Owner Financing

[RehabInvestor]

Hi, I am new to rehab investing.  I have one property underway which was secured through a bank loan.  I am targeting a new property that is offering owner financing.  I'm not sure how exactly this works but I understand it could be beneficial to me.  Can anyone shed any light on the intricacies and techniques of owner financing?  Thanks!

[gordo2417]

Owner financing is a nice way to buy, sell, or create a nice cash flow for the seller.  There are no banks, no origination fees, no junk fees, etc. with this type of deal.  Essentially an example is like this.

Sales price-100K
Down Payment-5%
Note balance-95K

You and the seller would agree to terms of the 95K note i.e. interest rate, monthly payments, term of the note, and then you would be responsible to make payments to the seller once a month, just like a mortgage.  There are many ways to go about an owner financed deal in regards to the note.  The seller can keep the note for the full term, they can sell the note to a private note buyer down the road, or they can even sell the note at the closing table which is called a simultaneous closing.  

If your rehabbing or flipping properties and would like the cash NOW then you can owner finance the deal and then sell the note at the closing table for a small discount.  You would attract more buyers, sell your home quicker, and get the cash you want for the next deal.  Happy investing and take care,

Nate

[RehabInvestor]

Thanks, gordo!  In this scenario I am the buyer.  I have good credit and can qualify for a good interest rate/no money down on a bank loan - as I did with my previous property.  Given that, I'm wondering if owner financing is worthwhile for me as the buyer?  Is it uncommon to approach the seller with a below market interest rate on the terms?  It sounds to me like owner finance is more commonly used as a technique for sellers to attract buyers with no-so-good financial situations.  I guess my question is how can I leverage owner financing as a tool get my offer accepted and decrease my purchase costs?

[gordo2417]

Its not uncommon at all to ask the seller if they will offer owner financing.  It just depends on if they need the cash from the sale for another home or an investment opportunity or if he can handle you making him monthly payments.  Its worthwhile for you if you don't want to pay a ton of closing costs and speed up the transaction.  You and the seller can agree to any interest rate or term that you both agree upon.  I've seen notes where the interest rate is 5 or 6% which is really good.  Not to good though if the noteholder wants to sell it to a note buyer cause the lower the interest rate will create a bigger discount if they wanted to sell the note down the road.  

Seller financing is not just for not so good financial situations.  I'm working with a guy who has 750 credit who is pondering a simultaneous closing cause its alot quicker and he is going to save a ton on closing costs.  He's sick of waiting for a bank to get their act together and he is in risk of losing some investment property that he wants badly.  

Ways to leverage your deal?  Mmmmmm.......Go to the seller and ask him what his goals are with this sale.  Does he need the cash from the sale?  If so then explain to him how if he does an owner financed deal that he could sell his note at closing for a small discount and have no ties to that property.  He would also have to wait only 2-3 weeks versus 6-8 weeks to get his cash.  You decrease your purchase costs cause you pay no origination fees, junk fees, no surveys, and no PMI.  Now your probably wondering what kind of discount is involved with the selling of a note?  Typically I say that you can complete a simultaneous closing and the carried back note would get in the 90-95% of the note value plus the downpayment.  The discount is dependent upon many things........your credit, your downpayment, appraisal, sales price, 1003 filled out, interest of the note, neighborhood, and term of the note.  A typical note that I see alot is 30 yr term, 8% interest, 5% down, and 600 FICO.  This would usually get you in the range specified.  The stronger of the above then the less of a discount your seller would have to take.  You and the seller would agree to terms whatever they may be.  Also keep in mind if the interest rate is too steep for your liking you can also re-fi with no prepayment penalty.  Of course you would have closing costs involved but if your sitting at 8 or 9% interest rate and you come down to a 5.5% then it makes sense.  If you want to talk more about it give me a shout.  My info is below.  Hope this makes some sense anyways.  Take care,

Nate

[Tmnoonan]

Make sure that you get a competent Real Estate attorney on board to help you draft up the contract.  This is key.

[Deal Hunter]

I have good credit and can qualify for a good interest rate/no money down on a bank loan - as I did with my previous property.  Given that, I'm wondering if owner financing is worthwhile for me as the buyer?  

Typically owner financing is an alternative to conventional financing when documentation requirements or FICO score cause the conventional loan terms/rates to be unfavorable in the investment.  In other words, owner financing is worthwhile for you as a buyer as long as the terms/rates beat that of the conventional loan.

Is it uncommon to approach the seller with a below market interest rate on the terms? 

Not at all.  Like gordo said, it depends on what the seller wants out of the deal.  However, you have to be able to appeal to the seller, given their choices:  Sell the property outright and get cash in return, or be satisfied with receiving a monthly payment.  (For example: If the seller gets $100K in cash from the sale and puts it in a savings account earning 2%, then leaving the cash in the property and getting 7% interes only payments from you is financially more lucrative for them.)

It sounds to me like owner finance is more commonly used as a technique for sellers to attract buyers with no-so-good financial situations. 

Yes, I am seller financing one of my properties to a buyer right now.  My terms are 8% down and 9% interest, IO for the first year, P&I on 2nd year with no payment recast.  My buyer is willing to pay the 9% as long as I don't check his credit.

I guess my question is how can I leverage owner financing as a tool get my offer accepted and decrease my purchase costs?

Right off, you can save on paying mortgage broker points, rate buy-downs and PMI.  Again, you have to do the numbers on both and compare side by side.  You may not pay upfront for these extras with seller financing, but depending on how long you are holding the property, the costs could accumulate over the term of the financing and be a wash. 

Note: Now, even if it is a wash - your owner financed property does not appear on your personal or business credit report, which puts you in a better position to continue purchasing and financing more investments with conventional lenders.