If you’re upside down in your Minneapolis duplex, it might be worth considering owner financing through a contract for deed as a way to recoup some of your losses.
If you purchased your property or refinanced during a period of low interest rates, you may be able to recapture some of your loss by charging a buyer more in interest than you’re presently paying.
If, for example, the mortgage on your duplex is at 5 percent interest, and you carry the note for the buyer at 7 percent interest, you can pocket the 2 percent difference.
On a $200,000 loan, this would result in an additional $4000 a year in income, and $20,000 if you agreed to carry the note for a minimum of 5 years.
Most duplex contract for deeds have a balloon payment. In other words, the seller agrees to carry the mortgage for a fixed rate of time, at which point, the buyer pays the note in full, usually by refinancing.
Of course, the duplex will need to appraise for the amount owed on the mortgage. Not what you owe, but rather, what the buyer owes you.
To diminish your losses further, you could agree to finance the duplex for a longer stretch of time. A mortgage with a ten year balloon, for example, would put $40,000 back in your pocket in this scenario, while a 20 year mortgage would return $80,000.
One of the often overlooked benefits of a contract for deed is the possibility of default. I know. This sounds like a negative, not a positive.
However, if a buyer simply misses two payments, ownership of the investment property reverts to you; without all the protracted foreclosure proceedings traditional lenders are required to travel through.
Not only do you get to retain all the money the buyer paid you, but you also have the right to sell the property all over again; at whatever value the market will allow.
I have heard of several duplex owners who have sold the same property two or three times, ultimately making far more than they ever would have on a traditional sale.
Of course, a contract for deed represents a prolonged wait for all of your money. But if you’re waiting for the market to rebound, you might be doing that anyway.