How to buy through owner financing

Question

I understand the process of buying owner financing, but not sure how to offer, negotiate and close a deal. My goal is to acquire real estate with little or no money, then use the property to yield positive cash flow through rentals. I've been looking at hundreds of listing's and playing with numbers. If bank home mortgage rates are 12% for 30 years. Realistically how much should owner finance homes interest be? please help, thanks!

Bill Gulley · Answer

You might begin by sizing up the seller through regular conversation. What do they do? Right now, you might make a comment about oil prices, how long do think it will last? Gauge their financial knowledge. Do they play the stock market? When you ask about why they are selling, might go to where they will be going, what the plan to do with their "winnings" on the deal.  All this takes less than 5 minutes, breaking the ice.

If they are a regular Joe type, they don't invest, less financial knowledge, you'll need to educate them as to the benefits of SF.  If they indicate the need for cash, a need, not a want, you'll need to approach it to solve that problem, that might mean selling part of the note at settlement to an investor if you can't dig up the cash. Sell the aspect of longer term with interest earned making up the difference in any discount. There are techniques to get short term, like a year or 18 months out of a note where there is less of a discount. You might also mix the loan with a hard money lender.

If the are more financially astute, they invest, then the education needed becomes much less, they may be more interested in the tax benefits to defer the gain on the sale. If they need cash, go to the method mention above.

There is no canned script, as the goal is to get the loan from an individual who is unique, every deal will be different. That means you need to not only know about the note but how to use notes, understand personal finance, be able to apply techniques that suit the seller's real need and overcome the wants.

All sellers 3 areas they need to be sold on.

1. Annuity income being better than a lump sum;

If they were to get the lump sum, where are they putting that money? What rate of interest would they get? Your loan will be paying a higher rate, financially the note is their best investment! I have said things like, you know the collateral very well, better than any other lender, so your note is well secured, then I'll say something like while you are well secured in this deal, you'll not be seeing the property back as you'll be paid" (come heck or high water). Hit on the tax benefits, what they walk away with at settlement can be with taxes due, but not your way.

2. Your ability to pay, this is set in their mind from the initial meeting throughout the entire negotiation and all the way to settlement.  Assuming you never had a foreclosure (if you have the seller may need to be selling by offering SF in reality, unless you can set other guarantees) you can show your credit, but I never did.

Your ability to pay hinges on several factors. As an investor, your business stands on your professionalism, ability to conduct your business, your ability to obtain funds if needed, it's how you make a good living, the last thing you'd allow would be not meeting an obligation! This impression begins at your first meeting. Your knowledge and sharing your knowledge builds confidence in the seller's mind.

While they will be secured, you really need to instill in them that when they deal is done, they will never be bothered with the property again, that you have several options to get the transaction to its conclusion, foreclosure is not an option for you. Unlike a regular homebuyer, who may have difficulties, your failure in a deal would put you out of business, your livelihood is on the line, you're not about to get a bad reputation over some home purchase!

3. Their real problem needs to be solved. If they must have X dollars the day after closing then you need to ensure they have or can get X dollars. They can sell part of a note, they can borrow more with your payment covering that obligation, use another lender to "blend" the note.

Your back up plan, you're going to fix and flip, they will be paid in short order. Buy and hold, you have sufficient income from your company without a tenant, your company has other investors that can finance all the payments if necessary. If you are going the lease option route, your tenant will be qualified as to their ability to pay, that means the seller has 2 qualified buyers to make one payment. Your ability to pay is set by the seller's perception of you and your company more than seeing financial statements or credit reports (both of which I have never needed to shown).

On my first SF deal, I didn't know squat! But, over time I honed my financial skills, start with personal finances, you can't suggest things you don't understand or without having your house in order. How you are perceived matters, suggesting some shady dodge tactic about the due on sale issue or some other legal matter paints a picture of you, be careful about what you say, project the highest ethical standards and you're more likely to be trusted. It all begins from your initial contact! Good luck :)

Javier Marchena · Answer

It all depends on how much the seller is asking, how much are you paying as down payment, how much is your credit score, how many years you are financing.... etc.

I am looking at a property that the seller is financing. Listing price: $139K, Down payment 30%, interest rate 8% with a 3 year balloon.

Hope this gives you an idea.