Seller Financing-Still a good business model?

Hello,
I am a seasoned “Lonnie Deal er” who is planning on moving up to single family homes. I am trying to decide whether I should become a landlord for these homes, or if I should continue my “Lonnie Deal” business model, i.e. fix them up and sell them with owner financing.
I pretty much have a grasp on the typical pros and cons for each (dealer taxes vs. tax deductions, giving up ownership vs. no management headaches, etc…) and might actually be leaning towards selling for top dollar and owner financing.
My big worry though is how the coming possible big government intrusion into mortgage contract law by pandering politicians might affect the profitability of my business. I’ve never been one to take advantage of less knowledgeable customers in my Lonnie Dealing, and usually will go out of my way to help my buyers through a bad stretch (sometimes to my detriment!). However, with the much larger dollar amounts and time frames involved with single-family homes, I’m concerned about having my rights (and with them, my profits)as a lender taken away.
What do you veterans think? Should I forget about starting my own rehab/mortgage business and go into rentals? Or are you not that concerned?

Thanks!
patsears

Alot would depend on “how” you’re planning on owner financing these properties. In Lonnie Deals, you don’t have an underlying note against the properties. Are you going to be able to do that with SFHs?

By, “how” then I mean were you planning on offering a true 1st mortgage, a wrap, a land trust, or lease-option? Each one would require different forms and slightly different methods.

A BIG difference is that lending on a singlewide and lending on a SFH is much different. The SW is treated as personal property, not real. Makes the loan process totally different.

Raj

Thanks for the reply!

I do use a promissory note on all my trailer deals. I was planning on offering either a true 1st mortgage with my financing of a real property house, or maybe a land contract/contract for deed deal to avoid the foreclosure process and keep the property in my name (what do you think?)
Are there there any good books or websites on the subject that you like?

Thanks!
patsears

With SFHs you’ve got to adjust your thinking model from your present one. In your Lonnie Deals, you have some of your own cash in the deal and the objective is to get a high rate of return on that investment.

In SFH investing, the typical strategy is to acquire the home with little or no investment on your part, preferably do little repair - no major rehabs, get some cash flow, but concentrate on getting those big back end checks when your buyer refinances and cashes you out.

In owner financing, you do no landlording. You’re dealing with a different strata of folks who will generally take care of their own property you have financed for them. As far as government intrusion – stop watching so much CNN and don’t develop paranoia. People will continue to make big money in REI for many centuries to come – just as they have for centuries past.

Why not forget the two most frustrating and time consuming areas of RE, the two you mention – rehabs and rentals – and learn more about this style of profitable investing?

Thanks Gerald(tx) for the replies. BTW, whereabouts in Texas (The Promised Land) are you?

Actually, with the mobile home Lonnie Deals, I do try to keep as little money as possible in the deal, which raises my note yields through the roof. I’ve sold partials against my notes to do just that, as well as freeing up more money to do more deals.

I’ve sold trailers on notes both “as-is” (which a review of my notes shows me that they make me the most money yield-wise, because I has the least amount of my money in them) and “rehabbed nicely” (which tend to give me lower yields and a couple losses because I have the most money tied up in them; although the park management and neighbors love me!)

The only significant difference between MHs and SFHs is the lack of appreciation for the mobile home, which is why there is no point in maintaining long-term control over them via renting. But with the SFH, they DO appreciate, and over 30 years at the national average of say, 5% (which I think will probably increase in the future), it amounts to A LOT. My calculator tells me
it’s at least >$100,000, (based on a house that I rehab first, then sell) which is a lot to give up for the pleasure of no tenant headaches.

Of course, If I just lowball for all cash, then turn around and offer to finance another “flipper” (ala “Hard-Money”) or a owner-occupier who is looking for some sweat equity?

Okay, where is my calculator…

Looks like my reply went completely over your head. This is understandable as one’s brain tends to lock in on what they understand based on their experience.

Investors locked into one style of investing often have a hard time realizing that owner financing is 5 to 7 times as profitable as landlording. They also have a hard time understanding they can make just as much with buying techiques as thru rehabbing – without the time, hassle, risk and frustration of rehabbing.

It may take some time to open your thinking to broader horizons.

Gedrald,
Could you decribe to me one of your owner financing deals, along with the numbers showing how much more profitable it is compared to landlording?
That might help me to open my horizons some!

Thanks!
patsears

The only significant difference between MHs and SFHs is the lack of appreciation for the mobile

If you truly believe that, then I’d suggest that you hold off until you develop a little more knowledge about SFHs and financing. It’s a VERY different ballgame. Kind of like comparing a high school baseball team to a major league team. Similar but very different.

As to books, whatever is out there to read. The more information, the better. Get a firm gameplan before starting.

And doing a CFD may not relieve you of having to foreclose. Depends on your state’s laws concerning such and the actual contract itself.

And I agree that owner financing is much more profitable in the long term than landlording, IF you know what you’re doing.

Raj

Thanks for the reply!

