds than mine exist on this board, so would ask.



Thanks

Nub

 

[Thomas Beyer]

A third option is an agreement for sale.



Unclear in your first scenario is if you kept the mortgage, or paid it out with a note ? Assuming the latter, a note with 5% down is high single / low double digits with 2-3% paid upfront, so in total double digit interest rate for sure.



The critical issue is always what happens in a few month when the buyer or tenant-buyer stops paying. Many scenarios work well in theory but not so well in the real world as real skills, well crafted legal contracts and substantial effort is required to execute a successful rent-to-own or highly levered strategy !

 

[nubiwan]

Thomas - I own the property. My potential buyer has good income, but in ability to attain financing due to recent bankruptcy. I am willing to hold a note for $337K at 6-7% that wouldcover my underlying $235K mortgage payment. Buyer has 5% down payment $20K.



Guess my question is - what is a better solution - Lease Option with Buyer or holding a note?

 

[Thomas Beyer]

"Holding a note" comes in two flavours: a second mortgage behind the first, or an agreement for sale. The former involves a transfer of title, the latter does not and as such is similar to an option to purchase with a lease. All three options have pros and cons and need sound legal structuring. The legal ins and outs are best discussed with a competent real estate lawyer, licensed in the province where the asset is located.

 

[bruynjustin]

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The pros are:


` Your property may sell more easily.


` Your buyer will save on many of the closing costs associated
with a mortgage.


` The building won't have to pass a bank's appraisal.


The cons are:


` The money you'll have invested in that mortgage could earn
more money elsewhere when rates go up,


` If you lost a mortgage, you'll have to pay that off in cash
when you sell.