Mortgages & Creative Financing

Opinion: THIS Is Hands Down the Best Way to Buy Property

Expertise:
11 Articles Written
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Did you know that I start every single conversation with a seller with the exact same question? Probably not. I mean, how would you know?

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Well, I do, and it is one of my favorite parts about real estate investing. The question I ask every seller is: “Will you do owner financing?”

Owner financing is the crown jewel of real estate (in my opinion). It affords you the ability to get into a deal a heck of a lot easier and much faster.

What Is Owner Financing?

Put simply, owner financing is when the owner of a property sells it to a buyer but acts as the lender and holds a “note” against it. Instead of paying a normal bank every month, the buyer pays the original seller every month. Going into the agreement, the seller and buyer have an agreed upon payment amount and term length, just like a buyer would with a regular bank.

Owner financing terms are normally much shorter than your standard 15- or 30-year bank mortgage. Before the agreed upon term expires, the buyer must pay off the seller with a lump sum payment, which is typically obtained through a refinance with a regular bank.

Related: How to Sell Your Properties With Owner Financing (and Avoid Dodd Frank!)

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The Benefits of Owner Financing

Less Scrutiny

Well, what is probably the worst thing about real estate investing? I would say it is the process of acquiring a mortgage from a regular bank lender. They want your left leg and your first-born child. Or, put dryly, they want 90 days of bank statements for all your accounts, your last two years of tax returns, a personal financial statement, and your credit score. Throughout the process of gather all of this, they’ll send 43 emails, leave 31 voicemails, and ask you to sign 27 or so different forms.

With owner financing, you effectively avoid almost all of this. Mr. or Mrs. Seller, more than likely, will not run your credit and pour over your personal and financial affairs. In my experience, the most a seller is looking for is that you are a trustworthy person and do, in fact, have the ability to pull money out of your own account or get it from someone or something else in order to provide the down payment (if required) and the monthly payments.

Please do note that while Mr. or Mrs. Seller may be more relaxed with the underwriting, you do absolutely want to be sure that you can pull this off. It does not do anyone any good to tie up a seller and then not be able to execute. The seller will normally have the power to foreclose on you just like a bank would if you start missing payments (via the governing agreement for the transaction).

Quick Closing

You can close the deal quickly. Once you have agreed on a price and terms and the governing contract has been looked over by your attorney, you are effectively a brand new owner of a property.

No or Low Down Payment

Ah yes, the dreaded down payment. Mr. or Mrs. Seller, in most cases, will not hold you to the normal 20 or 25 percent down that most banks want. Most likely, he or she will not be calculating your debt-to-income ratio as it relates to your down payment and the effect it has on your monthly obligations.

Is this not what most people struggle with when buying with traditional financing? Instead, with owner financing, all of the terms are up to the buyer and the seller. You determine what is required to be handed over up front, if anything. Maybe the seller really wants a used Prius, so they require $10,000 down. Maybe he or she has $7,800 in credit card debt that they’re looking to get rid of.

With owner financing, it is important to figure out the seller’s motivation. From there, you can start to craft the terms of the deal.

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What Buyers Should Know About Down Payments

Here is some bonus information about down payments: If you want to borrow the down payment, go for it. Can you do with a bank? Maybe. But when I have tried in the past, I was shut down. When I did it with an owner-financed deal, nobody even blinked.

What Buyers Should Know About Interest

In addition, you have complete free range to negotiate the interest rate. On one of my first deals, I had a 10 percent interest rate—not my best negotiation. But for my second owner-financed deal, I was at 5 percent. Getting better!

Related: How to Negotiate: 7 Real Estate Negotiation Tips

Example of Owner Financing

I found an off-market deal in Connecticut. The market was smoking hot in this particular area and I knew the town like the back of my hand. I knew he was asking about $50,000 too little. I jumped on it.

Come to find out, he did have a personal loan or two that were really bothering him. The total of those loans was about $22,500. That amount ended up being the down payment. The agreed upon purchase price was $170,000. That is 13.2 percent down—a far cry from the 25 percent down banks want.

It took 30 days to close. That did run a little bit long. It was due to our attorneys going back and forth with all the legalese. But I suppose it is important to make sure the contract is done right and is fair to both parties.