Yes, I know that there are significant differences between chattel loans like mobile homes & real property loans. I was only referring to the math behind the two investments, which is the same.
I realize there is more regulation, more involved contracts, possibly longer time frames, more money at risk, and probably more lawyers.
I would love to hear you describe one of your typical owner finance deals in more detail from the owner’s perspective.
Any books in particular you like? I saw some materials on this website’s own bookstore that I might check out.

Any thoughts?

Let’s say you buy a SFR for $35K and spend another $25K in rehab. Your investment in this property is $60K. You own the property free and clear. If the property sits vacant, your only ownership costs are taxes, insurance, utilities and the seasonal yard maintenance. Let’s say all these avarage out to $100 per month.

If you put a tenant in the property at $700 per month, you can transfer the utilities cost to the tenant, but you add wear and tear and minor repair costs to your overhead. Let’s say your rental costs you an extra $50 per month on the average just for the repair costs and extra preventive maintenance. So now, your ownership and operating expenses come to $150 per month when your property is occupied.

It costs you to fill a vacancy, too. Advertising costs, leasing costs, mileage to show the property, tenant screening, legal fees all have their costs. Let’s say these direct costs average $300 each time you have a vacancy. Amortize this to $25 per month. The indirect costs for your vacancy is that you have no income for the month. If your typical vacancy is two months because you are in a soft rental market, then you have to allow for $1400 less income in any given year. Let’s amortize the vacancy allowance over the year which will reduce projected rental income by $117 per month.

Now adding up all your direct and indirect costs, you are only putting $433 in your pocket each month from your $700 rental income. If you outsource property management, expect to pay about 10% in management fees, so now your net operating income is reduced to $363. If your property is in a planned unit community or a condo association, HOA/COA dues will take another bite out of your net operating income.

Let’s say you just have this one property which you decide to manage yourself and you don’t have any homeowner’s association fees. Your net operating income of $433 per month is your cash flow because you own the property free and clear.

Over the course of 15 years, you would expect to experience at least one major system replacement. A new heat pump system replacement might run $4500, a new roof could be $7000. Major appliances break down and need replacement too. A brand name heat pump system should last about 12 years. a roof should last about 25 years, and your major kitchen appliances (range, refrigerator, dishwasher) should give you about 10 years service. If you replace all the kitchen appliances just once, you will most likely spend 1800 by the time you pay for delivery, installation and haul away the old stuff. If you contribute to a replacement reserve account each month to take care of these major replacements as they come up, you would set aside $70 each month from your net operating income, so now your effective cash flow is reduced to $363 per month.

Over the course of a 15 year holding period, $363 in monthly cash flow will put $65340 in your pocket – just $5340 more than you have invested in the property. Let’s say that after your rehab, your property will appraise for $85K. If your market appreciation averages 5% per year over the next 15 years, then your property should be worth $161,270, for $71, 270 in appreciation. When added to your cash flow, your $60K investment has given you a $136,610 return over your 15 year holding period (roughly a 15% annual return on your investment).

Now let’s see what happens when you sell the property with owner financing. Let’s say you sell for the full appraised value of $85K with a $5K downpayment. You agree to finance $80K at 9%, interest only for 15 years. The buyer’s monthly payment to you will be $600 per month, or $108,000 over 15 years. At the end of 15 years, your buyer refinances the loan and pays the $80K mortgage balance.

You collected $5K downpayment, $108K in interest payments and another $80K when the loan was paid off for a total of $194K if the loan ran the entire 15 years. If your loan is a 15 year amortizing loan, your total will be less because of the declining interest payments over the life of the loan. When you subtract the $60K you initially invested in this property, your total return on 15 year financing is $134K.

As I see it, carrying paper and holding the property give about the same total return over the same period of time. Carrying the paper gives you about the same return without the landlording issues. Holding the property indefinitely lets you reap even greater rewards from future appreciation.

Carrying the paper does have one advantage over holding the property for rental income. You get your initial investment back faster when holding paper. In my rental property example, with $363 monthly rental income, it will take 13.7 years to recover your $60K investment. By carrying the paper, with $5k downpayment and $600 per month income, you recover your $60K investment in 7.6 years.

If you wanted to keep repeating the process, you can double your production twice as fast by carrying paper. If you project out 16 years, you could have two rental properties in your portfolio generating $726 in monthly cash flow, or you could hold the paper on four loans with a total income of $2400 per month on top of the down payments you will have received.

All this assumes that your buyers let the loans run to full term and don’t refinance after a couple of years. If this happens then you have to buy, rehab and sell another property to keep your income stream alive. If you are a rental property owner, the income stream could be perpetual (you just have to keep your units filled)

Each strategy has its own merits. You just have to decide which best suits you and your long range goals. You may want to start out holding paper for the quicker turnover and higher short term income, then evolve into a rental property owner for the perpetual income stream for your retirement years.
of the rental p

wow dave T you really broke ti down, man. thanks.