Owning Owner finance properties as rentals???
Wholesaler · Washington, D.C · Member since 2011 · 449 posts · 94 votes
Owning Owner finance properties as rentals???
25 Replies
Mike, if someone owns their house free and clear and they want you buy it they can be the bank for you and you both can negotiate on the terms of your payMents to them. If they don't own it free and clear then you can consider taking their mortgage "subject to" their existing financing. This is mostly done through a mortgage called a "wrap" or an "all inclusive trust deed".
Basically the sky is the limit. If you find a buyer willing to sell and hold terms then you can negotiate everything from there. I frequently make sellers multiple offers, one being all cash, another being seller financing, and generally one offer that is a combination of both.
Hope that helps. Lots of info on BP that deals with seller financing.
- Wholesaler · Washington, D.C · Member since 2011 · 449 posts · 94 votes15y
What if someone lets say owes 100k on the property and the property is worth only 50k. Is there a way that I can do a wrap/subject to with them for 50k?
- 15yBrian LevredgePro MemberInvestor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
It's my preferred method of purchasing. When you find a motivated seller it is, imo, the best way to purchase. You can negotiate whatever terms you like and you can preserve your capital. The seller gets to unload the responsibilities of owning the property itself and starts to get a return again.
The best part about this strategy is that you can purchase as many properties as you can find people to sell to you, provided you have the resources.
- Wholesaler · Washington, D.C · Member since 2011 · 449 posts · 94 votes15y
Brian - please help me understand this, how does is it possible for the owner to get a return again? Let's say the mortage is $1000 a month and the property can generate $800 a month in rent. How would you make a deal like this?
...you wouldn't make a deal like that. That'd be terrible. Essentially you'd only want to take over their payments if it's less than the property can bring in, after expenses. Ideally you find someone who owns it free and clear, so you can work out whatever price and terms work for both of you.
Run the numbers on that.
$800/mo rent. 50% to expenses. Cash flow $400. Minus debt service of $1000. You're cash flow negative $600 dollars each month. Ugly.
- 15yBrian LevredgePro MemberInvestor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
Originally posted by Mike Nelson:
Brian - please help me understand this, how does is it possible for the owner to get a return again? Let's say the mortage is $1000 a month and the property can generate $800 a month in rent. How would you make a deal like this?I forget the exact number, but there are a fair amount (1 in 3 or 4, I think) properties in this country that have no mortgage on them. Ideally, those are the ones you go after. Motivated sellers can be burnt out landlords, absentee owners, sudden job loss or job transfer, etc. As was already mentioned, you don't want to chase bad deals and waste your time trying to figure out how to make a hopeless situation work. This is a numbers game, plain and simple.
- Wholesaler · Washington, D.C · Member since 2011 · 449 posts · 94 votes15y
Brian - Let me give you a little information about me and what I'm looking to do. I would like to gain a portfolio of rentals, I would like to do this w/o coming out of pocket 20% for a investment property (I'm able to but I want to have a minimal investment).
Let's say if I do go after "motivated" sellers w/o mortages, why wouldn't they just sell their property instead of gaining $300-$400 a month for a owner financed property?
- 15yBrian LevredgePro MemberInvestor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
Mike,
Everyone has different needs. Most of the people you encounter will probably fall into the category you described. But to give you a few different examples, you could have the following: Someone doesn't want to take the capital gains hit by selling all at once. Owner financing spreads that out over time. Someone might own multiple properties that they want to sell all at once. About the only way to do this, other than a cash sale, is to owner finance someone. I personally bought 19 homes at once this way. Your job is to find out what their needs are and see if you can find a way to satisfy those needs in a way that works for both of you.
I hear what you are saying about wanting to preserve your capital, but keep in mind your either going to have to give on the down payment or on the terms, or possibly both, depending on who you are dealing with. You need to make sure that you can make the seller fell comfortable enough with the terms you are offering. If someone approached me with a low down owner finance scenario, I would probably not do it. That's just me however.
- Miami, FL · Member since 2011 · 299 posts · 75 votes15y
That will depend on the seller. If you offer them terms, including interest, they will end up making a lot more of what they are asking now. If they just want the money to dump it into a bank account this is a real good investments with higher ROI.
The thing here, and I will monitor this thread to look for others tips and comments, is that it is not easy to find people willing to do that(at least it hasn't been for me). So far I have made many offers to free & clear owners and no one has accepted.
