The Benefits of Owner Financing In today’s world of real estate most people have been indoctrinated into doing business one way: Buy, Sell, Pay Taxes. Sometimes, maybe most of the time, that is the best way. However, for a property to sell to a non-investor, or retail buyer in a bank financed transaction, not only must the buyer qualify for a loan, so must the property. In most residential sales, neither of these are a problem. But what can a seller do when their property will not qualify for a mortgage loan? Especially if the seller is not in a position to correct the problems, such as structural damage, code violations, environmental issues, and so forth? One of the most attractive benefits to owner financing is that the seller often times is able to realize more of the growth equity in their property. In a bank financed sale, growth equity can be lost to repair demands made by the lender. Usually, major repairs required for a property to qualify will have to be made before the lender funds the transaction. Owner financed properties will typically pay out over a 20 or 30 year period, but have a five or seven year balloon payment. That is, the monthly payments are based on a long term mortgage loan, but the entire prinicpal and any unpaid interest comes due in the balloon payment. The terms of the loan are negotiated between the seller and buyer. This is where a knowledgeable, ethical buyer can show the seller exactly what and how much they can excpet to collect during the life of the loan. Sales structured this way give the buyer the time to do any necessary renovations and to establish the property’s ability to support debt, making it easier for the buyer to secure long term institutional financing to pay off the balloon payment. This scenario, a distressed property and limited capacity owner, are “prime targets” for wholesalers, people who contract to buy a property at a low price, then sell the contract to an investor who will do the actual rehab. These are typically private cash deals; no bank involvement. There are a few things to be aware of. First, professionl wholesalers are good at getting the absolute bottom dollar from a seller. Secondly, these “all cash” deals will quite often involve what is known as a “private money,” or “hard money” lender. Hard money lenders demand very high interest rates from the actual buyer (redeveloper,) which generates even more pressure to drive the sale price down. There is what’s known as the “70% Rule,” which states a wholesaler should never pay more than 70% of a property’s retail value, minus the cost to remodel/renovate the property. It is also common to see wholesalers walk away with more money than a licensed broker’s commission. It is not uncommon for these transactions to fail, especially when the numbers don’t work for the actual buyer, which often leaves the seller in worse shape than before. So, why would some investor be willing to pay more for a depressed property as described above? It depends on the investor’s reasons, or program. If the investor intends to hold the property indefinitely for the long term production of rents, then paying a higher price via owner financing can work. This has a lot to do with tax law, the potential for appreciation over time, stable cash flow, and estate planning. Where hard money lenders tend to stick with short term debt, there are also private individuals and small companies that invest in long term debt. (There are websites that focus on this market.) A note and mortgage are personal property and can be sold just like a car or computer. Debt investers will typicaly want any “paper” (note/mortgage, contract for deed, moretgage deed) to be “seasoned.” That is, they will generally want to verify the qualifications of the debtor and to see a track record of timely payments, typically about six month, so they can assess the risk, which will affect the sale price. To Recap the Benefits of Owner Financing Sell a property that does not qualify for institutional loan Sell at a price that captures most, or all of the appreciation, regardless of condition Earn interest on the money loaned to the buyer via secured income stream Sell without making expensive repairs Possible tax advantages Avoid foreclosure if behind on payments (and save your credit) “Seasoned” paper is easier to sell than a difficult property Owner financing is a viable alternative for virtually any property that is otherwise a difficult sale. There are variations on this idea as well. If you find yourself in a tough spot because of limited financing opportunities, get in touch with the Roadrunner to explore your options. investrps19@gmail.com 754-610-9033