Flipping using Owner Financing and How to Structure

13 Replies

How would I go about structuring a seller finance deal for a flip? I know the terms would depend on the sellers situation but I guess I’m looking for an example of what one would look like. So for a house valued at $160k with minimal work needed (15k). Home is owned free and clear and seller has no immediate need for cash. With a HM loan, I would need to offer lower but I might be able to offer a little more if it is seller financed for a short period of time until it is flipped. Would it be an interest only loan? What is a typical interest rate and down payment in this scenario? Any thoughts? Thanks.

@Sean S. The terms are always negotiable and based on the owners needs...I just did one on a 12-yr am schedule because the owner need to get a certain dollar amount every month...it's all relative, but you want the least out-of-pocket up front with the most monthly cash flow...and enough time to reposition the property if you have a balloon payment. 

Thanks for the response @Brandon Sturgill I may also consider holding as a rental but the numbers would likely work better as a fix and flip.  So that’s why I was considering owner finance as an option to get in there and quickly fix what’s needed and put it on the market. 

@Sean S. Back to your original question: Be upfront to the seller about your plans..."Mr. Seller, I believe I can get you to your bottom line, but I'll need to pay you when the property sells. I'll do the renovation and put in the work to get the property sold quickly. What's the least you would accept for the property?"

Along those lines. 

Flipping a property you do not own creates huge exposure to risk. This is a complex transaction. Glad to help you further if I can...

@Brandon Sturgill If the seller owns the property free and clear and I set up owner financing with them, wouldn’t I be the owner if I took title since the current owner would simply act as the bank? It would just be for a shorter time period but I believe it would be similar to what you did in your example earlier. The difference is the owner in your example held the mortgage for 12 years, I would be looking for a 6-12 month balloon while the house is being rehabbed and flipped. I’m not sure if I’m misunderstanding the strategy. 

@Sean S. I don't think I was clear on your approach. Yes, free and clear and you taking title would place you as owner on the deed. The amortization schedule has nothing to do with the length of the loan, just the mortgage payment amount.

My only thoughts if you take title and flip would be to 1) have enough time to re-position the property (ask for 24-months even if it is just going to take 6)...you can always reduce this if the seller hesitates, but you can't undue a 6-month balloon if the market turns and you can't sell and settle the balloon. 2) You'll have a lot of costs, so be sure your ARV and repair costs are there...you may have attorney fees for drafting the deed/mortgage, closing costs to close when you take possession, renovation costs, holding costs, and when you sell, you may incur many of these same costs again...if you use an agent or list, you'll have RE commissions to pay...and you'll be taxed under ordinary income rather than capital gains...maybe 30%+...just some things to think about.

My approach is always to control even if the cash flow is not there because future equity is more important to me than cash in hand (but 99% of investors disagree)...it's all relative.

It sounds like this one will be a good learning curve, so even if it doesn't turn out to be a stellar deal, you'll benefit from the knowledge of this transaction. 

Best of luck

I've done a few of these that didn't work for rentals (too nice).

For my tired landlord SFs I usually put 10% down at 6%.  I provide local references. I get on title with a note and DofT, no Land Contracts.  If more than a month paying, we set up a contract collections acct with a local bank.  Sellers love that the local bank will be paying them with an ACH and handling the interest reporting.

If it is going to be a fast flip, I leave the grantee of the deed blank.  Here we have 30 days to file and pay excise transfer taxes. Why pay it 2x?

Make sure there is no pre-payment penalty.  They will be paid off with the new buyer's loan.  Easy-peasy.  

How did you find this deal @Sean S.?  Or is this just a hypothetical?

Originally posted by @Brandon Sturgill :

@Sean S. The terms are always negotiable and based on the owners needs...I just did one on a 12-yr am schedule because the owner need to get a certain dollar amount every month...it's all relative, but you want the least out-of-pocket up front with the most monthly cash flow...and enough time to reposition the property if you have a balloon payment. 

 Yep, mine usually say I need $600 a month.  Work out how long the loan has to be and let me know.  2 of mine worked out to be exactly 24 years.

Brandon, love seeing an agent get creative.  You are 1 in 110,000,000!  Keep it up!

@Steve Vaughan how do you setup your ACH process...I typically just use my business account dedicated to the property to ACH every Xdate monthly to the sellers checking account...you mentioned something about reporting interest as well? Is there a service that does that?...

Thanks in advance- 

Originally posted by @Brandon Sturgill :

@Steve Vaughan how do you setup your ACH process...I typically just use my business account dedicated to the property to ACH every Xdate monthly to the sellers checking account...you mentioned something about reporting interest as well? Is there a service that does that?...

Thanks in advance- 

 A local bank offers contract servicing.  The payment is auto drafted from me to them, then they send to seller electronically if they choose.  They hold the original docs, the amort schedule and pay off and do the annual 1098 interest reporting.  

A lot of sellers would not finance without these services I have found.  I let them know it's all handled through this respected local bank and they visibly calm. Check the yellow pages or online for contract servicing if you don't want to make a bunch of calls to random local banks and CUs to find one in your area.