Mortgages & Creative Financing

How to Use Owner Financing to Create Wealth And Grow Your Portfolio

Expertise: Landlording & Rental Properties
24 Articles Written

Owner financing is confusing to many newbie investors, as well as seasoned investors. It is referred to by other names, such as seller financing, holding paper, and private money mortgage. Owner financing is simply a loan provided by the seller to the buyer to help fund part of the down payment or for the primary financing. Buyers use this to assist in the financing of their deal and agree to make installment payments usually on a monthly basis over a specified timeframe until the loan is repaid.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

In this article, I want to describe how owner financing can make you extremely wealthy, how to identify a potential owner financed deal, what it takes to put together a deal with owner financing. I also want to highlight a couple of our case studies from our past deals as a way to illustrate the effectiveness of this technique.

How We Used Owner Financing as New Investors

In our first deal, we had no credibility and even less money, the two unmistakable qualities of fledgling investors. The property was listed for $750,000, but had been listed on Loopnet for over two years. We approached the seller and asked if she was willing to hold paper as part of the down payment. We agreed on a $600,000 sales price, with 10% cash down from us, 10% seller financing, and 80% bank financing.

There are several factors that are needed in a deal to be able to utilize this strategy. Your deal may have one of these factors or a few of them. Amazingly, our deal contained them all.


Related: The Seller Buy Down Strategy: A Clever Financing Trick That Nobody Uses

What You Need to Utilize This Strategy

Motivated Seller

First of all, you need a motivated seller or what we refer to as a “mom and pop” owner.

Here is a list of motivated sellers:

  • Retiring people
  • Divorcees
  • Out-of-state owners
  • Those experiencing partner acrimony
  • Those going through bankruptcy
  • People experiencing health issues
  • Those faced with a new business opportunity
  • Relocating people
  • Code violators/Board of Health violators
  • Those who have inherited property
  • Burned out landlords (I’ve been there!)
  • Families fighting amongst themselves

As you can see, the list is rather extensive. It is our duty as buyers to discover the true nature of the seller’s motivation to sell and then create a plan to solve their problem. Our sellers conveniently fell into the first description. They were an older couple preparing themselves for retirement. Seller financing solved three problems for them — they were able to defer capital gains, rid themselves of an annoyance, and receive a monthly income check with a rate of return far superior than a savings account.

A Broker Who Understands Owner Financing

Second, you need a broker who understands owner financing and can convince the seller to consider it. I would use the word “educate” rather than “convince” because there are benefits to the seller. This piece of the puzzle is crucial in seller financing. If you can’t convey the benefits to the seller, then it will be nearly impossible to structure a deal. Our broker was the one who recommended owner financing due to the nature of the property and the willingness of the sellers.

A Willing Bank

Third, you need the participation of a bank that is willing to lend money on a deal with owner financing. The bank involved in the financing was holding the seller’s mortgage, so there was no need to convince the bank on the operations of the property. They knew firsthand that the property was positively cash flowing and would support the mortgage obligations.

The Right Property Condition

Another criteria that can assist in negotiating owner financing is the condition of the property and the type of property. The property in question was a mixture of cottages, duplexes, four-plexes and a six-plex, not ideal for your typical Fannie Mae financing. It would be more challenging to secure traditional bank financing with this property due to its age and its non-conforming nature.

The Correct Market Phase

Finally, the phase of the market plays into owner financing. We purchased this property early in the expansion phase. As real estate gets “hotter” and deals become harder to find, sellers are less willing to owner finance a property. In their mind, if the market is hot and they can sell their property with ease, why should they become creative to sell their property? We were fortunate that this property had very little interest and even less competition bidding for it.

Let’s recap what helps to achieve seller financing:

  1. Motivated seller
  2. Broker participation
  3. Bank participation
  4. Property condition
  5. Market phase (recession and expansion phases are optimal)

You can check out our previous BiggerPockets article on market phases here.

We were able to control an asset that was valued by the bank at $600,000 with only approximately $80,000 out of our own pockets. This is one of the main reasons why owner financing leads to achieving massive wealth. Most successful real estate investors have heard of the term OPM (other people’s money), and being able to control the most amount of properties with the least amount of money leads to an explosion in wealth creation. One note: Leverage works in the other direction. If your investments begin to falter, then your losses will also skyrocket.

