How To Take On Owner Financing

Hi, it is good that you see this opportunity. I would talk to the owner,on what terms he wants to sell, the interests rate,payments, ballon payment, when?Walk through the house, check what are the repairs,I would simply try to feel him first. Let him do the talking. There is a forum on this topic, where you will get tons of information. I am sure someone will respond to you with details.
Happy investing, Halina

Hi Get out there and talk to people or work your computer, sounds like a investors dream, Jim

Thanks
I'll be going to the forums and getting extra information as well.

I've bought a couple of owner financed properties and the most important part, in my opinion - get it appraised and make sure you're not overpaying. You how to know true comps in your area to weed out what a fair price and what isn't. Going through a bank, they'll always require an appraisal but owner financing will not. Make sure you know your numbers!

A lot of owner finance terms include a balloon payment, 5 years out being very common. If you overpay $10k now, even with 5 years of payments, it's going to be difficult to refinance or sell and still come out ahead.

Good luck!

- Tom

Tom,
Would you mind giving us an example of how you negotiated one of your owner financed properties? (ie, what amount of money you had to put down, approx. size of the property, and anything else that would help us)

Thanks in advance.
-Teresa

"A lot of owner finance terms include a balloon payment, 5 years out being very common. If you overpay $10k now, even with 5 years of payments, it's going to be difficult to refinance or sell and still come out ahead."

Seller financing can be really simple, or really involved. You can over pay by $10k and still come out ahead if you structure the note with simple interest rather than an amortizing loan, or if you get no interest at all. As with anything else, the more you know the more you make.

Sure thing on the example:

- Purchase for $80,000, 5% down, or $4,000 down.

- Sellers holds a 1st mortgage for $76,000, the balance. Interest rate of 5%, amortized over 30 years, balance due in 5 years. (this assumes seller owns the place free and clear - a lot of people do). The attorney’s involved will handle all of the paperwork after you settle on terms.

- Principal + interest payment = $409/mo. In addition, taxes $100 mo, insurance $50 mo, home warranty $40/mo Rent the place for $1000, less $409 + 100 + 50 + 40 = $400 mo cash flow (I leave this in the account as a reserve for maintenance / other unknown expenses).

- In 5 years the balance due is $69,906 (use an amortization schedule to calc this). If in 5 years the place has appreciated from $80,000 to $90,000, I can then get an investor loan at 80% of the value = $(90k*.80) = $72,000, enough to pay off the note.

- I've also received $400 mo * 60 months = $24,000 in cash flow, less maintenance not covered by the home warranty, less misc (vacancies etc).

- On average I get a $2,000 tax refund per house per year ($10,000 over 5 years). This is because you depreciate the house, and it will generally offset your cash coming in, plus more. This lowers my taxable income from my normal day job.

- To summarize, for my initial $4,000 investment, in 5 years I've received:

$10,000 appreciation (this is an assumption and of course may be more or less).
$6,100 in mortgage balance pay down $76,000 original bal, $69,900 bal in 5 years).
$24,000 cash flow from rent.
$10,000 in tax refunds because the tax depreciation lowing my taxable income.

If I had only one tenant in the property for all 5 years, I may only have spent an 1 hour per month paying bills and making phone calls to address issues. Great return for your time!!

** Final tips (1) The 5 year balloon may be negotiable when due - the seller may be happy with the payments and want to keep it that way. (2) include "ability to subordinate" language in the contract - this gives you the ability to move the lien from 1st position to 2nd, usually for xxx amount of dollars - gives you more flexibility, (3) ability to substitute collateral. This gives you the ability to switch property to use for the collateral if the terms you have are really good and you want to keep them.

Hope that helps!

- Tom

while Tom has given you the financial end of owner finance, I will give you the personal side. My partner and I buy only FSBO's with seller financing and we have been doing this for the past 5 years.
Be very humble if you talk with the owner. DO NOT come across like Donald Trump unless you don't want the deal. Let the seller do all the talking. Ask questions why they are selling, give compliments even if they aren't warranted. Never pick the house apart in front of the owner. The more humble you are the more at ease the seller will be. Last but not least. He who talks about price first has lost...Jan

very good advice jan thanks

but you have to work the numbers to make sure it works. Just don't fall in love with owner financing because some is nothing more than a trip to the land of ruination.