For many investors offering the option of seller financing is attractive if you want to get a property sold, but there could be one tiny hiccup! You may not have immediate returns on your cash to do your next investment deal especially if you’re an active investor looking to wholesale properties or do fix and flips.
Here is a fairly simple and very real solution in today’s market that most investors overlook. Think about the returns of some of your family and friends (oh great the family and friends pitch!! …Stay with me this is exciting!! ), many of whom are getting 1-2% returns or less in the market or in their bank accounts. Wouldn’t it be great to create a win-win-win scenario for you, a prospective homeowner, and someone such as a friend or family member who would really like a better return? If you implement this simple strategy, you will be on your way to creating your personal bank.
You and Your “Bank”: I use the term bank to describe the person whom is interested in a higher rate of return that is secured by a tangible asset. By working with a “bank” you can create a note at anywhere between 55-75% of the total seller financed mortgage balance on your property and offer terms at 100% to a prospective homeowner. Here is an example:
You offer a property with seller financing at $100,000 sales price with comparable conventional sales in the last 90 days at $110,000 or above. You purchased the property for $55,000 cash. You set your terms at 15% down payment, 30 year fixed rate of 7.5%, no balloon. When you find a prospective buyer with the $15,000 down payment, your “bank” gives you $55,000 and you keep the $15,000 down payment. Let’s look at what you have done.
For Your “Bank”: Provided an $85,000 note at 7.5% on an asset that is worth $110,000 for $55,000. Not a bad return (12.67%) on a $55,000 investment that has collateral worth double the investment
For the Homeowner: You’ve given them financing and the opportunity for someone to own a home who might not traditionally qualify for conventional lending because self-employment, recent divorce, or another life event not related to just being a poor payer.
For You: Immediate access to $70,000 cash for your next investment. Not a bad return for providing a win-win scenario for an investor and homeowner.
This is a very real strategy that is used every day by savvy seller financing investors. You may have to adjust the numbers to make this strategy work, but this is a truly win-win-win investment scenario. If your ‘bank’ is a relative and their IRA funds, be sure they are not a disqualified person of your family tree. If they are, you will need to find another “bank” or work with other sources for funds.
Photo Courtesy: MuffetCreating Your Own Bank for Seller Financing by Kevin Kaczmarek