Fast forward three years. We have just refinanced this first deal. The bank appraised the property for $800,000, and we were able to distribute $180,000 to ourselves, while using a portion of the funds to complete exterior renovations. The power of leverage allowed us to purchase a property with only $80,000 of our own money, and with excellent management, we were able to increase the value of the asset and cash out more than we had invested into the property. We have no more money left in this deal, yet it continues to cash flow $3,000 per month.

Related: 4 Ways to Use Hard Money & Private Financing for Your Rental Business

What happened to the note with the seller? We decided to offer the seller $10,000 toward the note if she would extend the note an additional five years. She agreed, and the length of the term of the note is now eight years. We will revisit the seller in a couple of years and ask if she wants the remaining note paid in its entirety. My hope is that we will be able to offer a discounted price on the note and she will accept it. There’s no harm in wishful thinking.

547456_551381838234767_2006475041_n cyard FullSizeRender-3 IMG_6238-2

Think Creatively

The moral of the story is — to create wealth in real estate, create value and think outside the box. The most common phrase I hear from other investors is “you can’t do that.” Most people are stuck inside the box. Change your mindset to “how can I do that” and force your mind to come up with creative solutions.

Our next owner-financed deal was even more creative. If we had listened to the naysayers, we would have never landed this owner-financed deal, a 281-unit, $11,000,000 asset with NO money down. The seller offered to hold 20% as the down payment, and the bank provided 80% financing. This deal was more complex and had more problems to solve, but the payoff is much larger. If you look for opportunities instead of problems, they will begin to appear.

Your Task

Contact real estate brokers and discuss seller financing. Start to identify properties that fit the criteria of seller financing: motivated sellers, distressed properties, sellers that want deferred payments, properties that are difficult to secure traditional financing, properties with substantial equity.

Look to create these favorable terms with owner financing:

  1. Long amortization (at least 25 years)
  2. Lower interest rates
  3. NO prepayment penalties
  4. Longer terms (at least 10 years)
  5. No due on sale clause in mortgage

Remember, you need to ask the seller for these terms. You will never know the answer unless you ask!

Have you ever used owner financing?

Please leave us a comment below and let us hear of your experiences. We are always looking for creative and unique ways to expand our portfolio and our lives.

