Owner Financing - Profit Potential

The Benefits of Owner Assisted Financing

By Charles Parrish, Baltimore Maryland

Obtaining and understanding owner financing as it is compared to conventional financing is an exciting option that affords many types of benefits to a buyer (mortgagor).

An HP-12 C calculator is a valuable investors’ tool to break and understand the mortgage code and understand the internal benefits of creating owner financed transactions. With it many important formulas can be learned; amortization comparisons, exact balances after any payment, balloon pay-off amounts, determining yields, CAP rates, NOI, internal rate of return, cash on cash return, discounted mortgages pay-outs, future and present values, the time value of money and creative formulas.

With conventional mortgage financing, most all of the payments are applied toward interest in the beginning years of the loan freezing the reduction of the mortgage for many years.

With owner financing, there is much more flexibility and creative potential with hidden profit techniques.

Negotiate a principal only mortgage.

A principal only mortgages is a mortgagor without INTEREST, the entire payment goes toward reducing the principal.

Why would an owner accept a principal only mortgage?

  1. Because of how the offer was presented.
  2. The terms of the mortgage is dictated by the buyer.
  3. The buyer may withdraw the offer.
  4. The seller is motivated to move on and will accept any terms
  5. The seller wants a higher monthly payment

Here is a possible clause that may work when writing an owner financing offer.

“The seller agrees to a first subordinated $90,000 principle only mortgage having payments of $800.00 a month.”

How long will it take this mortgage to be paid off completely, 9+, 10+ or 12+ years? Take a calculated guess.

Get your calculator out, how long would it take to pay off the mortgage if the mortgage had an interest of 5%? Use these buttons; PMT, I, n, PV, on your HP for the answer.

The clause if accepted, will give the buyer (mortgagor) the right to move the mortgage to second position after obtaining new financing. Subordination is a great method to continue the seller’s leverage and cash flow position.

Asking the seller to accept principal only payments for short term would give the buyer time to recycle the property for a profit without interest expense.

Other ideas:
• Ask for a discount on the mortgage if it is paid off before the due date.
• Include a “First Right of Refusal” in the mortgage in the event it is ever offered for sale
• Ask for the right to miss one or more payments a year.
• Ask for the interest rate to be at prime.
• Ask for an ARM (adjusted rate mortgage) from the seller; interest starts low and goes up at intervals.
• Ask for right of substation of collateral.
• Ask for one time right of full assumption with release of liability.
• Consider a “Hybrid” mortgage offer; the owner agrees to a giant discount of the mortgage, you agree give the seller (mortgagee) a percent of the net profit when the property is sold. Agree to liquate at a preset date.
• No payment mortgage with a balloon payment sometime in the future.
• Ask for an unsecured demand note with personal guarantee.
• Ask for mortgage to be secured by another property you own.
• Ask for a blanket owner financed mortgage (make sure you have clearly written release clauses in the mortgage)
• If the seller is not sure of your ability to pay, offer to sign a deed in lieu of foreclosure to be recorded in the event of default.
• Ask for a release of the collateral after X number of payments has been paid

To encourage the seller to hold paper, suggest the benefits:

• Most sellers want their cash when selling, but would consider a high yield secured mortgage that produces a higher yield than they could get anywhere else. Installment reporting could be a benefit.

• Use your HP-12-C to show how much the seller will yield now and over the term of the financing and what the gross pay back will be.

• Show the seller how he is losing money at low interest CD’s and banking accounts.

• Explain the security of the mortgage

• Offer to pay-off demand by seller at their option after X months

• Offer right of inspection of the property during the term of the mortgage

• Suggest the flexibility of “Split Notes”, the seller, rather than taking back a $100,000 note, secured by a $100,000 mortgage; suggest four $25,000 notes. If the seller ever wants to sell one, he has the flexibility to do so, while retaining the payments on the other three.

The seller could also trade one or more of the notes for other real estate. Or he may give a note to a relative so they can enjoy the monthly income, or offer a note in exchange for a pay off of a debt.

There are many options a buyer (creative investors) has when negotiating owner assisted financing.

With owner financing an investor enjoys many benefits:
• No applications
• No required credit rating
• No appraisals
• No mortgage closing fees, also known as junk fees
• No rejections
• Not contingent on inspections or the whim of underwriters
• No long wait for approvals
• No interrogations or the supplying reams of documentation
• Fast closing
• Higher profit potential

Questions gladly answered.

Charles Parrish

Charles,Thanks for the info. I can figure the 90,000 principle only mortgage.It would be 9+ years.I dont have a mortgage calculator.I really need to get one. I also wanted to thank you for the investment class that you have once a month.My husband and I attended our first one this month and there was alot of info.I plan on attending the next one.It was really packed!!!Thanks,Michele

You are welcome, our meetings are on the first Saturday of every month at 6721 Harford Road, 10am -12:30.