Any Advice on Owner Financing?..

20 Replies

Hey BP. 

Currently have an offer in on a property. The seller/owner is willing to do owner financing. Zillow has it for 200 + and the county has it listed as a multifamily. We have agreed to write up the contract for 150. with 10% percent down payment. 

I have never done an owner finance before, my question is what are some of the things i need to have in writing to cover myself, and what do i need to know going into this deal?.

I would make sure you read the various seller financing blogs on this site. Make sure you understand terms length of loan, interest rate, down payment. What is your goal with the property as well. A lot of what you are going to need to get seller financing is going to depend on your end goal. Is this a wholesale, rehab, buy and hold? Determine your clear end goal and work backwords from there.

Get full title work done with title insurance and never, ever do a Land Contract or Contract for Deed.  Title won't transfer to you with those until it's paid off.  Do a Note and Deed of Trust / Mortgage.  Here you can also do a Real Estate Contract that still puts the property in your name day 1, but has a few less protections for you if you do default.  Talk to a title co about common ways to properly structure a seller-financed deal in your area.  Congrats and good luck @Tyon Pascal  !

Get a good lawyer to review the contract.

@Tyon Pascal  

You need legal assistance since it appears you're unfamiliar with the entire process. Thinking you can take this process on alone is dangerous.  Do it right by getting everything drafted and/or approved by legal counsel and you can rest easier thereafter. 

Take help from legal adviser, they will help you in order to take a decision for owner financing.

Originally posted by @Guy Gimenez :

@Tyon Pascal  

You need legal assistance since it appears you're unfamiliar with the entire process. Thinking you can take this process on alone is dangerous.  Do it right by getting everything drafted and/or approved by legal counsel and you can rest easier thereafter. 

 Agreed, Thanks for the fruitful advice @Tyon Pascal

Typically the big difference between owner financing is it typically has a balloon at some point. This is probably the biggest risk to the buyer is when the balloon payment is due. There are a couple things to mitigate this risk. First is push the time of the balloon off as soon as possible. The 2nd is to get an appraisal now. Ideally it will appraise where you would be at a 75% LTV or lower with your down payment.

The rate can be slightly higher to compensate for the lower down payment, but it should in line with currently available bank loan rates.

Using Zillow is dangerous.

I bet it's still overpriced. Get it appraised, at least get a BPO.

An investor financing it, you know how the older guys like the sell, finance, rinse and repeat, they aren't aware of predatory financing aspects yet.

Actually, that could work to your advantage, you might clean their clock later on, but, that's another thread.

I suggest you speak to a mortgage broker or loan officer, show them your deal and ask them when you can payoff that deal.

Absolutely see an attorney familiar with financing, not just RE.

Any balloon needs to be after you can obtain at least 25% equity. You can consider forced appreciation but be very conservative. 1-4 units is NOT purely from an income approach.

You don't pay points on an installment deal an equity funded note.

I suggest you have a debt coverage ration of at least 1.5%, more is better (PITI, maintenance, insurance and taxes being less than 1.5% of the income)

Did I mention an attorney and a broker? Good luck :)

What most newer investors see is a Zestimate value from Zillow and the believe that there's a profit to be made. 

In reality, you have a good chance of "Zover-paying". While it's less likely to happen when purchased via conventional financing, if even possible due to appraisal and current condition, in a seller financed transaction, buyer and seller are largely free to negotiate price and terms acceptable to both.

Unfortunately, @Tyon Pascal  you haven't really done any homework to research true market value. Nor discussed whether this will cash flow, or even your exit plan. 

The basic mechanism for seller financing is the buyer and seller agree to sell this property on these particular terms. Consideration could be cash, a note or notes(s) and/or other assets. 

There are some good books on seller financing. Try John Schaub's book or course for starters to help you understand how it can or should work. Another great source is 'Fixer' Jay Decima's books and newsletter. These will explain what you need to know and how to negotiate sensible terms with your seller. Both are friends of mine. 

Woww awesome responses!

So the owner is willing to 100% seller financing, ill just have to come up with closing costs, appraisal, and of course a lawyer to look over the deal before closing. 

The terms are: 

150,000 at 4% for 30 years! currently 6 bedrooms have tenants in them, basement is finished and attic as well. listed in county records as 8 bedroom multi family. currently looking for an appraiser in the Richmond VA area!

@Tyon Pascal  because the seller financing terms are so generous, I would look even closer!  You may have found a diamond in the rough.  But even more likely, you may have found a snake in the grass.

Reading through the thread, you don't know enough yet about the property itself to determine if it is a good buy or not.  Before spending money on hiring an appraiser, answer some questions for yourself, then do a financial analysis to see if it is a good buy or not.

Looking at both the address next to your name as well as your reference to finding a Richmond, VA appraiser, this property isn't close to where you live. That makes this even more risky because you haven't said anything about knowing the area the property is located in, etc.

PLEASE don't get dazzled by the owner offering terrific financing terms until you know what you are buying!  Not meaning to sound too harsh, maybe I should try to sound even more harsh.  I have alarms sounding all around me right now that something isn't right here.

