Possible owner-finance deal

15 Replies

Got a call from a yellow letter today. Guy and his wife have lived in the house for 45 years (inherited from in-laws who were the original owners) and they own it free-and-clear. Property is a nice 3/1.5 raised-ranch on a quiet street. Comps in the area have been selling for around $85k but values are going up. The way he described the house it's been well-maintained and needs little work to be move-in-ready. Typically I'll refer deals like this to a realtor to sell at retail, but this one I'm thinking a little differently. What I'd like to do (once I actually view the property and get a good idea of the condition) is to offer around $70k but see if I can pick it up as a zero-down owner-finance. I'd propose they carry an interest-only note at 5%, 30-year amortization with a 3 to 5 year balloon. I would then do the needful to get it ready for tenants and rent it out for $900-$950/mo (would really like to do a 2 or 3 year lease-option). If I can work out the owner-finance part that would make my debt-service on the property about $300/mo and I should cash-flow about $150-200/mo on it. Could someone verify this for me to make sure I'm not missing something? I want to make sure my numbers are good before I even float this to the seller.


Hi @Jim Viens  ! Your numbers look good to me.  It's a great strategy if the folks don't need cash right now.  My first meeting /call with a seller is all about listening  so I can structure a solution to their 'problem', like yours is I'm sure.  Because they have been living in the property for 45 years, they may not be that open to a creative solution with a balloon down the road, is all I'm trying to say.  I do your strategy more with younger sudden transfer out-of-town for work types.  As you ask them what they plan on doing after the house is sold, your answer to the win-win will come to you!  Good luck! 

@Steve Vaughan  thanks for the reply! Yeah...I tend to go for what's best for the seller (sometimes even at the expense of anything I could possibly get out of it) so this is a little bit out of my M.O. The homeowner mentioned they were thinking about moving into a one-level ranch as the main entrance in this house is on the bottom level so they have to go up stairs to get to the main living area. So there's a little bit of a motivator there (albeit not much). We'll just wait and see at this point I guess. The house is pretty close to retail-ready so there would be no meat on the bone for a standard wholesale/flip/etc as I seriously doubt they'd go for selling the place for anywhere near 30% below market.

Well the way I look at it is if it's Free and clear I'll give them $100% for their property maybe 105 % for the property, but my terms.

Say they got expired listing, they try to sell for hundred thousand, didn't get any offers

I'll go to the free and clear seller and see if I can get you not 100% but 105% for your house would you be open to some creative terms?

Then I'll take market rent let's say it's 1000 a month and I need a $300 a month positive cash flow out of out of it

So I'll offer them $700 a month for a period of time

I know with installment sales there is imputed interest I know you need get a minimum of imputed interest so I check out the imputed interest table on the IRS.gov website and charge them that.

That I work backwards and offer them 105% of the value of the property with the cheapest possible financing. I have three hundred dollars a month, no banks, put a long-term renter in there, no Dodd Frank because I'm not living in it

The way to sell this to the 60 to 70 year-old couple is,

if I can give you not 100% but 105% of value,

Think of this payment that I give you as an annuity stream, because if you got all cash today you probably have to save it and live off the interest or live off payment if you bought an annuity, right?

Go to investoPEDIA.com and print out all the stuff that they have on annuities.

Go to iRS.gov and print out all the stuff that the IRS has an installment sales of residence.

Go to Nolo.com and print out the seller financing articles.

Offer to see their CPA and give them all that information, and help them sell on installment sale

You take possession with two pre-pay payments paid for the future possession, and move a renter in, and make $300 a month positive cash flow.

If they want a solution to, "what if you don't pay me I have to foreclose?"

Offer to have a warranty deed held in escrow with escrow instructions that if you are 60 days or more lady they get the house back. They just have to honor the lease.

And in 12 to 18 years you have a free and clear house.

Do the math

@Brandon Turner

Is installment sales for free and clear houses and your creative finance book?

Brian, how many of these deals have you done? While on paper it sounds great, but have you actually been able to get 100% owner financing? Why wouldn't owners simply rent the property themselves and save the few extra hundred bucks you're making? Also, wouldn't the owner be afraid of getting back the property with a bad tenant if you were to stop paying them? Thx

@Brice Hall

Listen here to "how to negotiate terms deals."


1. Build rapport

2. Have an upfront agreement (avoid let me think it over)

3. Get the real feelings about listing w an agent, FSBO, renting it out (DIY or Prop Mgr)

4. Get the cash price lower

5. Use "what if step" to avoid having saying no, no way to your offer.

The  big thing that's a red flag to me in your plan @Brian Gibbons  , is that there's no set-aside for taxes, insurance, vacancy, maintenance or cap-ex. So, accounting for those items I worked backwards from a basis of $900/mo rent, took out $150/mo desired cashflow then deducted for the other expenses leaving about $300/mo for debt service. I'd love to be able to offer these people 105% for their house but I just don't see how the numbers would work even at under 4% interest unless I put 20-grand down and I just don't have that right now. So if the terms I presented in the OP don't work I'll walk from the deal.

Never, ever negotiate to buy a property with a loan term of less than seven (7) years minimum. 10-15 or more is preferable. Don't freak out about the interest rate as much as the payments, just as long as they cash flow. 

I've been through enough real estate cycles to know that having an impending balloon only goes to prove Einstein's theory and the time magically gets faster and faster. 

Btw, Einstein's is also attributed to the phenomena that astonished him the most - compound interest. (He presumably bought a car or something and financed it).

I wold offer them a few options,  Maybe 30 year fixed, or a 10 year ballon etc.

Then point out that by selling direct they save on realtor fees etc.  They may need all the cash or they may be interested in the annuity concept.

@Bob E.  - He did hint at the idea of preferring not to work through a realtor. I'll be following up with him and will get a better idea then if he's interested in the owner-finance option. I like the idea of comparing it to an annuity, but I also know that I need to be VERY careful there as I don't want it to sound like I'm selling any kind of investment. That could go very badly if I'm misunderstood, and I'm too pretty for prison. ;)

@Jim Viens    I don't think you need to ever mention an annuity, just the facts that he will receive regular monthly payments without having to pay 6% RE commission, closing costs, etc.

If he asks, his interest in the note can be assigned to hie heirs and then they would get the payment, if they want cash out they can sell their interest in the note at a future date.

You might also suggest that he use a servicer, they will collect monthly payments and calculate the end of year statement with tax information (you will need this if your are going to deduct interest).  I use a servicer that charges $18.50 a month.

@Jim Viens  one other important thing, make sure to get a right of first refusal if he sells the note.  If at some time in the future he or his heirs look to sell the note at a discount you want to at least have a shot at the purchase.  Often notes that are sold on the secondary market trade at a discount.

@Bob E.  - good point. I've actually thought about investing in discounted notes once I have the cash to do it. Have to stick with private notes as I believe most bank-held notes tend to be sold in bundles...but that's not for this discussion. :)

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