What does a good Owner Finance deal in Dallas look like?

Question

Hello,

I'm currently looking at acquiring a property here in the DFW area for $170K with conventional financing.  The rents in the area are around $1600, so it is just shy of a 1% deal and wouldn't make a great rental property.  If I were to owner finance this house, and convert a renter into a buyer, what would that look like and what types of metrics are typical for cash on cash return, etc.?  I believe that this deal would offer better cash flow than a rental and come with less headache of being a land lord (e.g. property management, vacancies, maintenance reserve, etc.).  Is there anything that I am missing?

Thanks in advance,

Alex

Travis Hughes · Answer

@Alex Montiel the due on sale clause can be a risk, but probably not a short term one.  In a past life, I did owner finance wrap transactions.  No one on my team, nor anyone I had ever met, had heard of a bank calling a note due under the due on sale clause.  So far so good.  If interest rates and prices continue to rise, though, it could mean danger.  If prime rates are a few percentage points higher than your underlying loan and the asset is appreciated significantly, then it would be in the bank's best interest to foreclose and re-sell the asset.  They would make more money that way.

Overall, having worked owner finance wrap transactions for a couple of years, my opinion is that they aren't worth the hassle.  Between the due on sale clause, buyer default, federal regulation compliance, etc, there are just too many possibilities for failure to be worthwhile.  You can deploy your capital with similar rates of return and much less risk.

Alex Montiel · Answer

Hey @Andrew Herrig,

I considered the "due on sale" clause, and saw that as a major risk area in this strategy.  However, a few folks that "teach" this strategy assured me that as long as the bank keeps getting paid, it is unlikely they will call the note due. They didn't offer much more information apart from trying to get me to sign up for their expensive training course / mentorship...

I'm really glad you brought that point up about refinancing.  I was actually thinking about that this morning when my wife asked me what if the buyer refinanced and the light bulb went off in my head.  I re-worked my Excel file to make the owner financed price a minimum of the down payment I made, plus the mortgage balance w/ the bank.  You also made a good point about this working better in the lower price range where the PITI is close to the rent (what I attempted to do w/ the "Amount left for P&I" row in my Excel file).... but after thinking about it a bit more, that renter would have to make 3x the rent, which on an annual basis would be $57.6K.  I imagine that they would be able to get traditional financing on a house like my example, barring any odd circumstances (high DTI, bad credit history, no creidt, etc.).  So even though the numbers may look good on paper, it may be hard to translate that into the real world...

Andrew Herrig · Answer

@Alex Montiel I don't know all the legalities of owner financing, but at the very least you would be risking the bank calling the loan due if title transfers.

Also, in general, owner financing works best on sub-$100k properties where the PITI to the end buyer is fairly equivalent to the rent.

I can't quite tell from your calculator what you are doing, but it looks like you are proposing owner financing the property for less than you paid. I would definitely NOT do that. You risk them refinancing into a loan with better terms in a year or two and cashing you out, in which case you are nowhere close to recovering your investment.

Bruce Lynn · Answer

The one thing you are missing is how often buyers with owner financing actually become owners.

My guess is fairly infrequently.

Plus it is pretty tough to do unless you have 100% ownership of the home  (no financing on your part).  Otherwise you are selling it contract for deed which while legal is pretty tough to follow the regulations required of you.  Most good board certified real estate attorneys I know will tell you don't do contract for deed deals.  It's just too tough to follow the laws.  If you have a saavy tenant/buyer you can loose the house to them if you did not follow all the laws.

If you owner finance you want to do with deed of trust, and therefore you need 100% ownership of the home.