Owner financing

[Jon Joseph]

I am interested in an owner financed deal. The property is a 5-plex in Ohio. For sale for 60,000 with rents of roughly 1,400 a month. Owner willing to finance for 5 years with 25% down. So with the payment to the owner roughly at 1,050 a month. And my other expenses, I would be in the red monthly. The way I look at it is, with my job I can support being in the red monthly, and paying off the owner in 5 years, after that I will be netting a lot every month. Is it worth the 5 years of $0 or red monthly for the the quick payoff in your opinion?

[Bill Gulley]

I don't know the market, but here are some points to consider as a buyer.

On a SF deal don't put more down than 20%, 15% is better and 10% is doable with a 3 year term. At 5 years, do 10% down. Now this is all subject to the payments required and cash flow. If you do put more down, ensure you can refinance it quickly at any time. If you're counting on the seller to hold the note for 3 or more years, you have risks in the deal.

While many don't like to count on appreciation, I certainly do with nicer properties, but you need to know the area and the "bankable" appreciation rate. If in the past 10/15 years the average is 2%, you can bank on 2%. Also, the area must be stable to weather any storm in a short run. So, this is really a judgment call.

But that gets to this point. You need to understand the basic guidelines for conventional financing, because that will be your exit to refinance (if you are holding it).

Better know what minimum loan amounts are and understand those minimums can go up in 3 or 5 years. If you're talking about a 40K property with 10K down, you have a problem. 

You will need 20 to 25% equity to refinance. At 10% down over 3 years, look at the amortization schedule and see where the equity will be established. Consider appreciation as in 3 years the home should appraise for more. You can consider you market rents from an income approach to see where the property might come in from that aspect on an appraisal. You should be at or near your 20% target in 3 years. 

Your down payment should be in line with your requirement of building equity as well as providing cash flow.

If you do a wrap or sub-to, where the seller has a mortgage, don't pay more down than you can afford to lose (LOL) but not more than 20%. If these deals blow up and you can't refinance and the seller walks because he got half his equity, you're hung. Keep the seller in the game. 

At 20% down, that's your skin in the game, IMO a motivated seller should be accepting that. It should also give them enough to cover the 25% of depreciation taken for taxes after the sale. So, a question to ask is how long they have had the property, or you can look it up.

Another issue is too much down often entices shyster investors to take your money, design a default, take the property back and repeat.  Beware of sellers offering seller financing, especially with large down payments required. They generally aren't motivated.

Don't overpay for the property! Financing does not add value to any property and overpaying steals your future equity being established. Shysters will price a property higher playing with terms, kinda like your no money down car dealers, just your trade in.  

Always check out your seller, look to the recorder of deeds, how many properties do they have and have they sold and ended up taking them back. Now, one foreclosure from 3 deals may not be an issue, but 3 out of 3 certainly is! :)