Owner Finance Business Model

5 Replies

I manage a small fund (less than $1M). To date, we've been joint venturing with other investors on flips and subto deals. I am now looking into how we can make owner financing the base of our business. I've been exploring what does a sustainable model for this looks like? ;

Here are some of the models I've considered. I'm not sure how likely some of them are. Has anyone had any long-term success in any of these or other models? Thank you.

Scenario A

1. Purchase the homes, make minor repairs, and sell with owner financing to create the notes. 

2. Sell the notes to note buyers. Rinse and repeat. 

Pros: No long term responsibility for the note. If I know what kind of notes the buyer wants, I can work backward from there in structuring the notes, properties, and buyers.

Cons: Discounts and other criteria from note buyers might make it difficult to find enough good opportunities.

Scenario B

1. Purchase the homes, make minor repairs, and sell with owner financing to create the notes.

2. Borrow against the notes or cashflow through a bank as a portfolio loan, business loan, or business line of credit. Rinse and repeat.

Pros: Repeatable and predictable. We still own the note and cashflow after bank loan is paid off. 

Cons: Finding a bank to do it. Qualification. Limits. Terms.

Scenario C

1. Purchase the homes, make minor repairs, and refinance through traditional lender.

2. After refinancing each property, sell on a note.

Pros: Due on sale. Longer process per house. Will the bank continue to refinance us if they see that past houses have been transferred. 

@Ram Gonzales

Companies can make this model work but here are what most do

1. Buy as an REO or tax sale in bulk.

2. Get borrower qualified and sell with owner financing

3. Hold it for 12-18 months and sell for 75-85 cents in dollar. Sometimes you get more but that is what I would budget

As you can see you need to have a wide spread and a lot of properties as some instances borrowers will fail.

I have always found its more profitable to exit the deal and sell for cash unless owner financing is significantly more or you cannot sell as cash.

Most not holders don't want to have more than 65% LTV, maybe a little higher for higher price point homes. My suggestion would be to sell the property with two notes, a 1st and a 2nd. Make the 1st 65-75LTV and the second the balance, (make sure to get a solid down payment). Then sell the 1st lien note and hold the second. If all goes well you will not have any cash left in the deal so even if the borrower defaults you will not have a lot of exposure.

@Ram Gonzales - So long as you target non-pros as the buyers of the notes you create I know of others who implement similar models. If you were to approach a group like retirees making pennies in a savings account and averse to volatility, a note paying 8% where the buyer made a 10%+ down payment and has 650+ credit is a good opportunity. 

Forgot about selling the notes to investors. We're a greedy bunch.

Bob E's model where you create a 1st and a 2nd is something I've been considering to do myself recently.