HELP! I am a newbie and was offered an owner finance option!

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HELP! I am a newbie and was offered an owner finance option!

Isamar Ochoa
Specialist · Bay Area | San Joaquin County · Member since 2019 · 19 posts · 7 votes

HELP!

I am a newbie and was offered an owner finance option!

I know very little on this topic but have heard this can be a great option. I am hopeful you all can share your experiences, warning, and tips.

I am planning to live in the home and househack… The numbers look promising even if rents drop a bit in the Bay Area. This home is 30 years old, fully renovated, a good part of town, one block away from a university, pretty much an A-list home.

I spoke with the representative of the owner and she shared the following…

Price is $1.5M and the seller wants 20% down payment which I DO NOT have. The seller is not set on an interest rate, but they are thinking (4.65-4.77). I think this is high since I just did a refinance and was offered 3.65% but on a much smaller loan. But I understand the terms are different on an owner finance deal. When we began discussing owner financing, I was hoping to negotiate a lower down payment, but the owner is pretty set on 20%.

Should I ask my loan officer (who is currently doing my refinance) about getting me a loan for this down payment? Has anyone had to get creative for a DP this large?

What should I be looking out for? Warnings? Negotiating tips etc…

Does this flat-out sound like a terrible deal?

The seller knows the mortgage can be covered with the rents so they are confident who over purchases the home can make the payment. So, I am hopeful I can make this work since my income isn’t high enough to easily qualify for a loan this big on my own (I’d need a co-signer which is not impossible but would rather do this on my own).

I am also going to have my agent check comps to see if we should offer less.

Thanks in advance!

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Jonathan PfluegerPro Member
Ben Lomond, CA · Member since 2016 · 338 posts · 337 votes
6y

@Isamar Ochoa

Owner financing is completely negotiable and an excellent option under the right terms and conditions. There are a few things to keep in mind as you evaluate this deal: 

1. Always negotiate the terms of the note with your exit strategy in mind. For instance, a 3 year note vs. a 20 year note will affect how you structure your deal. Will you do interest only for 3 years and then refinance or ask for an amortized loan stretched over 30 years with a 20 year balloon. These are just two options in a a endless sea of options, but tailoring your offer to your exit strategy is imperative. Even better is tailoring your offer as to allow for multiple exits in case of the unexpected (interest rates may be at 8% in 3 years - who knows?).

2. Do you have to use a realtor for this transaction? If you can save the owner the 5-6% realtor fee and pay a lawyer a set fee this may be a good way to get the price lower or negotiate a lower interest rate. With that said and depending on your experience level, a good realtor can be worth their weight in gold in terms of liability protection and experience. Just depends on the situation. 

3. Why is the owner wanting to owner-finance to you? It is important that you understand his/her motivations, not only will this help you tailor your deal but it may also help you avoid buying a dud. Motivation is key - it will dictate terms of the deal in more ways than one. 

4. Everything is negotiable - do not forget this!

Best of luck!

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  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    6y

    This a dangerous approach to real estate investing in an over priced market. Getting creative on the down payment is asking for trouble. Having skin in the game is vital to your success. If you can't afford the 20% maybe this property isn't for you. That's not what you want to hear but we are at the top of market right now. That's how people got burned back in 2008. 

    How much is the property worth in it's current condition? Is this a DEAL? How long has it been on the MLS? That can tell you a lot about the property. You need answers to questions before you make an offer.

    2Reply
  • Jonathan PfluegerPro Member
    Ben Lomond, CA · Member since 2016 · 338 posts · 337 votes
    6y

    @Isamar Ochoa

    Owner financing is completely negotiable and an excellent option under the right terms and conditions. There are a few things to keep in mind as you evaluate this deal: 

    1. Always negotiate the terms of the note with your exit strategy in mind. For instance, a 3 year note vs. a 20 year note will affect how you structure your deal. Will you do interest only for 3 years and then refinance or ask for an amortized loan stretched over 30 years with a 20 year balloon. These are just two options in a a endless sea of options, but tailoring your offer to your exit strategy is imperative. Even better is tailoring your offer as to allow for multiple exits in case of the unexpected (interest rates may be at 8% in 3 years - who knows?).

    2. Do you have to use a realtor for this transaction? If you can save the owner the 5-6% realtor fee and pay a lawyer a set fee this may be a good way to get the price lower or negotiate a lower interest rate. With that said and depending on your experience level, a good realtor can be worth their weight in gold in terms of liability protection and experience. Just depends on the situation. 

    3. Why is the owner wanting to owner-finance to you? It is important that you understand his/her motivations, not only will this help you tailor your deal but it may also help you avoid buying a dud. Motivation is key - it will dictate terms of the deal in more ways than one. 

    4. Everything is negotiable - do not forget this!

    Best of luck!

    4Reply
  • Arlen Chou
    Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
    6y

    @Isamar Ochoa I agree with @Jaron Walling you need to be very careful that you don't take on something that is too big for you to handle. With that being said you don't really go into your business plan on how you will afford the monthly payments PITI nor do you indicate how big your cushion could be.

    Based on the following assumptions:

    • You can afford the monthly PITI
    • There is a fat $ cushion 
    • The renovations are all above board 
    • The comps show that there is a large upside delta between your purchase price and market prices
    • You have good credit
    • You have a large 6 figure amount of cash for a down payment

    In my personal case, I would actually offer a higher interest rate for a lower down payment. Once I am in the unit, I would refi with traditional lending. Keep in mind that the lender will probably NOT take any rental income into account for the refi. I am not suggesting this is what you should do, just what I would do if everything aligned.

    Keep in mind, for the above strategy, your credit and W2 will need to carry the weight of the refi process. The big danger is that the seller says YES and your numbers are extremely optimistic and then your traditional lender does not give you a refi out of the situation. This is kind of a complicated situation with lots of moving parts. It could be a great move or a total disaster. I highly suggest that you talk to somebody who knows the area, knows the rental market, and can give you some deep-dive knowledge in leveraging these types of deals. 

    Think long and hard about the finances of this situation. Just because it is a good deal does not mean it is a good deal for everybody and every situation.

    Good luck with whatever you decide.

    -Arlen

    3Reply
  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    6y

    "3. Why is the owner wanting to owner-finance to you? It is important that you understand his/her motivations, not only will this help you tailor your deal but it may also help you avoid buying a dud. Motivation is key - it will dictate terms of the deal in more ways than one."

    @Jonathan Pflueger  This exactly. The motivation to sell something isn't always positive.

    1Reply
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