Skip to content

Posted over 8 years ago

Making owner finance work for you

It's always easy to talk about the back end of an owner finance deal when the cash is flowing and the the amount of work needed each month is low (especially if the deposits are automatically made into your account!). Reading a success story makes it seem like owner finance is a great way to get cash flow from a debt instrument, but it is usually not the case. In reality, before things get easy, it may get hard. 

The hard parts

  • The first big step is to learn the basics of owner finance. In my opinion, learning about owner financing is about learning how to be think like a bank or a mortgage company. That means learning about the kinds of things that banks and mortgage companies do, and to plan accordingly.
  • Another big step is to think systematically about the process. Just like renting a property, creating an owner finance mortgage that creates a steady cash flow means managing several processes. You can do most or all of it yourself, or you can have most or all of it done by a team that you manage. Either way, if you ignore even part of the process, the chance of failure goes way up.
  • An ongoing step, no matter what kind of real estate you are into, is knowing your market. Whether an owner finance deal will work for you or not will depend on the market. In my case, the local market allowed investors to charge rents that would be significantly higher than the kind of mortgage payments a homeowner with an excellent credit score would make. The key was that the property was in a part of town that homeowners with excellent credit avoided, but very attractive to hard working families with steady incomes and less than excellent credit ratings.

The easy parts

  • Making the numbers work may be scary to some, but if you dealt with the hard parts, it will be much easier to figure out if the numbers will work for you. In my case, a combination the price of the real estate, the term, and the interest rate determined the cash flow. The current regulations about owner financed mortgages allowed only conventional mortgages with fixed monthly payments and no ballon payments. 
  • Managing mortgage related issues such as accounting, insurance, taxes, an any mortgage servicing costs are not hard to deal with so long as you and the buyer are very aware of both what the costs are and who is responsible for paying them.

Worst case scenarios

Watching the income flow in my direction every month is fun, dealing situations where the flow stops (or reverses) is no fun at all. The pain will be a lot less if you think about them ahead of time. Some of the basic problems include the following:

  • The new owners don't pay on time: If you or your team have planned well, there should be very clear and legally binding consequences for late payments. If the lateness issues are rare, or go away quickly, your cash flow comes in a bit late, but it also comes in with late fees attached.
  • The new owners stop paying: If that happens, you have to start saying the f-word early and often, and the word I'm thinking of is foreclosure. Have a plan in place, and be ready to execute it.
  • The house is seriously damaged or destroyed: That's why you should require insurance, and set things up so that the policy is renewed automatically (using the new owner's funds of course) so long as the mortgage is in place. 
  • The new owners hit hard times and want to renegotiate the mortgage: This can either be a good thing or a bad thing depending on the situation. You should encourage the buyer to tell you about any issues sooner rather than later, to give you the opportunity to make the situation end well for everyone. If it can't end well for everyone, make sure it ends well for you.

Getting help

Don't be afraid to ask for help, especially from professionals and experts who can handle parts of the process. My suggestions on who to consider:

  • A properly certified legal professional to handle the necessary agreements.
  • An expert or company that specializes in qualifying potential buyers.
  • A servicing company that will handle issues like receiving payments, managing escrow accounts, and supplying information needed for your tax returns.

Any comments or questions?

I'd love to hear any questions or comments you might have about my experience, so feel free to get in touch.


Comments (1)

  1. Thanks for sharing @Todd Curtis