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The Essentials of Owner Financing in Real Estate

Owner financing is an intriguing method for selling properties, and it’s a favorite among savvy investors. This approach allows you to sell a property by acting as the lender for the buyer. While it can be complex, mastering owner financing can lead to substantial financial gains. Let’s go over some key points to consider when opting for this strategy.

Understanding MIP and PMI

Mortgage Insurance Premium (MIP) and Private Mortgage Insurance (PMI) can be tricky if you’re new to owner financing. If you take over a loan subject to that includes MIP or PMI, you can’t simply pass those costs on to your buyer. Not accounting for these costs can lead to substantial financial loss, so always factor them into your calculations.

Ensuring a Positive Cash Flow

One major risk in owner financing is ending up with an underlying lien that’s higher than your owner-financed note. For instance, if you owe $115,000 at 3% interest but only finance $110,000 at 9.5%, you might seemingly make a profit each month. But if your buyer refinances or sells, you could be left covering the difference. Always ensure your underlying debt is less than your owner-financed note.

Choosing Between Assignments and Wraps

When deciding between an assignment of lien and a wraparound mortgage, wraps often provide better control and more profit. Wraps allow you to maintain an interest in the property, which can be beneficial for both you and the seller. But it’s essential to understand both approaches, so check out resources on the differences and decide which suits your needs best.

Awareness of Refinance Limitations

Refinancing a property that you’ve sold via owner financing can be problematic. Once you’ve sold the property, your ability to refinance conventionally diminishes because you no longer own it. Explore alternative methods like collateral assignments to navigate this issue if necessary.

Compliance with Dodd-Frank

Owner financing transactions are subject to both state and national laws, particularly those outlined in the Dodd-Frank Act. Be aware of key rules, such as avoiding balloon payments and interest-only loans, and adhere to restrictions on interest rates and prepayment penalties. Understanding these laws helps you stay compliant and avoid legal trouble.

Rehabbing the Property

Decide whether to rehab the property before selling it with owner financing. A fully renovated property sells faster and at a higher price, but even unrehabbed properties can be attractive if priced right. Adjust the sales price to reflect the condition of the property and market accordingly.

Finding the Right Closing Agent

Your closing agent plays a critical role in a smooth transaction. Look for someone familiar with owner financing, such as Scott Horn and Associates in Texas. Their expertise ensures proper contract handling and adherence to legal requirements, facilitating a hassle-free sale.

Knowing Your Buyer

Understand the demographics of your target market and tailor your advertising accordingly. For example, if a majority of your buyers speak Spanish, use Spanish-language advertisements. However, be mindful of trigger terms in your ads, which require additional disclosures. Download worksheets on trigger terms to avoid legal pitfalls.

Servicing the Note

Decide who will service the loan. Options such as August REI and Prime Loan Servicing offer different benefits, from credit bureau reporting to lower costs. Consider whether you’ll handle servicing in-house or outsource it, keeping in mind that having control and additional revenue from servicing can be advantageous.

Preferring Principal Over Interest

When structuring the loan, prioritize higher principal payments over higher interest rates. This approach is more beneficial in the long term. Understand the mechanics by watching resources on wraparounds and using financial calculators to structure optimal payment plans.

Accurate Payment Calculations

Ensure you calculate the total payment accurately, including principal, interest, taxes, insurance, and any applicable HOA fees. Clear and honest presentation of these costs prevents misunderstandings and maintains trust with the buyer.


Owner financing can be a powerful tool for both selling and investing in real estate, offering flexibility and potentially higher returns. However, it comes with complexities that require careful consideration and thorough understanding.

By mastering aspects such as MIP and PMI, ensuring positive cash flow, choosing between assignments and wraps, navigating refinance limitations, complying with legal requirements, and accurately calculating payments, you can effectively leverage this strategy. With the right knowledge and resources, owner financing can lead to substantial financial gains and a successful real estate portfolio.

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