If you are looking for another way to get into the game without losing the shirt on your back or the girth of your wallet, take a close look at this strategy. Ask the same first questions of sellers that I ask. What is the worst that can happen?

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What other questions can I answer for you about owner financing? 

Ask me in the comment section below. 

Ryan Deasy, of Deasy Property Group and RentReddy, is a long distance landlord currently residing in Houston, Texas. Originally from Connecticut, Ryan has employed various strategies and studied unique niches in order to grow and manage his portfolio. In 2012, Ryan purchased his first duplex. Little did he know, he had stumbled into house hacking and, from there, never looked back. In 2016, he moved to Houston and left all of his rentals behind with no property manager. Through many trials and tribulations, he discovered the best way to manage his portfolio was, simply, by himself at a distance. After employing rock solid systems and an all-encompassing team, he has been able to scale his portfolio without missing a beat. Not only is his entire portfolio managed from out-of-state but it is also comprised entirely of rent-by-the-room arrangements. With the appropriate systems and teams in place, Ryan has taken a group of small multi-family rental properties and made them into an exceedingly profitable income source.

    John S Lewis from Jackson, NJ
    Replied 2 months ago
    HI Ryan - I generally ask for seller financing as well after finding out if there is a mortgage on the property or not.. The last couple of times they would do it, they wanted more money down than I had to put down. I've yet to secure one of these deals. How do you find your deals with seller financing?
    Ryan Deasy Rental Property Investor from Houston, TX
    Replied about 2 months ago
    John, also, with seller financing how much underwriting is the seller going to do on you? are they going to want to see seasoned money and all that stuff that the big banks want? no. most likely, no. you can get that money from anywhere. you could go get a personal loan at 12% from bank of america just to get the deal done. then, you have time to clean everything up before you put permanent financing on it.
    Ryan Deasy Rental Property Investor from Houston, TX
    Replied about 2 months ago
    John and Ryan, i just did a seller financed deal 3 weeks ago and put 13% down or 22,500. i got to talking to the seller and come to find out he had some personal debt he wanted to clear up. he wanted just that amount and not a penny more and that is what i gave him. it was an off market deal. happy to explain more on how i found it exactly. feel free to message me at any time!
    Ryan Gougeon
    Replied 2 months ago
    I too have never found a realistic "owner financing" Deal with 50% down. I'm beginning to think most these real estate guys get rich selling dreams to guys wanting to get into the game...
    Cindy Larsen Rental Property Investor from Lakewood, WA
    Replied 2 months ago
    I have a property I’ll be selling next spring. I find the idea of owner financing intriguing. But a few years ago a law was passed that makes it a lot harder for an individual to provide the buyer with a mortgage. https://smartasset.com/investing/dodd-frank-act This law was passed to protect buyers from predatory lenders, which is a great idea. But it sets up the owner who finances their property with a situation where the buyer could take advantage. I’m not sure whether it’s safe to do on our financing even if you qualify your buyer. Obviously I need to do more research including how to write a mortgage. One thing I’m sure of is that with the Dodd Frank act owner financing is no longer simple.
    Joseph Chan from Jersey City, New Jersey
    Replied 2 months ago
    Cindy, I grew up in Lakewood. Went to CP high school. I may be interested in buying your property. What's the address and asking price? Please DM me if you are interested.
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied 2 months ago
    Sellers have the benefit of an installment sale when properly structured to to recognize capital gain pro rata along with the annuity payment for the loan instead of recognizing the capital gain lump sum.
    Phillip G Alexander
    Replied 2 months ago
    I have a seller who no longer wants his rental property after owning it just 6 months. He bought it with his heloc from his primary residence. The price he wants is $8,000 more than he paid, with only replacing the hvac. He had rented it for $1200/month taxes and insurance were $3,600/year, and he wants $120,000. There is no deal here correct?
    Ryan Deasy Rental Property Investor from Houston, TX
    Replied about 2 months ago
    i agree with Mark. we need more info. if he bought it under market price, sure it could be a deal. what is price of the property? where is it? $8,000 may be very little in this scenario.
