Real Estate Investor · Gainesville, FL · Member since 2008 · 296 posts · 7 votes
18y
I love this method. I bought a house a couple of months ago from a lady that owned it outright and she agreed to hold the financing for a year with a little bit down.
I think this is one of the simpliest and most often overlooked way to buy RE. Its even better if you are a new investor.
Plus it is far easier to negotiate with a seller who stands to make a lot of money either way, than with a bank or HML.
Real Estate Investor · Gainesville, FL · Member since 2008 · 296 posts · 7 votes
18y
I love this method. I bought a house a couple of months ago from a lady that owned it outright and she agreed to hold the financing for a year with a little bit down.
I think this is one of the simpliest and most often overlooked way to buy RE. Its even better if you are a new investor.
Plus it is far easier to negotiate with a seller who stands to make a lot of money either way, than with a bank or HML.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
18y
Not only is it a great startegy for the investor, the buyer can control when and how much in cap gains taxes tehy pay by selling via owner finance.
WIN-WIN for both parties.
Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes
18y
Buddy of mine bought 100 houses that way. I just got financing of this nature on 1 more. If you can find an area that is experiencing an overload of tenants and a lack of buyers this strategy kicks major butt.
I will say this - I have a friend (Matt, feel free to chime in) who was having some difficulty getting some refi'd. As I understand, the banks put appraisal value secondary to how well he was cashflowing.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
18y
Maybe. If they sell you with terms like 30 year amortization, due in 3 years, they're expecting you to refi within three years to cash them out. Sellers certainly can't expect you to keep the loan for the full term. You could sell it, which has the same effect as a refi. Just avoid any prepayment penalties or unusual payoff calculations. Car loans, for example, used to use a "rule of 78's" calculation for payoffs that meant the initial payments were even more loaded with interest than normal loans. Be sure the note spells out the amortization and any pre-payments penalties.
Real Estate Investor · Jersey City, NJ · Member since 2008 · 203 posts · 1 vote
18y
So is it a reasonable strategy to request "short-term owner financing" (a year or less) from a seller? In other words, would it be just nuts if my conversation went something like "are you able to offer seller financing for the first year, with the balance due at that point"
My thinking is that this would convince sellers, who typically would not be interested in doing owner financing, to do so for a short period of time. Sort of a win-win.
Real Estate Investor · Rochester, NY · Member since 2008 · 193 posts · 46 votes
18y
It's a great strategy, and it will work better in some situations that others. They key is to find out what the seller needs.
Any time you can get the seller to hold financing, whether it is some or all of it, it is a benefit. If the seller owns the property free and clear and doesn't need the money right away, then it will most likely be more willing to owner finishing. If the owner is upside down, then this is probably not an option.
Real Estate Investor · Jersey City, NJ · Member since 2008 · 203 posts · 1 vote
18y
It seems, in my novice opinion, that most sellers typically are not open to owner financing. But again, if a seller who normally wouldn't be open to owner financing could be convinced to do so, as a result of a short-term agreement, this would seem to be a good strategy.
(Another rookie questions coming) If an owner agrees to do financing for a short-term, what are some payment terms that could be expected. For example, a 30k house, owner financed for two years, balance then due. Would offering (I'm just arbitrarily mentioning a number) $200 per month plus 7% interest even be acceptable?
I'm completely in left field when it comes to this type of agreement/terms, which is why these questions are so basic.
FS, a seller can't sell on owner financing unless they own the property free and clear. That's not a common situation, so it isn't usual to get owner financing.
Sometimes, if the seller has enough equity, they will finance the down payment for you and you borrow the rest from the bank (and this is getting harder to do, because the banks are getting tough about their lending standards.)
To figure the payment, you go to an amortization table, feed in the interest rate and the loan term, and it will tll you what your payment is going to be.
A very common owner finance deal woud be $XXXX dollars at 10%, amortized over 30 years, all due and payable in 3 years. That makes your payments the same as if you'd gotten a 30 year mortgage, but you have a balloon payment where the entire amount must be paid at the end of 3 years.
You negotiate the interest rate and the terms. Typically, you would pay 3-4% higher interest than the banks are currently charging. However, the interest rate is something that is negotiable, and the interest rate you pay is going to be heavily affected by your credit score.
If you can borrow all you want from the bank, you are in a position to get the seller to agree to a lower interest rate.
If the banks wouldn't loan you enough to buy a cup of coffee, you are very likely going to be paying a high interest rate for owner carry. If there is no place for you to get money, you aren't in much of a position to bargain.
Real Estate Investor · Rochester, NY · Member since 2008 · 193 posts · 46 votes
18y
FS - Like I said, it depends on the sellers needs. If you are talking to a seller that is selling their house and want to buy another one, they are probably not a good candidate for owner financing.
On the other hand, if you find a retiring landlord who is selling off 30 different properties that he owns, he may have trouble selling them all or may not want to pay taxes on them all in the same year. In this case, the landlord might like the monthly payments, which you can point out he will continue to receive if he owner finances, but he won't have any of the tenant hassles.
See how these two situations are totally different? A real estate investor has many tools in their toolbox, and you have to make sure you are using the right tool, or combination of tools, for the job. You wouldn't use a hammer to paint a house, would you?
