by TAYLOR J KOVAR

CHIEF EXECUTIVE OFFICER

CERTIFIED FINANCIAL PLANNER™

 

–Hey Taylor: I’ve been made an offer by the tenant of my rental property where they would buy the house and have me carry the note. They’re offering a decent downpayment and I like the idea of steady income on interest without the landlord duties. Should I do it?

–Hey Ken: As long as everything is on the up and up, there’s nothing wrong with holding the note and playing banker. That said, you need to consider absolutely every variable and make sure you’re in the right position to do it. If something goes wrong, things can get messy in a hurry. Questions to ask before going through with this:

  1. Is the property yours? It’s possible to be the second lien on a property, but this is a much more precarious position. You should only carry paper on a home sale if you own the property outright, as you’ll be in a real pickle if you’re expecting the buyer to cover your mortgage payments and then they stop paying. If you’ve almost finished paying off your home but still owe a little, make that part of the downpayment arrangement from the buyer so you fulfill the existing mortgage terms before creating your own contract.
  2. Is the buyer creditworthy? In the right scenario, you can help the buyer save a little money on a home purchase while still earning on interest and making good on your investment. However, you don’t want to let someone buy your home because they aren’t eligible for traditional financing. Since you know this tenant and it sounds like they probably pay their rent on time, this likely isn’t the case, but it’s still worth running a credit check so you can feel extra secure about what you’re entering into.
  3. What happens next? Ideally, very little changes. You keep receiving payments from your former tenant, but they’re in charge of the maintenance and upkeep of the house they bought from you. How you structure the terms of this loan will make a big difference in how the rest of it plays out. If you demand a big downpayment, you can also have shorter terms for the loan. If you have longer terms, the interest rate will have a bigger impact. If you’re looking to give this buyer a better deal than they’d get out in the open market as an act of kindness, that’s fine, just make sure you’re not being too generous. You’re already taking on a lot of financial oversight, so don’t cut them too big a break on the price/payments.

In addition to the above, I’d just make sure you don’t have too many eggs in this basket. If you own other properties or have healthy investment accounts, holding paper on a sale won’t be too stressful. If this house is your retirement, I’d advise against anything other than selling it the normal way and getting a bank involved.

Thanks for the question, Ken!