    Mark Nishiguchi
    Replied about 2 months ago
    As a professional investor, there is no proper way to answer your question unless we understand your strategy. What if the seller bought the property 25k undervalue? Current market conditions? Are you trying to cashflow or flip? or? What is your exit?
    Michael Gudgeon
    Replied 2 months ago
    How does the refinance process differ in a seller financed deal?
    Ryan Deasy Rental Property Investor from Houston, TX
    Replied about 2 months ago
    Hi Michael, it really doesn't. More or less, a first position lien is a first position lien whether it's John Seller or Wells Fargo. You have to get permanent financing on it before the term is up and your new loan simply pays off the existing note you have with the seller.
    Dirk Zeller
    Replied 2 months ago
    Owner carry best used in Self directed retirement account investing. Using leverage to build tax deferred or tax free revenue and assets. If owner financed is used in LLC, personally, or trust. Reduces the number of Fannie Mae mortgages by 1.
    Elizabeth Clyde from Atlanta, Georgia
    Replied 2 months ago
    Will add this approach, we actually used to ask then I stopped thank you for making sure we cover all bases
    Alan DeRossett Investor from Thousand Oaks, California
    Replied 2 months ago
    Most owners should prefer to offer owner financing and lower their personal capital gains taxes, by not receiving a lump sum all in the same year. unless they plan on reinvesting for a 1031 exchange
    Eric Ippolito from Los Angeles, CA
    Replied about 2 months ago
    Capital gains tax? So a seller doing the financing willl be getting payments for a few years and can avoid that? What about when it’s refinanced as the blog mentions? Won’t that happen then too? I’m ultra new to this and learning. Would love to know more
    Ryan Deasy Rental Property Investor from Houston, TX
    Replied about 2 months ago
    i agree 100%. mostly people say no because they do not understand it. educating the seller is a big piece of the puzzle.
    Nathan G. Real Estate Broker from Cody, WY
    Replied 2 months ago
    I bought two properties last year via owner financing. In both cases, I explained how it works and the seller's were over the moon with excitement because wat they really wanted was to avoid paying taxes and a steady income. I got the properties below market, low down-payments, less paperwork, and everyone is happy!
    Joshua Mangini
    Replied 2 months ago
    If I were to lock up a deal with owner financing, could I then turn around and sell it the same way?
    Ryan Deasy Rental Property Investor from Houston, TX
    Replied about 2 months ago
    yes i believe you can. if i am thinking correctly, you would need to use a wrap around mortgage with the new buyer because now when they go to buy it from you it is not owned free and clear as there is a note that needs to be paid off first because of what you owe to the original seller. if you use a wrap around mortgage that should work. happy to explain my thinking more if you would like. feel free to message me.
    Tim Nicholas Rental Property Investor from Lake Charles, LA
    Replied 2 months ago
    I just signed a contract to purchase 4 plex for 240k, 8% down and interest only for 2 years. That's way better than any bank and the closing time will take about 21 days. The caveat for me is that I found the deal through the MLS and negotiated the deal through my agent and the units are under rented at 750 per month. Pretty sweet! Its a great strategic tool to have in your belt.
    Katie Rogers from Santa Barbara, California
    Replied 2 months ago
    Most sellers are afraid of owner financing regardless of the benefits. Their seller's agent will also likely discourage consideration of owner financing. Very often, buyers and sellers do not meet each other, so the opportunity to directly educate the seller may be limited.
    Ryan Deasy Rental Property Investor from Houston, TX
    Replied about 2 months ago
    Katie, i could not agree more with what you said. that has been very frustrating for me. i usually try my best to contact the seller directly as the agent usually does not want to bother asking the seller if they are interested. i know that may be frowned upon but if it means i have a chance at securing a great deal, i will do it.
    Randy Dubiskas from Borger, TX
    Replied 2 months ago
    As I understand it, if the seller has a traditional mortgage on the property prior to making a owner-financed deal with a new buyer, they are risking the original lender to call in the entire note if they sell the property without notifying the lender. I think the article should mention this risk. I don't know if lenders would do this, but it is in most contracts. Could be a severe cash crunch on the seller if this were to happen.
    Ryan Deasy Rental Property Investor from Houston, TX
    Replied about 2 months ago
