buying a house
 

SO.... I'm thinking about buying a really mussed up house, fix it up, and rent it out here in the city. I really just don't know the first thing about purchasing and financing plans (thought I'm trying to avoid the bank). Anyone care to throw me a bone?

The first thing that you should do is get yourself over to NoSoup's credit threads here and here. Both are excellent sources of information.

There are so many options out there that I think that you need to give us a little more idea of what you're trying to do financially.

well, recently I got hit by a car on my bicycle and I will be receiving a settlement from that so I'm not too sure if I need a loan. I've heard about this deal called owner financing where I wouldn't have to get the bank involved. I would just need to put more money down on the house which shouldn't be a problem for me.
What I'm trying to do is I'm hoping to do some owner financing and pay the owner a good sum of money for the house initally and fix it up so that I could rent out rooms and pay the owner of the house off. Then I would move on to my next house where I would do the same thing.
I know a few things about fixing stuff and construction. Plus my mind works very logically so it shouldn't be a huge deal for me to figure things out with the fixin'.

I'd say the first thing to do is find the owner. Seriously, that's probably a much bigger problem than you think. If my house was for sale and you came to me with the same idea, I'd tell you in no uncertain terms to find sand. However, I know it exists and I've heard of it working. I think that you'll find that this is a case-by-case basis and while you may find the perfect house it may not have the perfect owner.

To go back to your OP, you're asking the owner to loan you the money, so make sure you understand that. You'll need to set the length of the loan along with any penalties, etc. This will be a contract, so you most definitely want to have a lawyer review it before you sign anything. However, I'm sure you can find some boilerplate out there that will fit your needs. You may even want to be preemptive and hire a lawyer to draw up the agreement now so that you work from a position of strength on it.

Thanks Jazz, this is really helpful! One more question: why if you were already selling your house and Me (the buyer) wanted to finance through you would you tell me to find sand? would you not be getting the same amount of money at probably the same speed? I guess I'm not too sure how bank loans work.

Sorry that should have read "pound sand". As in I'd never sell it to you because I WOULDN'T be getting it at the same speed. When you (the buyer) have a traditional loan, your bank pays me a lump sum, and I walk away never to be seen again. The loan is strictly between you and your bank/lender.

With the scenario you're proposing, I (the seller) become your bank, and it is beholden on me to make sure you're paying me off correctly and in a timely manner. Again, I'm sure you can find someone willing to do that, but you shouldn't assume that every seller out there is going to be willing to finance the house for you on their own dime.

I don't necessarily want to be the financer if I'm selling the house. I want to get the cash so that I can buy the next house. I don't want the headache of chasing after someone that decides not to pay the mortgage, putting liens on property, garnishing wages, and other things that must be done when the buyer defaults for whatever reason.

So maybe you'll pay cash for the entire purchase, I don't know what market you are in but $100k+ cash transactions great idea. Any accountant will tell you that it's not a great idea to pay cash for any property as the tax breaks along with the pay with today's dollars in the future is a better deal if you invest that money into some other vehicle.

My experience from this is the family has carried loans for people in order to sell a property at an agreed upon price. The buyer could not qualify for the total amount of the price, so we carried about $50,000 that was to be paid over 5 years. It was a pain in the ass because they decided to not pay for it the first 3 years. I had to threaten legal action and then collect the money each and every month until the note was paid off.

I'm not trying to dissuade you from purchasing a property, I'm trying to understand why you are not going with traditional financing.

well, I have come to understand that if you buy through the bank you will be spending significantly more money on the house than if you did owner financing.

if I am financing the purchase, yes I'd like to have some sort of return for tying up my money. If the purchase price is $100,000 I wouldn't finance it to you for 30 years for $100,000. Besides why would I want to be tied in some relationship to you for 30 years? or even 15 years? or 5 years? what is my incentive? $10,000 over the purchase price?

Hardly seems worth it to me when I could easily sell it to someone else for $100,000 and walk away with all my money.

Besides if you are using this as a rental property, then the interest payments help to offset your income from the rental. Also, you'll take some sort of depreciation hit when it comes time to sell the property.

Over time, yes. However, if you don't already know the buyer and have this approved with them, I think you're going to find it nearly impossible to convince someone to go this route. I, for one, would never go for it, even with family member for the reasons that Cyn gave.

I think you may be stuck going the traditional route, although I would love to be proven wrong.

Let me give you another real world example:

I bought a 1 bedroom condo in Las Vegas for $6,000 down. The purchase price was around $68,000. I borrowed $62,000 at 6.25% for 15 years. My mortgage is around $475. I believe that my total purchase price for the property when everything is said and done is $85,500. The current appreciated price of the property is about $187,000. For all that I've put into the property for the mortgage and downpayment, currently is about $39,000 as I'm about 7 years into the loan. When I sell for $187,000, I pay off the rest of the balance $46,500 leaving me with $101,500 minus capital gains taxes and misc fees. It still is a great profit.

Not exactly. If you buy a house and finance through the bank there is a good chance you will spend significantly more on closing costs than you would if you had seller financing, though some banks do over to pay all closing costs if you keep the loan for a minimum number of years. That said, if you came to someone with cash or a loan from the bank, you would have much more room to negotiate your price. If you came to the owner asking him to finance you, he is in a position to demand a higher price than he might otherwise be able to get for the property.

When you're working the numbers to figure out what you can afford to buy and rent to cover your expenses, you also need to figure in taxes, insurance, a percentage for vacancy/rent loss, reserves for maintenance on the property, etc. Finding an investment property that generates a positive cash flow isn't as easy as it used to be. Real estate is great to invest in, but make sure you don't take too much of an optimistic view of the property.