Owner Financing - First Time Advice

2 Replies

I'm looking at a portfolio of properties owned by one person who is looking to sell. They range from 4 - 6 units. He is offering owner financing. This all preliminary as I don't have any additional information until next week when we visit the properties and review the numbers. I do own a rental (6 unit) today and used a traditional bank mortgage. Owner financing is new to me.

What should I expect and look for? How do they compare to a bank loan? Pro and cons? Should also mention that I have a partner and we both have excellent credit and getting a loan shouldn't be a problem.

I will try to give updates as a learning discussion for others.

Thanks and looking forward to all input and questions.

John, rule number one when someone offers seller financing is value the property correctly. Sellers usually ask more than the property is worth and financing does NOT add value to the property. No appraisal is required so again, know the value.

The loan is negotiable, the amount, note terms, interest and payment structure.

If the seller isn't budging on terms or price, they are usually looking for a sucker and not motivated, so find the motivation. There are still sellers out there that do these with the intentions of taking the property back at the drop of a hat, some have cheated on collections, so use a servicer or a direct deposit method that can be verified, since this is a commercial loan.

Use a mortgage servicer!

While you save thousands in loan costs over a traditional loan, those saving don't increase the value of the property, perhaps the transaction, economically, but not the RE value.

I also suggest you do one loan for each property, do not go for one loan on them all as a blanket loan. If you did have issues with the lender/seller, all the properties would be at risk.

A point or two might be justified over market rates. If you have a higher than market rate loan make sure there is no pre payment penalty so you have the option to refinance. Again, any future loan will be based on the property value so if you pay too much you are limiting the ability to refinance.

Search on BP "Pros Cons Seller financing" there is a ton of information here already on the subject. Mostly it's about selling using a note, but you can see the issues of the flip side too.

If you have specific questions about terms or other issues, post it up! Good luck. :)

Thanks for the advice Bill. Very helpful.

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