    Randy, you are correct with what you said. that would apply if there was an underlying mortgage. i should have been more clear, as i was writing about scenarios where the current owner owns the property free and clear.
    Alishea B. Rental Property Investor from Georgia
    Replied 2 months ago
    I like the idea of owner financing ,but I was wondering can you do repairs and rent the place out?
    Ryan Deasy Rental Property Investor from Houston, TX
    Replied about 2 months ago
    Alishea, sure can. you own the property! your name is on the title. it is no different than buying a property and making payments to wells fargo instead. you have all the rights to property that you would normally have, barring anything agreed upon in your contract.
    James Manning
    Replied 2 months ago
    I will owner finance a property to you at 10% all day long, if you pass the credit check and have been at a job for 2 years.
    Ryan Deasy Rental Property Investor from Houston, TX
    Replied about 2 months ago
    James, thanks for sharing that. it is interesting because i have had sellers ask for a personal financial statement and i have also had one who did not ask for one shred of paper or evidence that i had any funds available. guess that is what makes it fun!
    Andrew Kougl from Chula Vista, California
    Replied 2 months ago
    I'm exploring a deal with a portion of the deal possibly seller financed and what I think people don't realize is the shorter payment period. As mentioned in this article, sellers want their money in 3, 5, 7, 10 years, not 15 or 30. That significantly increases the amount you are paying against the note each month and directly cuts into the cashflow. It could turn this deal I'm working on to negative if the amount that's seller financed is large enough. Seems like seller financing is better in appreciation markets versus cashflow markets.
    Ryan Deasy Rental Property Investor from Houston, TX
    Replied about 2 months ago
    Andrew, you are not thinking about this correctly. yes, you have a shorter time to pay off the seller but the loans are going to be amortized over 15, 20, 30, etc years. your payment will reflect, for example, a 30 year loan but yes, you will need to find different financing in only 2 years. your payments would be insanely high if they were like a simple loan for 2, 3, 4 years etc. that would be not good. i hope this cleared up your thinking. please let me know if it did not. i do not want you to miss out on a deal because you were not understanding it right. thank you.
    Jerry M Cutrona Developer from Florida- Missouri
    Replied 2 months ago
    Thanks for posting. It's a good reminder about ways to stretch your investment cash and shorten the transaction process. Have your list of seller benefits ready to remove potential deal objections...
    Farrukh Madaminov Rental Property Investor from Jersey City, NJ
    Replied 2 months ago
    @Phillip G Alexander there too many variables that you’re not listing here so it’s hard to tell if there’s a deal or not. But let’s assume you’re putting 20 percent down and negotiated a 5 percent interest rate. With the $3600 in taxes and insurance (assuming there are no HOA fees and the utilities are covered by the tenant) your $120k purchase breaks down to a $811/m payments with a 30year amortized loan (regardless if it’s a 5 year balloon or more). With this breakdown you’ll be cash flow positive $389/m. Everyone’s goal is different so it’s up to you to decide if that’s a deal or not. Also keep in mind that with balloon loans you’ll have to refi or pay off the loan balance once the term is up. Hope that helps.
    Jerome Kaidor Investor from Hayward, California
    Replied 2 months ago
    The thing that worries me about these sorts of deals, is the balloon payment aspect. Will I be able to refi it when I need to? I had a friend who couldn't - and she had to sell her property.
    Ryan Deasy Rental Property Investor from Houston, TX
    Replied about 2 months ago
    Hey Jerome, to be honest, that is just part of the game; part of the risk. you should know your area and your know your numbers and build in a buffer in case the appraisal comes in low.
    Dustin Nygard from El Paso, Tx
    Replied 2 months ago
    Thank you Ryan for the article. I'm hoping to owner finance my very first property and this helped me feel more confident asking from the get go.
    Lynn Bradley
    Replied 2 months ago
    I love owner financing! A few years back....the housing was a buyer's market. The owner wanted 165k, I offfered him $700 down and $700 a month for 5 years, no interest! he accepted. Selling price was 165k I lived in it about a year.....didn't do anything to it.....then rented it for another 2 yrs at $1450......and then sold it for 195k.....that was my first deal. I also asked that all the money i paid each month go towards bringing the house price down. The area I am in now is a seller's market and also a tourist town on the beach. It is a very tough market for me.....however I don't stop looking.....don't worry about all the what if's just do it.....some people you think will never accept are willing to accept and vice versa.....Good luck to you and me!!!
