This is a great site. I’ve been learning a lot. but I just came across an article today. It mentioned something about owner financed. Can someone tell me what that actually is, who qualifies or what you need to qualify or to do this… Thanks!!
Piece by piece … its coming together
I agree with you, it is a great site!
owner finance, in my understanding, means that owner will issue the loan to you. And instead of making your payments to the bank every months, you will make your payments to the owner, from who you bought the property
oh… SO. if thats the case… how would I make money? or better yet. how is that more appealing to the owner that is providing the money? ???
Howdy Scottycam:
Sometimes seller just need to sell and have tried to get a buyer to get a new loan and have still not sold the house. Some sellers too do not want to pay the taxes so the sell on installments. There are other reasons too especially short term like while the house is being rehabbed.
I am a little confused as to how owner financing works. If I am making my payments to the seller, how do we transfer title into my name without paying off the bank mortgage that the seller has?
Howdy Jennifer-K:
Seller financing comes in different forms. You can assume the sellers first mortgage and give seller a second mortgage. The seller could also have no mortgage and they would just finance the deal. The one you are confused about is called subject to financing. There have been many books written on this easy buy also complicated method. John Cash Locke wrote Sub2 Thats what I do. It is supposed to be the bible in this area.
It is basically just keeping the sellers loan in place and either paying the loan directly to the bank or paying the seller and getting them to pay the bank or a third option is to pay an escrow company to pay the bank. I do not like paying the seller but sometimes we do what we must to make a good deal.
Most sub2 investors get the deed from the seller when using this method of financing. There are also deals done with contracts for the deed, lease option, deed held in escrow and perhaps a few other ways. The more the seller cares about his credit and you paying the loan the more this method tends not to work. The seller needs to be motivated.
Hope this helps clear it up a little better for you.
Thanks Tedjr. It clears some things up but leads to more questions. I think I need to get the book you mentioned. I began purchasing new construction homes for rentals last year with a more long range plan but now would like to do some short term rei. So I am learning all I can and will probably be in here often asking for clarification. Thanks
Jen
Here is another way seller financing or carry-back works, you see a house for 100k and you can only get a mortgage for 85% or 85k, since you would like to come into this deal with very little of your own money, you ask the seller if they would “carry-back” 10% (since most mortgages will not allow a full amount of downpayment financed by the seller) so at this point you only have to come up with 5% or 5k instead of the full 15%.
Ok I too am a bit confused on this option of the owner carry back now they are not going to a bank to do this correct the owner is just agreeing to do this and sign what even agreement stating this is how the deal will be done and they move forward with the deal. This is just between owner and buyer right. Please explain a bit more thanks am I on the right road.
Michelle
REI-NY,
Let me give you an example so that hopefully it will make it a bit clearer for you. My company bought a property from a distressed seller in February of last year (2004). The property had a mortgage of $67,000, $3,500 in back payments, $2,400 in back taxes, $2,100 in IRS Liens and $10,000 in repairs. I agreed to pay all of this, all closing costs, and $1,000 to the seller to help them to move. After all buying costs and carrying costs, I had just under $90,000 into the property. I found a buyer for the property at $110,000. This buyer has not been in the country long enough to establish credit, but he has $20,000 for a down payment. I agreed to sell him the property and finance the $90,000 at 8% interest for 15 years. This interest rate is quite a bit higher than a home owner could get if they had credit, (and higher than he wanted to pay) but since he had no credit, he couldn’t go to a bank. Now instead of getting $110,000, I am getting $174,800 ($20,000 down plus 860 per month for 180 months) but spread over 15 years. If I had enough spread between what I had in the property and the amount of the loan, I could sell this note on the secondary market, but I will probably keep it for the long term income. This is money that I will make without having to worry about fixing leaky faucets, or stopped up toilets or leaky roofs. It will be there if I decide to take a month in some exotic foreign resort. The only reason that I need to be there is to collect the monthly check and I can set that up so that it is automatically deposited to my account. It is on autopilot. Now all I need is about 20 more just like it. ;D
Wilson
Ah. That makes alot of sense. Thank you.
it makes sense for the long haul and if you have 90K to play with… so you are spending 90K to earn ruffly 95K for 15 years? thats like 6K per year. Dont get me wrong… its still a great buy. But inorder to keep it as a living. You need at least 10-20 deals like that to make it.
Am I missing something?
I can get a rental which will make roughly 36K per year. (300 Cash flow per month) and at the end of 15 years… I still have a house to keep. (but of course you have to deal with tenants and repair cost.
Realstart, I believe you missed your decimal point. 300 times 12 is 3600 not 36000. You are right about renting the property. I could rent it for about $200 more than he is paying, but I would have to pay the taxes and insurance as well as the repairs. The house is 40 years old now, so I can assure you that there would be repairs in the next 15 years. There would also be vacancies. I don’t have to worry about any of those things. The buyer does. All I have to worry about is whether he sends me a check each month.
Wilson
Hehe… you are right. I was ahead of my self. I was going to say 10 units after that, but I have forgotten… Thanks for your correction!
Ant.