Is this a good candidate for owner financing?

16 Replies

I've never done an owner financing deal, so I'm wondering if anyone here could look at the situation and let me know what they think. It could be I'm completely wrong and that another exit strategy is even better....

The lowdown: I'm in Los Angeles, where the property is located. Single family home. Owners live out of state (in WA). They bought the place for their daughter to live in while she was here in college (must be nice!) and she's since graduated. They have a family friend in the property now as a tenant.

They're looking to sell but are not distressed at all. Not in arrears. Never been late. Tenant is also current on rent. They plan to list it and just leave it up on the market until it sells, which, around here, would happen very quickly due to shortage of inventory.

I estimate the ARV at $527K. House is in excellent shape and needs, at most, interior paint. Owners owe $200K on a conventional 30 year fixed at 5.5%. No prepayment penalty.

My question is this: is there ANY option I can present to them that would be better for them then listing it and selling it the old fashioned way? 

Here are my thoughts... would love to see what you guys think and if I'm completely off-base: 

Seeing as they're under no pressure to sell, they're obviously not going to accept a cash offer (on a $550K ARV I'd normally offer about $405K cash). The owner told me explicitly that they want top dollar for the place and they're willing to wait in order to get it.

I'm thinking that I could offer then an owner financing deal that goes something like this. I give them a 10% down payment towards the $527K and they finance the rest to me under the current terms of their mortgage. I'll then turn around and sell it (or lease option it?) to someone else whom I'll qualify -- someone who is just under the bar of being able to get a conventional loan but is still someone who can pay the bills. I get a 20% down payment from my buyer (covering the 10% I put down and keeping 10% for myself) and finance to them at, say, 8%. So what I end up with is $52K in my pocket and a monthly cashflow in the difference between the 5.5% I'm paying and the 8% i'm charging my buyer.

NOW, assuming that this clusterf*** of a transaction that I just described is even feasible, my next, and more important question is, what can I tell the current owners that will show them that this option is better than just listing it and selling it the old fashioned way? Again, my thouhgts that I'd love feedback on: (1) they no longer have to pay property taxes, but they still are collecting a check every month for MORE THAN their mortgage payment (cashflow for them every month). (2) They avoid having to pay upwards of 24% in taxes on the lump sum they'll receive by selling with an agent. (3) They'll avoid having to pay the realtor's commission.

Thanks in advance for anyone who actually read this whole thing. I would really REALLY appreciate anyone who has any input.

Do you already have a buyer lined up?

Hi @Jason Pachomski  

Very informative, well done !  As far as my understanding from what you posted, I don't see what is the asking price by the owner (unless they are waiting for you to make an offer).

You really have to make sure that you have enough profit margin/reserves in order to make it worthwhile for yourself while being more attractive than all cash offer.

In regards to owner financing by yourself, you need to make sure you offer better rates than hard money lender, which you are with 8%, you can even go a bit higher.

Your bullet points are good to convince the owner to go with owner financing, just make sure the finance is not too tight on your end to make a profit

From what I can tell it seems like the numbers make sense. I have no idea how the bank and end buyer will feel about the S2 part. I have no experience in that area but have heard that concern be raised before, as the bank most likely has a clause allowing them to call the 200K when the title changes. I could be way off but just something to consider. 

Thanks Issac! Yeah I've heard that discussed before as well (on the BP podcast as a matter of fact). I don't think it would be unethical to also qualify to the seller that the bank calling it due rarely ever happens (from what I've heard). It makes sense that they wouldn't too right? I mean, they call it due and they'd be losing out on 26 more years of interest payments...

@Travis Foster  I don't currently have a buyer but I don't foresee having any difficulty in finding one the way the market is in LA right now. 

@Eldar Manetsh  Hello fellow Valley dweller! Yeah the owners haven't decided on an asking price yet and they're actually planning on getting it appraised before they list it. If I can convince them to "be the bank" I can realistically offer them whatever it appraises for though right? 

@Jason Pachomski  

Great scenario! The missing piece as I see it is the catalyst to motivate the seller.  There is no apparent pain here for you to remove from their life.

That being said, if the sellers would enjoy a superior steady income without the liability & management that comes with property ownership tenant, you can make a case for them to let you buy the how subject-2 their 1st TD.   If they plan on taking a capital gains tax hit on selling the property, you can point out the advantages of an installment sale & getting a return much higher that the bank or bond market can provide them ( they can also help their new graduate daughter by gifting her the income now or in the future if they wish.)

