Owner Finance Business Model

[Ram Gonzales]

I manage a small fund (less than $1M). To date, we've been joint venturing with other investors on flips and subto deals. I am now looking into how we can make owner financing the base of our business. I've been exploring what does a sustainable model for this looks like? ;

Here are some of the models I've considered. I'm not sure how likely some of them are. Has anyone had any long-term success in any of these or other models? Thank you.

Scenario A

1. Purchase the homes, make minor repairs, and sell with owner financing to create the notes. 

2. Sell the notes to note buyers. Rinse and repeat. 

Pros: No long term responsibility for the note. If I know what kind of notes the buyer wants, I can work backward from there in structuring the notes, properties, and buyers.

Cons: Discounts and other criteria from note buyers might make it difficult to find enough good opportunities.

Scenario B

1. Purchase the homes, make minor repairs, and sell with owner financing to create the notes.

2. Borrow against the notes or cashflow through a bank as a portfolio loan, business loan, or business line of credit. Rinse and repeat.

Pros: Repeatable and predictable. We still own the note and cashflow after bank loan is paid off. 

Cons: Finding a bank to do it. Qualification. Limits. Terms.

Scenario C

1. Purchase the homes, make minor repairs, and refinance through traditional lender.

2. After refinancing each property, sell on a note.

Pros: Due on sale. Longer process per house. Will the bank continue to refinance us if they see that past houses have been transferred. 

[Bob E.]

Most not holders don't want to have more than 65% LTV, maybe a little higher for higher price point homes. My suggestion would be to sell the property with two notes, a 1st and a 2nd. Make the 1st 65-75LTV and the second the balance, (make sure to get a solid down payment). Then sell the 1st lien note and hold the second. If all goes well you will not have any cash left in the deal so even if the borrower defaults you will not have a lot of exposure.