Owner financing opinions

12 Replies

Anyone recommend owner financing? I have a couple properties I own outright and I’m tempted to try this route but don’t know much about it. I have a couple properties I still have a mortgage on and the tenants want to lease to own. But I understand that probably can’t be done.

I've lease optioned plenty of houses with a mortgage as the Optionee and Optionor.  When they exercise they can get a new loan.  LO into a wrap is pretty advanced and risky for the Optionee.  

Are you sure you want to sell all these?  Problem properties?  Peak value in your opinion?

I wouldn't owner carry until I learned more about it. I would and do only carry for owner-occs, not investors.

The tenants want to LO. That's great, but what does John want? Why are you looking to exit?

@John Morgan we love owner financing! There's no maintenance or worry of increasing property taxes and insurance. The tenant pays for it all! 

I have found it's a great addition to our portfolio and our buyers/borrowers have all been paying as agreed. 

We have never done a lease option but some of the properties we owner financed had an existing mortgage (wrap) and we haven't had any issues. 

The one big thing is owner financing payments are taxed as interest payments with minimal deductions. 

Best of luck!

@John Morgan

I’m glad you asked this question because I was about to start a new post about OF. For the others that commented i would appreciate your feedback on the following:

Let’s say some motivated young buck approaches me and wants to buy my 3 flat because I own it outright and he tells me that by OF I can avoid paying the tax on capital gains. So he gives me a $5K down payment, and I agree to hold the paper on his loan at 0% interest for 360 months. Suppose he pays on time every month for 2 years, and then he stops paying me. How do I avoid getting screwed if he stops paying? Also, since I haven’t been collecting rent from the tenants at what point can i tell them that they need to be paying me instead of that young real estate investor since he’s now defaulting on my loan?

Thanks in advance for the feedback.

Originally posted by @Matthew Carlson :

@John Morgan

I’m glad you asked this question because I was about to start a new post about OF. For the others that commented i would appreciate your feedback on the following:

Let’s say some motivated young buck approaches me and wants to buy my 3 flat because I own it outright and he tells me that by OF I can avoid paying the tax on capital gains. So he gives me a $5K down payment, and I agree to hold the paper on his loan at 0% interest for 360 months. Suppose he pays on time every month for 2 years, and then he stops paying me. How do I avoid getting screwed if he stops paying? Also, since I haven’t been collecting rent from the tenants at what point can i tell them that they need to be paying me instead of that young real estate investor since he’s now defaulting on my loan?

Thanks in advance for the feedback.

All of that would be specified in the contract.  I know my commercial property loan says if I don’t pay my mortgage the bank has the legal right to change all rents to them and me as the dead beat payer loses control.  The same would be for you (you’re the bank) and the buyer would lose out.  And 0% interest is about 6% too low.  ;)

I love seller financing as a buyer. I’m about to close on a 4-plex with 15% down, 6% interest, 7 year balloon, 25 year amortization. 

The seller will cash flow nicely and end up with way more for the property. He also gets to put off some capital gains.

Eric

@Eric Mayer how do you typically structure a deal like this? Is there a general format used so that it works out as a win win for both parties? In other words, is there a formula/calculator or is this something learned from speaking to other savvy investors?

I ask because I am considering putting on an offer on a 4 plex and am afraid traditional financing routes are going to take too long and may be unappealing to the seller due to the lag time

Thanks in advance!

VP

@Vishal Patel All of those numbers I mentioned are negotiable and we went back and forth a few times to reach those terms. This is just stuff I picked up on my own really.

I typically start by offering full asking price (assuming it’s a decent deal,) but I tell them I am giving them their price in exchange for my terms. You want to put as little down as possible and give yourself enough time to build 30% equity to refinance. The 7 years will give me more than enough time just paying the minimum. 

Eric

@John Morgan Owner financing is a great option and creates a win-win as long as the terms are agreeable. I know there are people who do lease to own with a mortgage in place, but it is more complex. Many have done this on commercial apartments as well, but you would certainly need to dive into it more deeply. 

@Ryan Proffit That is a good strategy, but on this one I just went in with full ask, 15% down, 5% interest, 30 year amortization, 7 year balloon. I feel that was a fair offer for both parties, but I did go a bit higher on the monthly payment after some negotiation. Offering full ask will get most sellers to think about it in my experience. 

Eric