08 Nov Is Owner Financing a Good Idea?
There are many strategies to help you get started with real estate. Strategies that help you purchase your first investment properties or even your first home without having a lot of cash on hand and, in some cases, without having a traditional mortgage. One strategy that you can use to help purchase your properties is owner financing. But is owner financing a good idea?
This is an alternative to a traditional loan, where the purchaser agrees to make a down payment – often 20% of the purchase price – but has the rest of the purchase price financed by the seller.
With owner financing, the seller is taking the risk that the purchaser may default on their payments. However, a seller may also make more money from this kind of deal than if the buyer used traditional lending to buy the home.
The way owner financing works is similar to a sandwich lease, but instead of making payments to a mortgage company, we make principal-only payments directly to the seller increasing our equity stake long-term. For investors, we purchase the property with owner financing, then find a buyer to make these monthly payments to us, usually at a higher market value to ensure we get paid, and we can also fulfill our obligations to the seller. Because the property isn’t paid for outright, there is a chance that the buyer could stop making payments, and the investor and seller are stuck in a difficult situation.
So, is owner financing a good idea? The short answer is yes. Owner financing can be an excellent option for buyers and sellers, but it’s not for everyone. To learn more about owner financing, continue reading.
How Do You Convince a Seller to Do Owner Financing?
We get questions all the time about owner financing. Some of the most common questions are: “How do you find a seller who will do owner financing?” “Why would a seller agree to owner financing?” “How would you even calculate payments?” “Is owner financing a good idea?”
These are all great questions.
Let’s start with “Why would a seller agree to owner financing?” Well, about a third of the properties, and please don't quote me on this, but about a third of the properties in the United States are potentially debt-free. They're free and clear.
Okay, if we know that, why not fish in that pond?
People say, “Well, you guys only do sandwich leases.” No. Actually, these are the most lucrative deals that we're talking about right now. That's why owner financing is our favorite strategy. When approximately one-third of homes aren’t mortgaged, why not leverage them and fish in that pond?
When you fish in that pond, guess what those homeowners are concerned with? They’re not concerned about lowball offers. Because their homes are paid for, they don’t have to get out of their home right away.
Presumably, if they needed money, they would have pulled it out already. Or perhaps the owner inherited the property. Either way, owners of homes that are paid for in full are very susceptible and very open to creative financing.
Right now, the whole world is open to creative financing (which is another topic we will cover another time).
As a whole, though, property owners who have paid off their homes are very open to owner financing, which is pretty cool.
So what you're going to do is you're going to show them a way to get the full value for their home. In most of these deals, we're going to structure principal-only payments.
Principal-only payments so you're not going to pay any interest. That is the most recession-resistant way we know to get from Point A to B. Point A is now and Point B being three, four, five, ten, even 20 years out.
Of course, there is much more nuance to owner financing, but this example gives you some rough ideas on how the deal works.
As for other most common questions asked, I’ve put together a short 10-minute video with all the answers. Be sure to check it out here!
What Does This Mean for an Investor?
As a real estate investor (or potential investor), you may be wondering how owner financing can work for you. After all, you don’t plan on living on the property you purchase, so how does that work?
The first thing to know about owner-financed homes as an investor is that at least the way our company structures the contract, the deed to the house is transferred to us upon closing.
This means that as soon as we close on the home, we can find a rent-to-own buyer to make the principal-only monthly payments that we owe the seller. We love deals like this for many reasons, one of which is they’re great, even in a down market.
Another reason we love deals like this is that we have the deed to the home, and we can sell the house with owner financing! And, sellers who use owner finance can often make top dollar for their homes–we even six-figures in deals like this.
That said, we typically stick with rent-to-own agreements. If the tenant defaults on payments with lease purchases like these, we can evict the renter and fill the spot relatively quickly. However, if the buyer defaults after purchasing the home with an owner-financed purchase, you legally have to foreclose. In most states, foreclosing on a home is much more expensive and time-consuming, and it ultimately takes away from our investment.
In Closing, Owner Financing…
- Is a great form of creative financing that can benefit both buyer and seller.
- As an investor, you can sell a home you have purchased with owner financing.
- Sellers who use owner finance can often make top dollar for their homes.
If you're still unsure when you ask ‘is owner financing a good idea' be sure to visit our blog and check out all of our amazing articles.
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