Hey everybody! Grant Kemp here from Creative Cash Flow. Today, we’re diving into the basics of owner financing—a strategy that can truly set you apart in the real estate game. We’ll break down key concepts, strategies, and the nitty gritty details you need to know to get started. Let’s jump in!
Understanding Owner Financing
The Core Concept
At its core, owner financing is simple: instead of the buyer paying a traditional bank like Wells Fargo, they pay the seller directly. This bypasses the need for bank involvement, making the transaction smoother for both parties involved. The buyer gets the deed to the property but makes monthly payments to the seller instead of a bank.
- Seller Finances to You: The seller finances the property directly to you.
- You Finance to End Buyer: You become the financier for your end buyer after acquiring the property.
Owner Financing Strategies
Wraparound Mortgage
Wraparound mortgages are fantastic for capitalizing on interest rate differences. You make a mortgage to your end buyer at a higher interest rate than what you owe on the underlying mortgage. For example, if you charge the buyer a 9.5% interest rate but only pay 4%, you profit from the difference.
- How It Works:
- Make a mortgage at a higher interest rate.
- Pay your lower-rate debt.
- Keep the difference as profit.
Subject To
In a “subject to” deal, you take over the seller’s mortgage payments. The seller’s name stays on the mortgage, but you’re making payments on their behalf. This strategy shines in down markets where properties might be underwater.
- Advantages:
- No need to put up cash upfront.
- Buy multiple properties without bank approval.
Free and Clear Owner Financing
The simplest form of owner financing is when the seller owns the property outright. You agree to pay the seller directly over a specified period.
- Example:
- Seller owns the property free and clear.
- Instead of paying $80,000 upfront, you pay $800 monthly over 10 years.
Understanding Liens
What is a Lien?
A lien is essentially debt attached to a property. It ensures that creditors get paid before the property can be sold.
Common Types of Liens
- Mortgages: The most common type of lien.
- Mechanic’s Liens: Filed by contractors when they haven’t been paid for work done.
- Tax Liens: Both federal and property tax delinquencies can result in liens.
- Child Support Liens: Courts can place liens for unpaid child support.
Lien Position and Foreclosure
Lien position matters because it determines who gets paid first. If a primary lien holder forecloses, subordinate liens can get wiped out. Conversely, if a subordinate lien holder forecloses, they must satisfy the primary lien.
Basic Real Estate Investing Terms
ARV (After Repair Value)
The value of a property after you’ve made necessary repairs. This is crucial for calculating potential profits.
LTV (Loan-to-Value)
The ratio of the property’s current loan versus its current market value. For instance, if your loan is $75,000 on a $100,000 property, your LTV is 75%.
Basis (Cash vs. Total)
Your “basis” is what you have in the deal:
- Cash Basis: The actual cash you’ve invested.
- Total Basis: The total amount, including loans and other investments.
Cents on the Dollar
When you buy a property at a fraction of its ARV. If you buy a property for 75% of its ARV, you’re buying it for 75 cents on the dollar.
Reasons to Do Owner Financing
Pros
- Avoid Tenants, Toilets, and Trash: You become the bank, not the landlord.
- Set Returns: Your income is predictable, with no unexpected expenses like repairs.
- Low Barrier to Entry: No need for massive upfront cash if structured correctly.
- Unlimited Funding: You aren’t limited by conventional bank loans.
- Non-Recourse: Deals are done through your LLC, protecting your personal assets.
Cons
- Lost Appreciation: You miss out on future property value increases.
- Foreclosure Hassles: If a buyer stops paying, you have to cover costs and handle the foreclosure process.
Legal Considerations
Dodd-Frank and State Laws
There are federal and state laws you must comply with when doing owner financing. Using a residential mortgage loan originator (RMLO) and working with experienced attorneys can keep you compliant.
Building Your Business
Create an LLC
Never put properties in your personal name. An LLC provides legal protections and separates your personal assets from your business dealings.
Understand You Are an Investor
You’re not just a wholesaler, flipper, or landlord—you are an investor. Having multiple strategies at your disposal allows you to tailor your approach to each deal, maximizing your effectiveness and profitability.
Knowing how to execute various strategies—from subject-to deals to wraparound mortgages—gives you the flexibility to create custom solutions for sellers, which increases your chances of closing deals.
Learn the Nuances of Each Strategy
Take the time to understand each strategy deeply. This knowledge will empower you to make better decisions and increase your success rate in negotiations and deal making.
Final Insights
In conclusion, owner financing offers a versatile and powerful approach to real estate investing. By understanding the core concepts, different forms, and various strategies like wraparound mortgages and “subject to” deals, you can tailor your approach to suit different scenarios and maximize your profitability. With knowledge of liens and key real estate terms, along with the advantages and potential pitfalls of owner financing, you are well-equipped to navigate this niche market.
Remember to comply with legal requirements, create an LLC for protection, and always view yourself as an investor with a diverse strategy toolbelt. With these insights, you’re ready to take advantage of owner financing and elevate your real estate game. Happy investing!
Get started with Propelio and unlock all the tools you need to succeed in real estate. Sign up now for a 14-day FREE trial: Start Free Trial