Your exit strategy can make this a bit more complicated.  If you plan to resell to an owner occupant & also keep the sellers original mortgage in place & take a spread, there is the risk that the new buyer can default in the future & destroy your sellers credit.  These risks must be addressed before you proceed & I suggest you consult a good real estate attorney to help you structure the deal.

Dodd-Frank rules probably won't apply if you don't more than the minimum number of seller financed transactions each year.  But I am always extra cautious with lending involving an owner occupant these days.

Good luck

Want to help this guy, Tell him the truth. His best out is a 1021 exchange probably . Every so often you pass on a bad deal, and if you have character you pass on a good property rather then hope to pick the pocket of someone with no problem. It seems he is in a position to get close to market.  Is there a dime in it for you somewhere, my first thought was this guy if he doesn't exchange is going to have a lot of bucks to invest and may be a lender for you rather then get a low percent on the money elsewhere elsewhere. But to avoid that tax hit he should do the exchange. But then what did he buy it for, maybe the tax won't bother him. Too bad your not licensed.  

Brian makes a whole lot of sense. Treating this guy right in this transaction may open up a good relationship or referrals and ultimately lead to some good stuff. Thanks Brian!

@Brian P.  @Isaac Guzman  

 I totally agree. I'm not lookin to do anyone dirty. I literally have no experience in this area (or many other areas for that matter) so I definitely appreciate all the input. I spoke with my mentor here in LA and she kind of had the same opinion. There isn't much of an incentive for the seller to do anything except list it and sell it. They're not in any hurry to sell, and they want top dollar for it. I was thinking when I call them next (tomorrow) I could explain the concept of a lease option and see if they show any interest (at least it'd save them the realtor commission) but otherwise I think they'll be a follow-up. See if the house doesn't sell and then contact them again. In the meantime, I was gonna offer to be their "man on the ground" here in LA being that they're so far away. No idea what they could use me for but ya never know...

@Jason Pachomski  , you can definitely offer them the appraised price, but you have to make sure you are not  loosing money from the whole deal, you always have to take the worse case scenario possible- meaning leave yourself enough room to bargain.

But I really think you are on to something here, as long as this property stays only on your radar and not with an agent, even as pocket listing, do enough to keep the owner interested in the deal but not too much to loose from it.  

You can spin the potential benefits 10 different ways to the seller, but if they aren't motivated they wont have any reason to get creative with you. Step into the seller's shoes and ask yourself if YOU would sell your own property in this way in a seller's market.

After talking to some people both on here and off, I'm wondering if there would be any incentive for me to buy it on a lease option. The benefits for the seller would be the continuation and increase in monthly cashflow (current rent + option fee) as well as not having to handle any repairs that come up. To @Account Closed  's point -- you maybe be right though... I don't know if there's any scenario that would be attractive enough to a seller who's holding all the cards (pretty house in a seller's market with no pressure on their end to sell quickly). I'm also not even sure what my strategy could be after I buy it with a lease option...

I love creative deals, but this one doesn't fit the mold. Try marketing to low equity absentees who really need your help. The more leads you have, the less you will be tempted to waste your time on unmotivated sellers like this.

Hi @Jason Pachomski  

I live in Studio City CA.

Here's the issue, once you get over $350K or so,

SFRs dont cash flow (PITI + Maintenance) versus rent.

Buying on Terms (Lease option, sub2, Wrap-AITD, Installment Sale on Free and Clear Properties) to non motivated sellers is almost impossible.  So find a motivated seller.

Your exit can be a straight rental or a rental with a ROFR instead of an option may be something to look at.

A Sandwich Lease Option with an Equity Split with the Seller is another good idea for more expensive homes.

The way I get sellers to look at "creative financing" is to ask them questions.  The link to downloading some of these questions to ask the seller is below.

"Being the Doctor For Home Seller Problems" is here

Don't sell, act like a financial planner, ask questions.

Best of Luck!


Great stuff @Brian Gibbons  taking the position of a financial planner seems like a great route to go and I will definitely start using that mindset as well. 

@Jason Pachomski  Good luck and thanks for the post, it helps us all.

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