As per the underwater house, I have a thread with a similar question open. From what I have learned my own and from the some posts in my thread, it I'd say that it is possible to work with underwater properties. In your example though, 50k is waaayyy to off.
You could work with a prop that is a little over-financed and has a sweet PITI. You could then, Lease/Option it and collect a higher rent. Watch out for the negative equity though, or you could get in trouble if your term with the sellers arrives and the house wont appraise for a loan for your tenant/buyers.Please, take this advice with some caution, since I'm a newbie too.
Good luck
- Wholesaler · Washington, D.C · Member since 2011 · 449 posts · 94 votes15y
This is all a lot to grasp and I still have a lot of questions. I'm going to do a little more reserach on this topic. I have a couple of people who are underwater on their mortage and even more who have properties in areas where there arent no comps because properties just arent selling.
When you use seller financing, how does the title and deed work? Would it stay in their (the sellers) name? How am I protected and not just handing them a check every month?
The reason I ask, most landlords are older, especially those who own their properties free and clear. God forbid the guy I worked a deal out with suddenly passes away.... Then what?
- Real Estate Investor · Greenacres, WA · Member since 2011 · 47 posts · 8 votes15y
Yes, goog question John T, anyone know what would happen? I assume if it is done through an attorney and payments are made through an escrow company, payments would just continue and the heirs would collect.
Yes?
I beleive if you do the above, the buyers name would go on title if it is owned free and clear by the seller and it would record just like any other property, ie: they are just the bank.
But the recourse of the death is the biggest question for me as well. Great topic, btw!
- 15yBrian LevredgePro MemberInvestor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
In my experiences, you open escrow just like you normally would on a sales transaction. There is a mortgage and a note that are both recorded against title and title transfers into my name (or the name of my entity) at close. I pay insurance and taxes directly and mail the mortgage payments to the seller on a monthly basis. Their accountant provides me with a 1098 at the beginning of the year for tax purposes.
You could do a 3rd party escrow if that's what you both agree to. I haven't had anyone request that yet in my experience. As always, it's best to consult with a qualified attorney because you may have some unique circumstances.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes15y
The question with owner finance still comes to experience and reserves.
I can buy no money down with owner finance and show reserves to make the seller comfortable.
They want to know when the time comes you can cash them out if needed to and pay off the loan.
They also (depending on foreclosure process and timelines of the state) worry that you will run the property down worse from what it is today.They will foreclose,not receive payments,spend a bunch of money,and take back a bigger headache then they had before.
I have sellers who have financed me that will write a letter stating I do what I say I am going to do and follow through.
If you are just a buyer just learning and wanting to put "no skin in the game" then the seller will not want to take the risk.
You have to have experience,reserves,cash to put down (something of value) to get a seller wanting to do the deal.
Now you can find sellers wanting to go for anything but the deals are crap.
I know a seller right now offering owner finance.Wants 15% down which for the condition of the properties is a pipe dream.
The property a 4 unit is owned free and clear.It has been run down over the years.I know taking it over I would want no money down,2 to 3 months of no mortgage payment on the note,and a great interest rate to purchase.
I know the landlord just stuck below market tenants because they didn't want to make repairs.I am going to spend a few months getting those tenants out and rehabbing the units and fixing all the problems before generating cash.
I know this because I have other buildings close by in the area and I know what it takes to turn them around.
If you only want to put 10% down max then start at 3% down and make the seller feel they brought you up to the 10% down.Have to make it look like they won.I am willing to give the seller a little more on price for the right structure and cash flow for me.
If they do not own it outright and you do the wrap you have to watch out for the due on sale clause.Especially true if you put a bunch of money down.You have to make sure you can refinance out of the note quick if called and that the payments go to the bank to make sure mortgage is credited every month and not headed to foreclosure.
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes15y
I bought my first house many, many years ago with seller financing. It was just like any other transaction, expect the lender was also the seller. I got a deed from the seller, I gave them a deed of trust. I make the payments (P&I only, no escrow) directly to the seller turned lender.
- Involved In Real Estate · Rochester Hills, MI · Member since 2010 · 812 posts · 178 votes15y
Originally posted by Mike Nelson:
Brian - please help me understand this, how does is it possible for the owner to get a return again? Let's say the mortage is $1000 a month and the property can generate $800 a month in rent. How would you make a deal like this?You're not doing it with properties that are under water. Only properties with equity. Owners want to make a spread, or make interest on their equity. Usually you set up whatever type of balloon you're comfortable with.
