Owner Finance Deal

10 Replies

Hi everyone,

    Let's say there's an older gentleman who owns a multi-family property free and clear. Bought it back in '85 for $30K and is selling it because he lives a good distance away from the property, is older and looking to retire from being a landlord. I'm guessing he wouldn't want to carry back a 30 year mortgage considering he is older. Would a good approach be to see if he'll carry back a 5 to 7 year low interest mortgage with a balloon payment when the 5 to 7 years are over? If so, what are the benefits of doing this other than buying 5 to 7 years of owner financing.

    If I did this, what would be the best exit strategies to use? I would be looking to pass the property off rather quickly as opposed to holding onto it myself for a number of years. Retail buyer? Assign it to another investor?

    Thanks,

                  Mike

So your looking to sell it? After how long? What are the rents like in your area? Does it may sense to buy and hold it?

If you can get away with doing owner financing great. Usually that is for people who cannot get a mortgage of their own. Its less attractive to the seller but if he is ok with it, why not.

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Pm me and I'll send you the info on a great podcast on how to present owner financing. Everytime I visit a seller who I think might benefit from seller financing, I listen to it on the way.

Shoot for at least a 15 year amoritization.  If you have to do a balloon to get the deal that'd be fine but at least with a longer term you'd be more likely to cash flow if you couldn't sell right away (what are the numbers like?).  If you can get away with no balloon you could also wrap it if you can't get a buyer with the funds.  If you get owner financing don't assign it... Put it on the market.

You might pay more if he finances it, you don't pay more than it is worth as financing does not add value to RE.

If a podcast or other information is referenced you don't PM folks about it, 1. it may be something they are trying to become involved with or sell something and 2. if it can be mentioned in the forums it may have issues with it, may not be good to follow. With 2, others are not able to comment in the forums. BP also has rules about suggesting to contact someone concerning forum inquires rather than addressing the topic, it appears to be soliciting. And, after a podcast is mentioned, I suggest you search the forums to see if that podcast was the subject of comments, some podcasts have generated much concern in the forums, especially those dealing with financing.

The greatest benefit will likely be the deferred tax treatment of principal received as opposed to paying tax on the sale as a lump sum. Next, the interest paid on his equity will be higher than he might get by investing the money elsewhere.

Need to search "dealing with an elderly investor" !!!!

To you, at your age, saying older might be that the seller is 65, if he is over 70, he is barking at the door of elderly. Elderly folks need to be given much more attention as to their position in financing anything, they are almost an unofficial protected class as their ability to conduct business can be questioned as well as their understanding of the transaction. Often the kids will find out what was done and trouble can follow. So, search that thread and understand where your liabilities can be dealing on either side with an elderly person.

Next, even being older, they are more likely to have medical issues, often they will get into a situation where they may need to sell the note in order to pay medical costs or qualify for benefits. Why is that important to a buyer/borrower.....because it may mean a discount can be obtained on the unpaid balance, saving you thousands. Notes can also be designed to be more or less marketable, that effects the discount or the ability to sell the note.

There are many other issues, like loan servicing that you need to understand before you leap, it is not a casual fling type thing that investors seem to approach seller financing as in the forums. An investor that sets up a deal, offers a note, makes the loan (the borrower is the "maker of the loan" not the seller) takes on more liability than most are aware of, commercial or consumer deals. You have time to study since this is another "what if there were" type questions. :)

@Bill Gulley  

Your concern about my offer to answer a message about a podcast is understandable.  I didn't realize that my offer violated any rules.  I get what you're saying about researching the episode to get feedback on ethical concerns regarding the content.  I am not involved in the podcast at all, I just listen to quite a few of them.  I'd be glad to share it in this forum.  

Its buy/sell/fix/flip episode 4. Its not a bp podcast, but it's really good.

Updated almost 7 years ago

Revised with requested link. http://buysellfixflip.com/podcastitem/bsff-podcast-004-seller-financing-presentation-terms/

Updated over 6 years ago

Revised with requested link. http://buysellfixflip.com/podcastitem/bsff-podcast-004-seller-financing-presentation-terms/

Originally posted by @Tim Bishop :

@Bill G. 

Your concern about my offer to answer a message about a podcast is understandable.  I didn't realize that my offer violated any rules.  I get what you're saying about researching the episode to get feedback on ethical concerns regarding the content.  I am not involved in the podcast at all, I just listen to quite a few of them.  I'd be glad to share it in this forum.  

Its buy/sell/fix/flip episode 4. Its not a bp podcast, but it's really good.

Thanks! I have not heard it, may not listen to it, but at least others can be better informed, need a link...........thanks again. :)

Originally posted by @Tim Bishop :

@Bill G. 

Your concern about my offer to answer a message about a podcast is understandable.  I didn't realize that my offer violated any rules.  I get what you're saying about researching the episode to get feedback on ethical concerns regarding the content.  I am not involved in the podcast at all, I just listen to quite a few of them.  I'd be glad to share it in this forum.  

Its buy/sell/fix/flip episode 4. Its not a bp podcast, but it's really good.

Well, usually I don't go to links, but I did.

Should have known I'd be wasting my time, but I did it knowing that but to review as to what gets put out there.

Michael has a good reputation here, I don't recall him ever getting into details here on BP, mow I know why.

His angle as to the phycology, shaking his head and hand gestures, yes, that can be effective.

When we got to hard money lenders loan more than 100%, ain't gonna happen in reality in my neck of the woods, not without a good relationship and certainly not to a newbie off the street for the first time.

