Owner Financing Deal When Owner Has No Equity
Contractor · Glenside, PA · Member since 2012 · 30 posts · 3 votes
Owner Financing Deal When Owner Has No Equity
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Investor · Syracuse, NY · Member since 2014 · 170 posts · 73 votes
12yDoes the seller really lose? He's looking to sell for a reason (hassle, money problems, bad property maybe) and you can help him/her out. What's the cash flow like? What's the potential? Will you end up trying to sell at ~340 payments?
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- Investor · Syracuse, NY · Member since 2014 · 170 posts · 73 votes12y
Does the seller really lose? He's looking to sell for a reason (hassle, money problems, bad property maybe) and you can help him/her out. What's the cash flow like? What's the potential? Will you end up trying to sell at ~340 payments?
- Real Estate Investor · Redondo Beach , CA · Member since 2012 · 21 posts · 7 votes12y
I can see you are trying to help this seller the best you can. However, if the seller has no equity, they have nothing, and would not stand to make any money on any type of sale. In fact, to sell traditionally they would have to pay out of pocket to sell it. If they truly want out of the property, then you buying from them and taking it off their hand IS THEIR WIN. You, as the investor can and should pursue buying this as an owner financed deal. Depending on the terms of the existing loan, it may not cash flow and may not be a good buy&hold. May be better to find an end buyer to take it over, where you earning your money from a down-payment from the new owner. If you wanted to share some of that with the seller, that would be up to you.
- 12yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
These deals can work for buyer IF the value of the property appreciates during ownership period. Because this is the beginning of a long term mortgage, equity buildup for the first 10 years via mortgage amortization will be negligible. You will be banking on property appreciation.
Seller wins by getting out of obligation to make monthly payments and/or manage property.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes12y
Seller financing includes the financing of existing debt as well as equity. Debt is assumed by contract with a seller with the seller retaining the obligations. The only way to assume the loan or mortgage is for the lender to allow the note to be assumed, with or without releasing the maker's (seller's) obligations.
Equity funds a seller financed obligation or note, without equity it is an unfunded transaction, it has no value in the contract. That's not saying you don't acquire equity in the property in the future but the contract or the financing agreement will not have value at any time.
I mention this because any default in an installment contract voids the sale, the property reverts back and there can not be any deficiency obtained by a selling lender who funds the transaction with equity. But, a separate contract for the assumption of debt is a different matter if the assignee (buyer) fails to perform. The seller may seek a judgment for the breach of contract, it's not a deficiency but an amount agreed to be paid on debt.
So, depending on how your state sees these matters, breach of contract, you may not be in the same position had you financed equity in an installment contract. The concept of installment sales are covered in the UCC and apply to any contract, state law may better define the installment sale of RE and local practice must be considered.
Reason I mention this, again, is that you could be held "more liable" in this deal than customary seller financed deals where a seller stands to benefit by obtaining equity. The seller has a greater reliance on your performance and is willing to walk away basically and transfer title, might be another way to look at it. I'm not saying you will be held liable under your contract, just saying you could be, just be aware.
From the business side, no equity deals are not a favorite of mine but have been done, usually due to circumstances but the key will be to force equity into the property through improvements or through management techniques.
Cash flow over expenses does represent an equitable interest in the management or to the annuity income. So, I do wonder about your assessment of value but the property could certainly be underwater. As mentioned, you're in this one for the long term relying on appreciation and established equity.
Looking at financial ratios, like cash on cash or ROI are rather meaningless with no cash injected and assuming debt. It's not really a profitable situation as the only profit is cash flow above the cost considered for management, buying a job first and profits above that. Forced equity may not represent much profit above the efforts and costs to improve the property. Equity obtained over time is more of the return of your money as much as on the money. Appreciation is also subject to the risk of holding the property, not just a windfall. It's not that much of a win for you as you may think.
I agree with all the above as to it being a win for the seller allowing him to walk away, reflect on the aspects of his benefit in the contract.
I only did these types of transactions in distressed situations, more often when there was some other economic benefit other than price and current property value. Good luck :)
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