How do I determine the interest rate to charge for owner financing.?
Answer:
Rates are relative to risk. A buyer that has 20% to put down is a better risk than say a buyer with 10% down, but there is still an element of risk. The other factor you should consider is the buyer's credit. If they have judgements against them those judgements could become liens on the property. If he doesn't make the payments and you cancel the contract, you may have inherited his judgements. Because of these risk factors, it is reasonable to request an interest rate slightly higher than bank financing. One good idea is to offer a rate equal to prime which currently is at 8.25%. Bank financing for unimproved lots ranges from 7.25 - 9.25% Keep in mind, by going contract for deed, the buyer saves 2-3% of the sales price in financing fees normally charged by lenders so even if the rate is higher it's still an attractive deal.
You have to be fair, but reasonable. You can get 5% on your money in most banks now, especially with money market accounts, so you should charge more than 5% to make it worth doing. Depending on the type of financing (30 yr, 15 yr, etc), I'd say anything over 7.75% would encourage a buyer to shop elsewhere for lending.
Raw land is a Hard Money deal. If you want to be nice than yes 7.75 is good. But if you want to be a hard money type than charge him/her 10% since hard money at level he is going to purchase is around 12-13%. Buisness is buisness and you dont want to cut yourself out of two much. If you want to treat him as a 2nd on the loan than you could charge him 15-16%. Crazy but true. My advise find another buyer who has the captial to put down.
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