Owner Financing vs Bank Financing? Any thoughts?

Question

So one of the Investor around my marketplace is selling some properties off his portfolio and wanted to know the best to approach him? I am debating whether to get a loan from a bank with lower interest rate or owner finance it? And can I do an owner financing and then refinance it with the bank once I gain some equity into the property by paying it off for couple years?? what are some other options that I should consider?

Doris Ng · Answer

I always prefer to go the route of seller finance, if possible. In my experiences, I usually put in a lower down payment and your closing costs are minimal. Not sure if you have a realtor involved. Additionally, your DCR maintains in good standing since your credit is not pulled/reported. This also allows you to acquire more property faster.

Frank Wong · Answer

Go get approved by a lender and approach him to purchase it as a finance deal from a bank. You want to be prepared and appear as a qualified buyer.  You don't want to scramble to get approved once you start the conversation.  If the seller prefers to finance the deal they will let you know.  I find that most investors selling off their investments want the entire amount.

Kerry Baird · Answer

I just got one under contract yesterday.  I said I was prepared to pay him over time, and he asked, “How does 6% interest with a balloon in 3 years sound?”  Great!  He was an older man, and was concerned about capital gains when selling this rental house.

David Fernandez · Answer

@Farhan Khan, the best approach is to understand why he/she is selling part of his portfolio and solve his/her problem. Does he/she need the money to buy more/bigger properties? He/she won’t be interested in Seller financing. Does he want to unload some properties that he/she can’t manage? Is he/she selling because he/she thinks the market is too hot and would like to wait a bit until a new buying opportunity comes? What is he/she going to be doing with the sale proceeds? If you understand his/her motivation to sell, you will be able to put together an offer that works best for him/her.

If you are not sure, you can also give him the option to chose what works best for him, so he can decide.

Option 1: $X (mention that you will be financing this purchase)

Option 2: $Y, with $Z carried by the Seller at x%, interest only, balloon in 5 years.

You can get as creative as you want, but you need to know why the Seller is selling. What’s his/her goal. If you can answer this, you will have a higher chance of putting together an offer that works for him/her.

Mark Sewell · Answer

There are two parties to this transaction, and you are one of them.  So offer what you are prepared to do, and be earnest and upfront.  You are the buyer, and so offer what works for you.

@Frank Wong might be correct, but let the seller be the one to tell you that.  Coming prepared with two offers is a good offer.

Luke G. · Answer

Others above have said that sellers always want their money, that most certainly is not the case, especially in off market deals.  I’ve closed on quite a few deals where the seller didn’t want the entire sum to avoid the capital gains.  A lot of times these are tired older land lords that want a stable income and they don’t have to manage their investment anymore while still getting a monthly check but it takes zero effort.

I’ve gotten into properties with a 20-25% note from seller and bank financing the rest, but you need to keep in mind that you need to have an exit strategy when the agreed upon balloon comes due, but I’ve had sellers agree to a ten year balloon as well. They like the ease of the transaction, it lowers their tax liability, and keeps my out of pocket and payment to a minimum. Can be a win win for everyone. You may need to shop around some for local lenders that will agree to it, but I’ve got a couple where I know I can submit the deal and they compete over me at this point.

Dennis M. · Answer

Owner financing is a great option - if- it’s done right !

It all comes down to the terms . Ideally You want a good interest rate , low down payment  ,no balloons , and for a long term

Steve Vaughan · Answer

Whether you can refi a SF deal or not depends on how you do it - Land Contract or Mortgage/ Deed of trust.

With a Land Contract you own nothing until its paid off so a refi will nol be available.  It will need to be a purchase loan when you go to cash the seller out.

There a different types of owner financing.  Get the kind where you own it during the payment period.

Frank Wong · Answer

You are overthinking it.  Sellers want their money.  The capital gains are not your problem.  Focus on showing them you are a well-qualified buyer and you are serious about closing.  That's how you get your offer accepted.  Any mention of seller financing before the seller does shows that your finances are not secured.   Keep it simple.  Real estate doesn't have to be complicated.

Dennis M. · Answer

my deals looked like this- 5k down -5.5% interest -for 7 years -no balloons- no funny business. Simple easy terms without hoops and headaches . Better than a bank imho .banks are bullies !

Owner Financing vs Bank Financing? Any thoughts?

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