Mike, just because it wouldn't make sense for you to sell a property owner financed doesn't mean it doesn't make sense for someone else. Once you start talking with motivated sellers the sky is the limit. I've been really surprised in the past about what I've been able to talk a seller into.
Example: I bought a 4-plex last year from a seller who financed me at 0% interest. You read correctly, 0%! every payment to him goes straight to principle. The really cool thing is that the term is for 12 years. I'll own the building free and clear in 12 years if I just make the agreed upon pmt (and why would I pay extra? You can't beat 0% interest, any where else I put my money beats that). On top of that the property cash flows after all expenses (utilities, on site management, repairs, etc). Which is all a bonus as far as I am concerned.
Point is, I would never finance someone at such crazy terms, but if your seller is motivated enough they might. I found out what the seller really cared about and I gave him that. Don't assume that sellers care about what you care about. A good rule for life and real estate investing is to give people what they want, and you will get what you want.
Hope that helps..
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes15y
what about the SAFE act?????
I just went to do my 1st seller financed property, got coc* blocked by the SAFE act, could not process it as I had negotated.
Many people saying they do these but not 1 word about this law....
- 15yBrian LevredgePro MemberInvestor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
Originally posted by James Hamling:
what about the SAFE act?????I just went to do my 1st seller financed property, got coc* blocked by the SAFE act, could not process it as I had negotated.
Many people saying they do these but not 1 word about this law....
If you are financing a non owner occupant, the SAFE Act doesn't come into play. Even if you are financing an owner occupant, I believe you are allowed to do up to three (that may vary depending on the state) per year. If you want to go beyond that you are looking at a little extra dough (which the buyer will pay for) to have a licensed person do the paperwork.
- 15yBrian LevredgePro MemberInvestor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
Originally posted by Andy McFarland:
Example: I bought a 4-plex last year from a seller who financed me at 0% interest. You read correctly, 0%! every payment to him goes straight to principle. The really cool thing is that the term is for 12 years. I'll own the building free and clear in 12 years if I just make the agreed upon pmt (and why would I pay extra? You can't beat 0% interest, any where else I put my money beats that). On top of that the property cash flows after all expenses (utilities, on site management, repairs, etc). Which is all a bonus as far as I am concerned.How do you get around the IRS' imputed interest requirements?
- Wholesaler · Washington, D.C · Member since 2011 · 449 posts · 94 votes15y
Can someone tell me how this deal would work. I have a guy who is interested in selling his home, there are no comps in this area at all. The area has been hit hard and homes have been sitting on the market for over two years. He purchased the home for $137k back in 2008, he owes 121,000.
I just got off the phone with him and he's interested in owner financing the property. Please bare with me I'm new to this, he said that he would be willing to take $300-400 a month from me so that he wouldn't have to pay the whole mortgage plus taxes and insurance by himself. Could this possibly work out? I can get 900-1100 a month in rent for this home.
Mike N: Area hit hard and no comps seems like a bad place to consider. Also, rent of $900/month is not very good if you buy for $121k. And he can't really owner finance the property - he has no equity in it. What the owner is suggesting doesn't make sense. You would pay part of the mortgage payment? What do you get for that? Would you own the property? What happens when he decides to stop making his part of the payment? This deal doesn't make sense to me. I suggest looking for something else.
John T: With owner financing, you are still buying the property and you have a loan. It's just that the loan is not with a bank. The debt is still there.
- Wholesaler · Washington, D.C · Member since 2011 · 449 posts · 94 votes15y
Mike - Thanks a lot it all makes sense now.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes14y
Mike,
C.Y.A.
In an area like that, you the buyer have all the leverage in the world, offer him back 1/2 of what he is asking, negotiate from there.
I would say, if there is money to be made, go forward, especially as your 1st, press thru to a final conclusion, the learning experience is key.
The numbers do not make sense, so in my opinion I am willing to bet he is in or moving into a foreclosure status and happy to receive funds from you while he pays nothing, knowing you will never be able to receive the property without paying off the 1st. Position the structure of your deal so you may have a lien on it to take it as a redemption in the worst case scenario, and you may make lemonade out of lemons.
Other then that, press thru, structure to keep all responsibility on him, and all power of property with you.I explained it recently to another investor this way when he expressed being baffled over a deal I was doing, because I really was not going to have any ownership of the property, just use. I explained, I do not care 1 drop about owning real estate, that is far down on the priority list. What matters to me, is the control and use of property, that is all I want, equitable control and use.
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