how to set up owner financing

[Naomi Spira]

I just found what might be my first fix/flip purchase (New Jersey).  Owner owns house free and clear.  I am considering asking him to owner finance this.  There is no broker involved.  What would be the steps to go about this?

Rent to Own?

Subject To?

Obviously I would need to run a title search and do a home inspection.

All I know I have learned thru books and this forum.....I don't want to mess this up.  

I hope to get the property for $180,000 and I intend to fix for $25,000.  I estimate that I could sell in about 3-6 months for $256,000

Any and all advise appreciated.

[Brandon M.]

Naomi, 

As Guy mentioned there is no subject to because that is where you would assume the existing mortgage. 

First step you should ask the owner if they are willing to finance the property, otherwise it is all an exercise in futility. If they are willing to finance you draw up a regular real estate contract but put the owner financing portion in the contract (real estate contracts are state specific so can't exactly tell you how to do one in NY). You would have a mortgage drawn up, either by a lawyer or a title company (try to someone besides a lawyer, they will charge A LOT). That mortgage will state the amount of the loan, the terms, etc, just as if you were borrowing money from a bank. The only difference is the lender is the owner's name instead of a bank name. That mortgage will get recorded with the county the same way a mortgage with a bank would. That way the owner has first lien position on the property and will be paid off first when the property is sold. 

In terms of owner financing you can choose to set up a few ways, depending on how long the owner is willing to finance. They likely won't be willing to loan for 30 years like a bank does, but they might entertain a deal such as 25% down at closing, $500/month with a 2 year balloon. That would allow you to maintain a small monthly payment while rehabbing the property but requires you to do something to pay them off in full in 2 years (either sell the property, pay them off in full, or refinance with a conventional loan if you decide to keep as a rental). 

Long story short owner financing allows you to be a lot more flexible with the terms than a bank would. You could possibly do lower amount down, no monthly payment, longer term, etc. Just depends on the willingness of the owner. Either way you have a mortgage drawn up and recorded. 

Hope that helps.