I always notice things like sale price, value of the property and how stupid we must assume a seller is, that is where I should have put my boots on.

When it got to the 5 elements of the note, seems we hit one, the sale price (which would be the loan amount at 100% otherwise it isn't in the note) but then went on a rant missing other elements, actually there are legal aspects and interest is not necessarily stated but must be computed for some types of transactions.

Seems a comment was made that a seller signs the note, so we aren't even speaking to what actually goes on, lenders don't execute notes, the buyer is the maker of the loan.

You'll also have issues of presenting terms, doing so means you carry the liability of what you presented to Harry Homeowner;

Seems there` was the mention of putting in a occupant buyer under a lease option, that was another strategy, but make sure you aren't financing that! 

It reminded me of going from a seller financed presentation to paying more than a seller was asking by paying them with zero coupon bonds, trading the future value of bonds for the present value of a property, pretty much a scam deal, but other than that, not something that happens in reality, most sellers just aren't that stupid.

Pretty much fast talking, justifying the manipulation of a price and terms to arrive at 100% with no payments (ideally) to a future balloon.

Now, Cali might be different, but doing a balloon note with less than 12 months is not an issue or different in notice, demand and foreclosure than an 18 or 360 month loan.

Salesmanship was good, take out the numbers as being the run of the mill deal, terms are much easier to arrive at than trying to be slick moving shells with no pea under them.

Now, I know, thanks for posting the link.

This just confirms that better material really does need to be put out there about seller financing. :) 

Hi @James Klafehn  

    I met with the gentleman, and the appointment went smoothly. Unfortunately the house did not live up to my expectations. There's more information on it here in one of my other posts (but if you don't feel like reading that, long story short the house was not in a very good condition and the tenants were not ideal):

http://www.biggerpockets.com/forums/93/topics/1671...

    As for the seller financing, I am just starting out my investing business, so I am looking for creative ways to finance deals. I currently own a three family house which I live in, and work full time as a teller at a bank. So on the income as a teller, I've got to get creative with the financing (i.e. I have good credit and am hard working, but my debt to income ratio isn't ideal according to banks and CU's).

    Thanks for the input guys,

                                                Mike

Let me clarify. My thinking I'd be wasting my time was before I clicked the link, when I got there and saw it was Michael's podcast, my interest peaked from knowing him here on BP.

I think Michael is great at marketing, I can tell those who have had "training" in sales presentations, nodding the head, hand gestures that "connect" you with positive body language and asking "yes" questions is trained and not natural for most people.

Companies like Met Life and Prudential Insurance, probably have the best one on one training and marketing on the planet, selling financial products is the hardest thing to sell to the average Joe. You're selling an intangible product with concepts and ideas, methods of planning the unknown. New insurance agents are trained using these techniques, the psychology  of the sale. Salesmanship is the manipulation of thinking, it works, but it cam also be over done, too much can kill any deal. Need to assess who you're talking to in a presentation.

 Having been through such sales training myself, long ago, I'm probably more sensitive to catching such techniques. If anyone has followed my posts, you'll see that I have spotted new posters leading into some guruish area before they ever make their pitch, it's from marketing experience.

I have found that a more sophisticated approach is better in financial marketing and real estate than sizzle, trying to pull on emotions rather than business senses. Going this route means you need to take command of the situation early on, you need to be seen as the expert in the room and demonstrate a bit of understanding, empathy and interest in the other party. One of the reasons I harp on learning RE basics, knowing that will make you the expert in the room.

Too much sizzle in RE can become illegal, unethical and just dangerous, it's called "fluffing" and/or "puffing" overstating facts, giving implications or misleading others. There is no "presentation cop" sitting at that kitchen table, but rarely do RE transactions go smoothly without any hiccups. Putting too much buzz or fluffing or puffing in a deal can backfire on you.

The thing about seller financing is that while the title transaction may have been accomplished, the aspects of how you put that financing deal together extends the liability and circumstances surrounding the transaction over the term of that loan, the entire deal is never finished until that note has been fully paid as agreed. Seller financing is an installment purchase transaction even though you may have taken title, title has not been paid for.

If I were to fluff the benefits of a life insurance policy, the insured can switch coverage or drop coverage, if they are to collect, they'll be dead! Every insurance policy will have a disclosure that the terms are contained in the contract, that no agent or others has the authority to change the terms made by the company. You don't have this in real estate, when you are a buyer or seller, representations matter, even with the statute of frauds (all agreements made to be in writing) how you structured that agreement always matters, who structured it, why, and it will be determined usually in favor of a seller, but also toward the more innocent party. How you justified giving 60% of the true value of any property can be snake's head rising later on, financing it lengthens that issue of concern.

I'm not saying you can't offer 60% or finance it, but how you justify that can be fluffing, puffing, misleading, unethical and even fraudulent. You'll see the gurus and wheeler dealer types totally ignore such aspects, it's all about the deal struck, that approach can be dangerous. The further you get away from the norm, the higher the risk becomes of losses.

The road to RE has wide shoulders, starting out driving on the shoulder just puts you closer to the ditch and there are some big drop offs along the way!

My visit to Michael's site, was worth it to me to better understand where he operates, not a waste of my time, I won't follow his technique, but it informed me as to the need to give more information on the technical side, I have no idea how Michael tackles that.

I'm more concerned about predatory issues, good faith dealing, if the bacon is cooked properly, not how much sizzle it makes frying. :)