I am sometimes asked, “Why not just carry a note or 1st Trust Deed for the property and then you don’t have any of these hassles?” True, you don’t have any of the hassle or responsibility for the home, but you also lose control in a big way. In this series of blog posts, we are going to make you way smarter than the average bear.
First, you should never think about carrying a note unless the purchaser/borrower is going to put down at least 30% or more. Remember, you no longer have any control over the property. You want your borrower to be heavily tied into the property and have heavy penalties if they don’t perform. Of course, one of the biggest drawbacks for a borrower is to have to come up with 30% or more as a down payment. There are people out there that are capable, but it really limits your number of candidates.
What kind of interest rate will you charge for the note? 6%, 8%, 10% or maybe 12%. Wow, that is very high, and most people will not like the idea of paying high interest rates.
So now compare that to a 12% or more return with a Rent to Own. Realistically, you are getting a better return with the Rent to Own than carrying a note, but the Buyer is much happier with the arrangement in a Rent to Own. The Buyer has been able to get into the home for much less than the 30% down required to carry a note. This is huge! It opens up the market with a much larger number of Buyers that have enough cash to get started in a Rent to Own, as compared to those Buyers that must come up with 30% down, in order carry a note.
Most importantly, you are the one that is in control in a Rent to Own. If you carry a note and the borrower fails to pay the monthly payment, you are in for a long, drawn out process of foreclosing on the home. That process will always be contingent on your state laws and political policies that are in vogue at the time.
Here in Nevada, the foreclosure will cost between $2,500 and $5,500. You can serve them a Notice of Default after the number of days your Promissory Note states after non-payment on the Note. Once you serve them a Notice of Default, you have to wait 90 days before you can take your next action. As of this writing, after they are served a Notice of Default they have the right to mediation in the state of Nevada. Mediation will drag the process out by two to six months depending on the waiting period for a state appointed mediator to be available.
At the mediation, the borrower has the right to ask you to negotiate in good faith to resolve the issue. Whether or not anything comes of it, it will always drag out the foreclosure time.
Once the 90 days are up on the Notice of Default and the mediation has been completed, you will need to serve the Notice of Sale.
The Notice of Sale requires at least 21 days and you must post public notices. Most of your cost will be in making sure all the notices are served properly. You do not want to find yourself with some borrower that may have a propensity for suing you to have anything to sue you about. Following the law is easy and hiring a Trustee to do all the work is the only way to go if you find yourself in that position.
Finally, after all that is done, you need to decide how you want to set it up for the actual foreclosure on the courthouse steps and what price you will set as an opening bid. You will be able to bid up to the total amount owed to you plus penalties, late fees, accrued interest, etc. If that is high enough (meaning no one on the courthouse steps bids on the property), it will go through the foreclosure proceeding and you will receive the home back in your name with the title.
We are not done, and believe it or not, this is definitely the abbreviated version. You now have to get them out of the house. If they want to be stubborn about it, this may require hiring a lawyer to serve them and get them removed. They are considered squatters and you have to follow a whole other set of laws to have them removed. How much fun does this sound so far?
Then, to add more salt to the wound, remember for the four months to possibly a few years during the foreclosure period on the property, they are not making any payments to you the whole time. I am getting irritated by just writing this scenario out for you.
It won’t always be a nightmare. The process of foreclosing can actually go relatively smoothly and be completed in four months, yet it can also drag on for up to a few years if they fight you all the way.
Now, contrast that with a Rent to Own. If the Buyer stops paying the rent, it becomes normal eviction proceedings. Here in Nevada, that can be done in as short as 14 days and costs somewhere between $40 to maybe a few hundred dollars. That’s it!
Do you see why this becomes a no brainer from an Investor’s point of view, yet is a very fair and reasonable deal for the Buyer? I love those win-wins!