How to structure Owner Finance—Texas

Question

I’m in a bad deal and I want to know how to structure an owner finance transaction to minimize my losses.

Quick Backstory: I purchased a deal from a wholesaler in an investor-active neighborhood, but estimated too high ARV ($310k).  Interest rates went up 3 times since I secured lending and buyer activity has slowed down.  If I sell as-is, I lose about $20-30k.  I’m hoping an owner finance will be a better option than renting it out with a large down payment and higher interest rate payments.  Details:

Purchase: $177k

Cash at Closing: $22k

As-Is Price (per Realtor): $180k

Estimated ARV (per Realtor): $250k

Quoted Interest Rate for Refi: 8.125%, 30yr

Agents’ Commissions: 6%

There is interest already on FB Market Place and from other Facebook groups who are asking for terms, but I don’t know what to tell them.  I’m thinking of 10% down at 10.25% interest, but I’m not sure for how many years or with a balloon payment or not.

Is owner-finance a good strategy?  What would work during this time?  Anyone willing to discuss this over the phone?  Anything helps, thanks!!

Wale Lawal · Answer

@Turner Wright

An owner financing agreement between buyer and seller should always be memorialized in a written document that includes the specifics of the deal. However, there are a few different ways to accomplish this, and the best option will depend on your specific needs and circumstances. Here are three main ways to structure a seller-financed deal:1. Use a Promissory Note and Mortgage or Deed of TrustIf you’re familiar with traditional mortgages, this model will sound familiar. The buyer and seller agree to the terms of a promissory note that details terms like the loan amount, interest rate and amortization schedule. The mortgage is secured—or collateralized—by the house, the buyer’s name goes on the title and the mortgage is recorded with the local government.2. Draft a Contract for DeedAlso known as an installment sale or land contract, a contract for deed is when a buyer does not receive the deed to owner-financed property until he makes the final loan payment. Alternatively, the buyer receives title if he refinances the loan with another lender and pays the seller in full.3. Create a Lease-purchase AgreementThis option, also referred to as rent-to-own or a lease option, involves a seller leasing a property to a buyer who has the option to buy it for a set price. The buyer pays rent and, at the end of the lease term, can purchase the property or give up his lease option. If he opts to buy the property, rent paid during the lease period is applied toward the purchase price.Because owner financing can be complex, we recommend working with a licensed attorney who will consider your best interests when drafting the necessary documents.

All the best!

Chris Davidson · Answer

@Turner Wright Is it livable now? big spread on as-is and ARV compared to your first ARV. But like @Eliott Elias said take a down payment and let them assume your note, and if able add a second.

Will say all OWC deals I have been doing are below market rates not above. So if you can get 10.25% more power to you, but if you need a price that is higher than market to cover your debt likely are going to have to give lower rates.

If your loan is hard and coming due soon so you can't wrap or have them assume it. Look at cash out just for the HARD money amount say 175k ~1300/month @8.125%. Sell subject too with you carrying a second for 100k or what ever you need at 0% ~275/month if 100k. Balloon the second in 5-10 years. This puts the PI for the buyer ~1575 which is lower than the buyer could get with market rates at 275, and not need to qualify. And allows you to break even or make a little and you have a win win and a cheaper than expected education on due diligence.

Best of luck, and if you want to talk about it more give me a call.

Eliott Elias · Answer

Market it as a owner finance deal and wrap the new note around yours. Have them put up more money down than you and collect cash flow with the higher monthly payments you charge

Lucia Rushton · Answer

@Turner Wright did you pay cash or HM for the property initially ?

Rick Pozos · Answer

It sounds like you have not even done the rehab. You mentioned as is price and arv. What is the story there??

IF it is livable, there are people who would buy in rough shape and are willing to pay above market interest rate. You probably should not charge over market price, but you could at least over time get back your money. Contractors are great for this. They usually can not get credit or bank loans because of their fluctuating income. AND they will fix up the property!!

Jon A. · Answer

@Turner Wright Owner financing generally only works if you own the property outright, no mortgage. And it seems you took out a mortgage. If the note if assumable - a big if - then you could put yourself in second position like others have said. But do you want the risk of second position? If the note isn't assumable and you wrap the mortgage as others have suggested, one party will always have to worry about whether the mortgage is actually being paid, depending on which party is responsible for paying the lender. If you're responsible for paying the lender, for instance, the other party would have to worry about you pocketing the monthly payments instead of paying the note. I personally wouldn't structure things that way for that reason. I don't think you mentioned how much repairs would cost. Can you not get the place fixed up for $50k and break even? Or maybe fix it and rent it until the market improves?Something to consider is getting your real estate license to save yourself the 6%, or list as fsbo.

Jeremy Rychlik · Answer

Curious if you have found a solution to this. We just finished our first flip and are considering offering owner financing but it seams in Texas it is very tricky. Would be interested in hearing if you made a decision on owner financing and why or why not.

How to structure Owner Finance—Texas

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