How To Structure This Owner-Finance Deal

17 Replies

I have this deal I want to finance using owner finance.

After I get the contract signed what’s the next steps? 

I have a motivated seller that I want to present this offer to ASAP.

Thank you...

@David Brown Open escrow with an escrow company, title company, or attorney, depending on what's common practice in the state you're buying the property. For the owner finance part of it, you'll need a Note and Deed of Trust or Mortgage, again depending on the state you're selling in. You can use boiler plate forms from Staples or use the forms that the title company or attorney like to use. The title company or attorney will guide you through the transaction and you can complete these forms during escrow. For the purchase agreement, you just need the basic terms laid out.

@David Brown , first you should make sure you understand the difference between money mortgage and contract for deed, as this are two distinct ways owner can finance your purchase. 

1. Money mortgage (preferred way for the buyer). You are the owner of the property and the other party acts as a bank. Standard foreclosure laws and protections apply. If you choose this rote, use the title company. They can help you in creating and recording money mortgage.

2. Contract for deed (preferred way for the seller). Seller remains the property owner until the contract is fully executed (last payment is made), buyer has benefits of ownership, but if something goes wrong, it's a contract termination not foreclosure. In my state forms are available from secretary of state, or use a real estate attorney. Make sure your contract is properly recorded with the state or you may face a fine. 

Good luck.

@David Brown Makes sense. If you need any assistance (for example, if she refuses and prefers cash), I am more than happy to help. Always looking to partner with like-minded individuals. 

@Ryan H. More competition and higher prices in this area which typically means that the homeowner will sell it. Plus, with laws in NJ, (I'm not a lawyer, just spoke to some about it) the homeowner could say they were fooled or something. 

I would be curious to know how many investors are really purchasing residential real estate deals with owner financing...

The idea of owner financing in the context of a residential property has always seemed to me to be a bit of an urban legend; something promoted by so-called gurus to new investors hoping to get started buying deals with "other people's money" and no capacity to get a loan from a traditional lender.

Let's consider the the most basic version of owner financing:  Buyer agrees to purchase property from seller.  Seller agrees to hold promissory note in the amount of 80% of the purchase price.  The promissory note is secured against the property as collateral by way of mortgage recorded against the deed.  Buyer pays the remaining 20% at closing in cash.  Thereafter, buyer makes payments to seller as set forth in the promissory note.

Here's why I think the foregoing rarely happens in residential deals: 

(A)  It requires a seller who either owns the property outright, has a very small balance on their mortgage, or has a substantial amount of other liquid assets such that they could have already paid off the property.  The only way the seller can agree to owner financing in the example above is if they do not need the proceeds from the sale of the property to pay off the existing mortgage.

(B)  It requires a seller who does not need the proceeds from the sale of the property to fund the purchase of their next property.  Again, if a seller agrees to owner financing, they are agreeing to leave some or all of their proceeds in the deal, by way of loaning the funds to the buyer.  I would imagine that most sellers need to use the proceeds from the sale to either pay off the existing mortgage (discussed above) or to put toward their next home.

(C) It requires a seller sophisticated enough to understand what owner financing means and to appreciate the value of the income stream that will accompany the promissory note.

How many sellers of residential real estate do not need the proceeds from the sale to (a) pay off the existing mortgage, or (b) use toward their next house, and (c) are sophisticated enough to become a lender?  I would say very few.

I could see that owner financing in the context of commercial property may be more likely because it eliminates some or all of the issues I outlined above.

Just my two cents.

@David Brown Has the seller already agreed to owner financing and you are wondering about the mechanics?  Or, are you preparing to present an offer to the seller with owner financing as one of the terms and, in essence, you are going to be broaching the topic of owner financing with the seller for the first time?

@David Brown Congrats on the deal!  Once you have a seller that has agreed to provide owner financing, then, as other commenters have stated, it's pretty much just a promissory note (which governs terms of the loan and creates obligation to repay) and mortgage (which secures the loan against the property).  There may be a few other ancillary documents required by NJ law. Your attorney or the title company should be able to draft the documents. 

Will the owner financing be the only loan in the deal?  If there is other financing (e.g., 50% owner financing and 50% hard money lender) you will likely have to address priority of the mortgages (i.e., which loan will be senior and which will be junior) as well as the interplay between the lenders (e.g., will junior lender have any cure rights if you default on senior loan and vice versa).

@Ryan H. I wouldn't call it "an urban legend". It's not the most widespread way to sell a house, but there are tax advantages to those who would prefer them and don't need the money, there's contract for deed options for those purchasing low cost homes, there's people like myself who would like to purchase a property, rehab and sell it on seller financing...

I think it's more accurate to say that there are newbies who hear about all these creative financing methods and think it's their way in when in most cases they are best reserved for more experienced investors. That doesn't mean there aren't people and situations that it is ideal for.

@Ryan H. , I am getting ready to close on deal right now using owner financing. Details: Owner has three properties, one SFH and two duplexes. I am paying cash for the SFH and he is owner financing the two duplexes. He is older, and wants to have an income stream for the next several years in case he or his wife end up in assisted living. He is worried about having a huge sum of money in his bank account that the state can come after for the living costs. It is advantageous for me because he is offering, after negotiation, very competitive terms. Win win.......