Real Estate Investor · Gainesville, FL · Member since 2008 · 296 posts · 7 votes
18y
slimjim,
it should be just as easy as with refinancing a conv. loan.
your lender will ask what the debt is on the property, (hopefully it is a low LTV with your seller financing) and then they will approve the loan to cash out your seller.
it goes to closing, the title company will need the payoff from the seller (who should be happy they are getting their cash) and the new loan comes in place.
this is going to be an interesting scenario in the next couple of years with all of the 3 and 5 year balloons coming due from the 'hot market' and no banks lending on the refis. I think you are going to have a lot of people holding expired balloon notes not knowing what to do with them.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
18y
Originally posted by "PNW":
FS, a seller can't sell on owner financing unless they own the property free and clear. That's not a common situation, so it isn't usual to get owner financing.
Certainly its neater if the seller own's it free and clear, but creative techniques like AITD (all inclusive trust deed), lease options, and contract for deed are all ways to do "owner financing" even if the owner has a loan. Heck, even a subject to is a form of owner financing.
Rental Property Investor · Jacksonville, FL · Member since 2008 · 784 posts · 528 votes
18y
If the seller is financially stable, you can do the lease option, without much fear that, if they own a loan, they will default on it. If the owner of the property is teetering on bankruptcy or having a problem with the payments, you want to do a subject to, where you get your name on the deed and you send the payments to the bank, yourself.
It is a great way to buy real estate and Wendy Patton has some great material on it as well, if you are looking for places to eduate yourself.
I have done land contract or contract for sale on the seller side with a real estate lawyer lining up the paperwork. We were told no problem if you have to take the house back for failure to pay insurance, payments etc. Could only do it because the mortgage was a commercial bank. Other banks won't let you do it so you either have to own outright or ask the bank.
Got notice that the mortgage company had selected an insurance policy because the "buyer" had not made the insurance notification, ie dropped the insurance, stopped making monthly payments. Finally left.
When the house was sold, the closing attorney wanted that buyer to sign papers dissolving any claims or interest in the house. That's because the contract for sale was filed at the courthouse. If he hadn't been cooperative where would the seller be? Ir becomes a big storm cloud on the title. I suggest not filing the paperwork if it can be avoided and held by an attorney.
I know a guy that bought several houses in a new up and coming neighborhood years ago and did the lease option balloon. The last time I saw him he said he was out of that game and selling his last house.
Also, if someone is making payments on owner financing be sure you have good records of payment and preferably a return receipt or signature. In Tennessee the seller published a notice in a rag sheet and foreclosed on us because he "misplaced" two of our payments. It costs alot of money to back these guys down through their lawyer. It straighten out but that "put in my mailbox" won't get it. Believe me.
If we can now only have 3 mortgages on our credit plus the one being purchased we're really going to have to be selective.
I second that thought about 5 year balloons and no where to go for refinance of investment property. I"m sure banks don't want to see investors coming in the door right now.
dal1 reminded me. If you are buying with owner financing, have all the payments go through an escrow company. They will handle the account for a couple of bucks a month, and then there is never any question of who paid what, when they paid, or what the remaining balance is.
Real Estate Investor · San Jose, CA · Member since 2008 · 228 posts · 13 votes
18y
Originally posted by "gainesvillej":
your lender will ask what the debt is on the property, (hopefully it is a low LTV with your seller financing) and then they will approve the loan to cash out your seller.
Thanks for your response.
You owner finance for 500K and now it's time to refi, your property is now worth 400K. Your stuck, your property is worth less than what you paid, would the bank still refi your property? You still owe 450K to the seller.
What happens now when your LTV is not low enough to refi?
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
18y
You owner finance for 500K and now it's time to refi, your property is now worth 400K. Your stuck, your property is worth less than what you paid, would the bank still refi your property? You still owe 450K to the seller.
What happens now when your LTV is not low enough to refi?
If you owe more than the property is worth, you can not refi. You are stuck with the property until you receive appreciation or let it go to foreclosure.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
18y
Originally posted by "nationwidepi":
You owner finance for 500K and now it's time to refi, your property is now worth 400K. Your stuck, your property is worth less than what you paid, would the bank still refi your property? You still owe 450K to the seller.
What happens now when your LTV is not low enough to refi?
If you owe more than the property is worth, you can not refi. You are stuck with the property until you receive appreciation or let it go to foreclosure.
Or bring enough money into the refi to get the LTV to the lender's acceptable level.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
18y
Good point Jon. That would be a third option. This is why communities such as BP are so beneficial. An option I left out was added by someone else "in the know" :superman:
Real Estate Investor · San Jose, CA · Member since 2008 · 228 posts · 13 votes
18y
Thanks for the input guys. Overall, owner finance do come with risk, either you buy way below market value or you hope for "speculation", I mean appreciation. If the LTV is not met, it could mean trouble.
Real Estate Consultant · Member since 2008 · 792 posts · 30 votes
18y
Not to be nit-picky, but the owner can only do 100% owner financing if he/she owns the property free and clear. Very frequently, the owner can do 10-50% owner financing which makes getting a loan for the remainder a lot easier (at least it used to).
My favorite part about seller financing is the flexibility. Give the sellers options, for example: "Mr. Seller would you prefer":
A. 10% interest, 30 year amortization, balloon in 2 years, no payments due until balloon payment.
or
B. 8 % interest, 15 year amortization, interest only payments, balloon in 4 years.
or
C. 5% interest, 5 year amortization, no balloon, PI payments.
or whatever else you come up with. Just make sure that ALL options are winners for you.