With all of that said, I love owner financing and do it every chance I get.  I also love no money down deals (or little money down) and do them all the time too.  But I never get to the part of how to pay for a property UNTIL I first determine if I want to own and for what price.

Good luck, be careful!  Keep posting details so others can chime in their thoughts too.

Is this a rooming or boarding house? You said something about bedrooms.....dude, I've done boarding houses in WV and let me tell you - the first people to lose their jobs when the economy dives are weekly renter types. I don't know if that is what this is but it sounded like it to me. 

My first foray in REI 10 years ago was on boarding houses. Yoiks! It's horrible. They live lives of chaos, and their chaos becomes your chaos. And when the economy dives, it's over.

Hopefully your building is a lot better than mine was.

Hey, @Adam Johnson, well i went to school in the area VSU, and the seller is actually my mentor. I think I might have been to vague with my explanation. we talked about the fact that he's getting board with being a landlord, and he's on to note selling and buying, this process he's actually helping me out "or so it seems" until further notice

I've ran the numbers with a partner of mines and it comes out to be a great deal especially due to the fact I'm not putting any money out of pocket, and I'm getting the 4 % 30 year (at least i think) 

@Account Closed  where we have it writing up and with the current occupancy, its cash flows 2200 monthly - 714 mortgage 400 month electric, 40 a month water. and 1900 taxes a year.  was planning on have the cash flew pay for improvements in the home, and selling maybe at year 3 mark. i know zilliow isn't accurate as they have it listed worth at 210,000 but imagining its somewhere anywhere near that number theres equity in the home, and again this is my mentor so of course ill cross my tees, but this guys one of the reasons I'm even doing RE. 

What do you guys think?! thanks

If this is somebody you know and trust then you may have stumbled into a decent deal.  I am not familiar with the area or your goals, so my thoughts don't include whether or not I think it is a decent deal.  The challenge will still remain that you don't live near the property, so managing it will still be a challenge.  I would include future management plans in your due diligence.  If I read between the lines correctly, the seller is still in the area of the property.  But if it is being sold because your mentor is tired of being a landlord, that person likely will not want to continue as a manager indefinitely.  

Okay so still crawling through this whole selling finance process, Just doing some research on closing process, since this is my first "official" closing process I'm just curious. 1). is a title company necessary? and 2 whats the least expensive way to close a deal like this?

Also i am putting the home into a S Corp name, does this require anything special or different, then it would be to buy it in my owner personal name?..

All answers are welcome!

I am not familiar with VA practices, but I think using a title company for the closing is common practice. I ALWAYS recommend title insurance. The comment about closing as inexpensively as possible concerns me a little since you don't seem to have a lot of experience to rely on. Spend a few bucks extra if you have to in order to make sure it is all handled properly and by somebody other than the seller.

Real estate can be titled personally or in a corporate name. Other than my personal residence, all my other properties are titled in an LLC. This adds a layer of liability protection for my benefit.

Settlement needs to be by a title company or RE attorney, not long ago the was a thread where some ido_ was trying to close his own transaction, really dumb. I've closed transactions and won't do it now due to the new compliance requirements, so if I won't try it, where does that put newbies?

You need title insurance as well as a lender's policy which is usually free that goes with an owner's policy to a lender, if that note is ever sold, the lender's policy goes with the note so that new holder will be covered and that adds to its value.

Settlement costs are part of any deal, belly up and pay it, buyer, seller or finance it, but it needs to be paid. Surprise! Does that blow some "buy RE with no money: strategy out of the water? It takes some money from somewhere. :)

@Adam Johnson  Yeah i wouldn't ask the seller to pay it, He's already doing !00 % Financing, that would be too much i think.

@Bill Gulley  Yeah you're right I've come to the same conclusion. heard about financing the fees back into the deal but not sure how that would work, is this the financing you are talking about..

Financing your loan or settlement costs can get tricky as such costs can be a cost of obtaining the loan and then are used to compute the APR, if you have usury laws for seller financed transactions (many states do) that can put the note in violation. A residence seller financed may well be under that category or classification regardless you the buyer's use, just because a buyer is an investor may not set an equity financed note in a commercial classification as cash loans would be. Equity loans are installment contracts, even with a note and deed of trust.

One way is with a future advance note, the property is sold, equity financed, then a future or additional amount is advance in cash paying expenses to the loan's limit of advances, it's a two step process as the settlement costs are actually paid last in the settlement. A cashiers check or certified funds is need for the payment (not cash).

Another way is to get the actual costs, amend the agreed sale price, the note is 100% and the seller shows up with settlement costs, but the title folks need to know that as it effects settlement expenses. Say you have 2K in costs and an original price of 100K. Each time you add to the sale price you change the settlement figures that can be on a % basis of the price, so the seller needs 100K net. To find that, divide the 100K by the reciprocal of the % of costs, 100%-2%=98%, 100k sale price / .98 = 102,040.00 (rounded)

Or, you can ask your settlement agent to compute settlement costs and work it in the note, they may show costs of both sides and funding by one party by credits to the other. :)

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