    EMMANNUEL CHRISTOPHER from MERRILLVILLE, IN
    Replied 2 months ago
    Make sure to include if possible, placing the Title/Deed in an escrow with a title company as part of the land contract. In my last FSBO deal, after I paid for the house in full with my rent payments, the owner refused to give me the title, or deed. Worse, he didn't pay the taxes, and lied to me that he was paying the taxes. I found out after the Tax deed sale,and was shocked. The house needed so much repair, which I had declined to do until the title was in my name. So, don't get screwed. CYA. There are lots of scammers out there.
    EMMANNUEL CHRISTOPHER from MERRILLVILLE, IN
    Replied 2 months ago
    I don't give a flying F about realtor listers. If I like a property, I contact the owner directly, and suggest they do a For- Sale- By- Owner (FSBO) if their house does not sell by the end of their current contract cycle with an agent. That way the owner knows he most likely has a potential buyer without paying 6% to an agent. Some will tell you to talk to their agents. Some will play along. Homeowners are misled by agents who tell them they shouldn't talk to anyone. I tell them that is BS. It's your house, and if you sell it by yourself, the realtor still gets his 6% regardless, i.e. if you are under contract. The issue is the greedy commission agents who inflate initial asking prices to maximize their commission. F' em.
    Justin Juhan
    Replied 2 months ago
    Great article, I look at what the property would have sold for in 2009-2011 and target the balloon payment to be below that value when it's called due. This in my mind minimizes the risk of being upside down when the note comes due. Usually this works out to a 7/20 or a 5/15
    Andrew Syrios Residential Real Estate Investor from Kansas City, Missouri
    Replied 2 months ago
    Great article Ryan!
    Jess Kinzel
    Replied 2 months ago
    This is exactly how I look to invest. It is my #1 strategy and my main goal when obtaining any property. I am in Missoula, Montana. Its a sellers market here. Deals are extremely hard to come by. So far I have been doorknocking on the very few Preforeclosures listed. I hope to eventually get lucky. But until then, I constantly read up more on Creative Financing deals.
    Christopher Grobbel Rental Property Investor from Washington, DC
    Replied 2 months ago
    How do banks feel about lending on a land contract property when you go to refi?
    Dawn Vought Buy and Hold Investor from Commack, New York
    Replied 2 months ago
    I love to offer my houses out with owner financing. If there is an underlying mortgage, I do an Installment Sale aka Contract For Deed. If there's no mortgage, I just do a straight Mortgage and Deed of Trust. I love being the bank! That being said, I'm just starting to look into investment property in Florida, and will be sure to ask everyone if they are willing to hold financing. Thanks for the reminder!
    Eric Ippolito from Los Angeles, CA
    Replied about 2 months ago
    Can you elaborate on both of those methods?
    Dave Rav from Summerville, SC
    Replied about 2 months ago
    I just locked up an Owner Fi deal a week ago! Details are $8k down and payments of approx $400/mo with full payoff to Seller in 36 months. PP is $82,000. ARV is $135-145k. Will rent for $1100-1200 mo. Multiple profit centers, including a nice (+) monthly CF of $450!
    Jessica Roland Investor from Atlantic, IA
    Replied about 2 months ago
    It's always worth asking. We do as well and have found one deal so far and another we are discussing. We had a guy knock on our door saying he wanted to sell us a house on contract. (It's a very small town so word gets around). 20 years, 3% interest, 0 down! Nice older lady with her son helping her renting it. Even one deal like that a year makes it worth asking!
    Mark Nishiguchi
    Replied about 2 months ago
    Thank you, this is a great article and suggestion. Would love it if you could share any thoughts on term structure examples? I find most sellers who are interested in financing only want short-term loans, similar to a bridge financing loan and am wondering what your experience is with a longer duration ie: 3-5 years or more. Thank you!
    Ryan Deasy Rental Property Investor from Houston, TX
    Replied about 2 months ago
    Mark, i agree. my experience also has been shorter term loans. it seems that most people want to do 2 years. i actually have no issue with that. i understand why they would not want to hold it forever. i have heard of longer terms but i have not come across any personally. 2 years should be enough time to clean up the property, your finances and credit and get some longer term bank financing on it.