Gino Barbaro is a father of six and the co-founder of Jake & Gino LLC, a real estate education company focused on multifamily investing. He has grown his portfolio to 674 units in three years ...
Read more
    Curt Smith Rental Property Investor from Clarkston, GA
    Replied over 3 years ago
    Hi Gino, thanks for the deal description. – Specifically what do you recommend for direct marketing for buying / getting the list of prospects who contain folks who are prospects to offer seller financing (and lease / option)? where do you buy lists? Get lists with shoe leather? – Do you have a script when talkinig to them? You left off your “assignment” list – substition of collateral in the note. IE you put a tenant buyer into the property who eventually gets bank financing. Assuming you sold the virtue of this being a great investment to the seller, why close out the note at house sale. Move the note to another property and keep mailing profit to the seller. This is an advanced tactic but works for a smart investor to keep what amounts to a private lender.
    Gino Barbaro Rental Property Investor from St Augustine, FL
    Replied over 3 years ago
    I just got an email from a broker in NC pitching seller financing. We were fortunate to network with a broker who utilized owner financing. You have to make sure the property fits the criteria. The script is basically the same, trying to find a solution to the seller to see why he is selling and to see if it will benefit him. Some sellers like to get monthly payments, AKA mailbox money. Thanks for your strategy Gino
    Steve Vaughan Rental Property Investor from East Wenatchee, WA
    Replied over 3 years ago
    Thanks for the article, Gino. I’ve had the best luck with tired boomer+ plex owners. As far as seeking 25+ year seller-held amortizations, my sweet spot and most common longest allowable has been 24 yrs. Anything over that, I get balloons and a lot of push-back and I don’t blame them. With the shorter am’s, these aren’t cash-flow plays for me. Creative value plays that are fun to put together and truly solve seller problems. I also shoot for assumability for a subsequent buyer. Never once has a broker in a creative deal done anything but gum things up and complicate for me. Thanks for sharing!
    Gino Barbaro Rental Property Investor from St Augustine, FL
    Replied over 3 years ago
    Thanks Steve, It is difficult to find a broker who is an advocate. Our broker was an investor/builder who knew how to pitch it to sellers. Our broker even took a note as part of his commission to help us close a big deal. He knew the note would be paid off after we refinanced the property Gino
    Samuel Cervantez from Fort Worth, Texas
    Replied over 2 years ago
    So the broker was pretty much the one who pitched it ? Is a broker needed if you have a seller that owns the property? Who draws up the paperwork on the deal? I’m sorry, new here and trying to learn as much as possible.
    Andrew Syrios Residential Real Estate Investor from Kansas City, Missouri
    Replied over 3 years ago
    Great article! Often times sellers will say no to seller financing at first, only to come around later during the negotiation. That’s definitely worth noting.
    Gino Barbaro Rental Property Investor from St Augustine, FL
    Replied over 3 years ago
    Andrew, I have learned one thing in life. If you don’t ask, you don’t get. Six children drills home that fact every day. Hearing the same question multiple times wears you down. Bets negotiators on the planet! Thanks Gino
    Michael Healy Investor from Great Barrington, MA
    Replied over 3 years ago
    I just used seller financing to pick up a second property around the corner from one I’m already in contract on. In this case I will put 10% down and seller will finance 15%. The terms are not as favorable as what is described here (15 year amort and 5 year balloon) but it’s good to know about possibility of renegotiating later. Also it’ll enable me to hold on to more of my capital reserves while I get my feet wet land lording on a bigger level. I only wish I’d known about this before contracting on my first property! Still, through these two first deals I’m acquiring 14 units proving 12-15% CCR. Not too shabby
    Gino Barbaro Rental Property Investor from St Augustine, FL
    Replied over 3 years ago
    Hey Michael You will get better as you acquire more experience. This is only your second deal, and you are already mastering the technique. Keep growing your portfolio and the snow ball effect will kick in.
    Madison Adams Investor from Nashville, TN
    Replied over 3 years ago
    As a young investor with a mountain of college debt, owner financing has been a great way for me to start building my rental portfolio. This article gives me more tools for my toolbox. Thanks Gino! O and the podcast you did with Joe Fairless was awesome!
    Gino Barbaro Rental Property Investor from St Augustine, FL
    Replied over 3 years ago
    Hi Madison Joe has a terrific show and does a great job. He makes it easy to sound good. I had the privilege to interview him on our podcast. His story is pretty inspiring and he has really grown
    Ian Coyle Investor from Rochester, New York
    Replied over 3 years ago
    Gino, Great article. On the sample deal cited (80K down on 600K deal) did you need to show banking institution X amount in reserves, some investment pedigree, etc to secure deal as well? Thanks
    Gino Barbaro Rental Property Investor from St Augustine, FL
    Replied over 3 years ago
    There were 3 of us in this deal. We each needed around 27,000, plus the bank requires personal financial statements and tax returns. It helps to have partners in this regard, more people to guarantee loan. Banks like that, they want to feel more secure. We had no pedigree in the market, but I did have education and a willing seller and a knowledgeable broker to help make it happen.
    Jeff Deleon
    Replied over 3 years ago
    Thanks Gino for the article, I agree wholeheartedly – you have to be creative at times when it comes to real estate investing. What we learn in the investing world is a blueprint, sometimes you have to step out of the box to make a deal work.
    Rich Hupper Broker / Investor from Tewksbury, Massachusetts
    Replied over 3 years ago
