27 Oct Structuring an Owner Financing Contract
One of the most frequently asked questions we get is “how to structure an owner financing contract?” We love hearing this question because owner financing is one of our favorite strategies to have our students get the most out of a creative real estate deal.
That’s why we’re going to outline how to structure an owner financing contract right now! Keep reading to see precisely how we structured one of our deals.
Our Structured Deal with an Owner Financing Contract
Back in 2015, we met a guy whose father had just passed away. At the time, he just inherited his father’s home, and there was no money owed on it. For one reason or another, our company didn’t get the deal. But, a few months later, the guy called us up and said, “Hey, you may not remember me, but I’d like to do a deal with you.”
It turned out he was moving out of state two days later, and he needed to make a deal quickly. So we went out and structured an owner financing contract.
The first thing we did with this contract was to make it contingent upon a buyer, then we told the owner we would buy the home at $183,900 and make principal only payments of $923 per month. This is the key. With owner financing, you are paying the principal payments.
We also put $900 down, so the owner was financing $183,000 with 48 months of owner financing. What this payment is — I did the math on agent fees and subtracted those from the value of the home. I told the owner that this is the money he would have taken away after all the closing costs and agent fees were paid, had his agent sold the home during her contract. But she didn’t, and he was moving to South Carolina, and he needed to make a quick deal.
After making this deal and buying the home with owner financing for $183,000, we sold the home for $229,000. Right away, that’s a profit of $46,000. Our buyers were giving us $1,500 a month, which means we had $577 per month in profit that we get to pocket.
It's really that easy.
Deals like this are one of the reasons why we love owner financing so much. If you like how we structured this deal and want to hear how we approach sellers with the option to do owner financing, watch the entire video we made outlining how we structured this entire deal here.
If you would like to learn more about our company and how we do all our deals, check out our entire video collection on our YouTube Channel.
What’s Unique about Our Structure
When it comes to owner financing deals, you want to be sure that it’s structured well. Without the proper structuring, your owner financing deal may end up costing you more in the long run than a traditional loan.
That’s why we want you to know about principal-only payments.
What is a principal-only payment? The principal is the amount borrowed in a loan. Banks typically structure mortgages so that most of the monthly payments cover interest charges for the first several years of the loan period. The principal payments are only started to be paid gradually after the interest payments are complete. An owner-financed deal can allow for all payments made to be principal.
When all payments are principal, the loan can be paid off more quickly. Additionally, without having to pay interest, even in downturned markets, these deals hold their value.
Additionally, because you are investing in a property—rather than buying a primary residence—an owner-financed home can easily be flipped, so you get paid faster and turn a profit more quickly. So if you buy a home with owner financing, where you’re making monthly payments of $1,000 a month, then sell the home as a rent-to-own with monthly payments of $1,500, you can start making a profit on your investment almost immediately.
What are Some Takeaways Regarding Using an Owner Financing Contract?
- Owner Financing contracts are a favorite of Smart Real Estate Coach
- This is a great deal especially when the seller is needing a quick turnaround
- Make sure to structure your deal using principal-only payments
Learn more about the details of an owner financing contract and much more by visiting our blog.
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