    I am interested in owner financing. I am compiling a list of 3 and 4 families where the last sale was recorded over 20 or more years ago. I figure these people have little or no mortgages. However I don’t understand how I can give someone paper if they have already gave someone paper and still owe them money. Also I am trying to highlight the benefits of them holding paper. Would holding paper be better for them from a tax perspective or would a land contract be better? Thank You
    Melissa Hall Wholesaler from Wilmington, North Carolina
    Replied over 3 years ago
    Help!!! I have the opportunity to partner with a landlord who owns 22 properties…he will seller finance, hot market on the east coast… where do I begin? how should I structure the deal?
    Gino Barbaro Rental Property Investor from St Augustine, FL
    Replied over 3 years ago
    I would need some more info before offering advice. What type of property, per unit cost, debt in place, cap rate,
    Curt Smith Rental Property Investor from Clarkston, GA
    Replied over 3 years ago
    HI Melissa, Starting with the most important point re seller financing that typically includes a balloon for the balance. One of the enticers to the seller is above market selling price as long as down payment is low. IE 5% or less, often MUCH less. But sellers like cash in hand so it’s a negotiation. The biggest risk for the buyer is that they over pay and the balloon period is too short that appreciation does not rise the appraised value past the selling price and at the end of the balloon a banks appraisal comes up short and the buyer (now owner) will have to bring yet more cash to the closing table to get the new loan to close. Smart buyers kick this problem back to the seller who by now is 5 years older and in no position to take back a commercial deal. You say the price on the deal was inflated and now I can’t refi this deal and take out the balance of the seller financed note. 2 choices: 1) the seller takes a hair cut at the appraised value and we close, 2) you get the properties back. This is not such a bad situation for the buyer if they give back the deal to the seller, they got the cash flow over 5 years and if the deal was half ok, are net net cash a head (and now a lot smarter). The offer: Sellers always inflate the asking price and they know it. Assuming the ask is not crazy, say you’ll pay the ask, but seller will finance. You offer as little down as possible. Start with 1%, and negotiate up to 5%. Walk if the seller wants more than 5%, he’s unrealistic. You can bring in an appraiser that you pay for to show that the ask is over market by some 30% (lets say). Monthly payments are: asking price / 240 (this is 20 amortization at zero interest). 7 yr balloon. I’d never do shorter than 5 yrs and given the risks of not being able to refi out 5 yrs is short IMHO. Lots of sellers will take this offer: their ask for the price, monthly is 20yr, 25yr even 30 yr am, 5yr balloon, to 10yr balloon.
    NA Smith Investor from Kansas City, MO
    Replied almost 2 years ago
    Hi Gino We are newbies and interested in this avenue for creating wealth. The below paragraph Im sure is only a snippet of information and I would like to understand more behind the numbers of a deal like this. Where can I get such info? Fast forward three years. We have just refinanced this first deal. The bank appraised the property for $800,000, and we were able to distribute $180,000 to ourselves, while using a portion of the funds to complete exterior renovations. The power of leverage allowed us to purchase a property with only $80,000 of our own money, and with excellent management, we were able to increase the value of the asset and cash out more than we had invested into the property. We have no more money left in this deal, yet it continues to cash flow $3,00
    Gino Barbaro Rental Property Investor from St Augustine, FL
    Replied almost 2 years ago
    Hi William You can look Into educators who sell training, such as MIchael Blank, Brad Sumrok, just to name a couple. Your question dives into a big case study Thanks Gino
    Lee Zhao Investor from Las Vegas, Nevada
    Replied over 1 year ago
    Hi Gino! A great article! I am in the middle of planning two deals using seller financing. Both of them are condos, one is mine as a seller thru owner financing, the other one I am buying it thru seller financing. My question is who I should use for drafting a contract – an attorney or an escrow company? Do you have any experience in this regard? Any advice? Thank you in advance!
    Gino Barbaro Rental Property Investor from St Augustine, FL
    Replied over 1 year ago
    Depends on your market. In NY, you need an attorney to draft a contract. Some states, such as FLorida, have contracts prepared and use a title company to close.
    Hugh Little Rental Property Investor from Alpharetta, GA
    Replied 7 months ago
    I have been using this technique with commercial real real estate lately and the concept is very effective. Its great for multi family and self storage. This is a great way to generate wealth with less risk.
    Dustin Nygard from El Paso, Tx
    Replied 7 months ago
    Thank you for the article. Very great for helping me get my feet wet with owner financing which is currently what I am shooting for. Thanks
    Donald R Rohsner Property Manager from Baltimore, MD
    Replied 3 months ago
    Gino, Thank you for your information. I began my own LLC, which I use to manage my first two properties. I am planning on approaching an investor who is trying to sell out over the next few years in my target area. I want to use this strategy to buy large amounts of properties in a short amount of time. I am considering trying to write up a deal where I buy all his properties by owner financing as we go. I have already bought my first two off him. I will be utilizing the points above to show a quality deal for both. I plan on doing something like each property over 100 months from conveyance. How would I present terms? We have a God centered mission and are hoping to use these properties to do great things. My title company does not seem to have much info for me. Must I use a real estate broker? or can I just just a title company? If I am missing something, I would appreciate some wisdom/clarification. Thanks, Don