What Is Owner-Financed Real Estate Investing?
You’ve likely seen one of those real estate reality TV shows where the hosts and participants find an old house, spend a few days fixing it up and then sell it for a profit. Or maybe you know someone who has been “fix and flipping” or “buy and renting” (aka “buy and hold”) homes and making a profit. If you’re considering getting into real estate investing with one of these strategies, be aware they aren’t as easy — and sometimes not as profitable — as you might think. Both investment strategies require a lot of up-front cash (or a financed loan) and a lot of time, effort and headaches. Owner financing is another investment strategy that offers fantastic income-earning potential — and has many other advantages. Here’s how owner financing works and why we think it’s a win-win for all involved.
How Does Owner Financing Work?
In a nutshell, owner financing means that instead of a homebuyer securing a traditional bank loan, you (as the investor) loan them the money to buy their dream home. The buyer repays you the loan amount, plus interest — which adds up to a big chunk of money over several years. Before you say, “I don’t have that kind of money to loan out,” just wait! You don’t need a lot of cash on hand or take out a loan with the strategy we teach at Owner Finance Academy.
In our owner-financed strategy, one of the most popular strategies available is that you take over the mortgage payments on a home seller’s existing loan and then resells the home to a new buyer. The new buyer pays a nice down payment and then pays you a larger mortgage payment each month. You take the money from the end-buyer, pay the seller’s mortgage, and keep the difference as your cash flow.
Here’s how a typical owner-financed scenario works:
- A homeowner needs to sell their home quickly, usually because they owe more on their mortgage than the home is worth, they can no longer afford the mortgage payments and have fallen behind, or the home needs repairs they can’t afford.
- You and the homeowner negotiate a win-win deal where you take over their mortgage payments and they transfer ownership to you.
- You find a buyer who wants to own a home but can’t secure a traditional bank loan or mortgage. These are typically homebuyers who are self-employed or lack a solid credit history but can afford mortgage payments.
- The buyer purchases the home and pays you a higher monthly payment than the original owner’s monthly mortgage payment. You pay the original mortgage and keep the rest. Once the original loan is repaid, you keep the entire payment.
How Is Owner Financing a Win-Win for All?
If you follow our owner financing strategy, everyone involved in the transaction benefits, and no one loses! Let’s break down the win-win (meet or exceed objectives for the transaction) for each party involved:
How the Seller Benefits:
You (as the investor) help desperate homeowners who need to sell their homes quickly — and can’t sell at a high enough price to cover they debt they owe on the home. These are usually people who have fallen on hard times due to illness, job loss, divorce, or other life-altering events. Many have fallen behind in their mortgage payments and are at risk of losing their homes to foreclosure (meaning the bank takes ownership of the property and evicts the homeowner).
You help the homeowner avoid foreclosure, which would destroy their credit rating and make getting a new home or auto loan very difficult. You help them maintain or rebuild their credit score because you’re paying off their mortgage on time. Closing costs and other fees are very low using this method, so the seller ends up being paid more for their home than with traditional real estate transactions.
Furthermore, every month you make the seller’s mortgage payment on their behalf, you can rebuild
their credit. For those buyers that were behind on their payments when you purchased the house, you
can actually add up to 100 points each year you make the payments on a timely basis. This does not cost
the seller or the investor anything, it is the just nature of the transaction. And the seller continues to
reach the rewards as long as the investor is paying their mortgage on time.
How the New Buyer Benefits:
Many hardworking people dream of owning a home but can’t find a bank or mortgage lender willing to loan them the money. These are typically buyers who are self-employed and lack a documented income history or small-business owners who invest most of what they make back into their business. They can also be people recovering from a previous debt crisis, and their credit rating hasn’t improved enough to secure a bank loan.
You help these buyers achieve their home ownership dream by loaning them the money to buy the home. Closing costs and time to close are much lower using this method than traditional real estate transactions, so the buyer has more money to put toward a down payment and can move into their new home sooner. The buyer also gains equity in the home as it appreciates in value.
How You (the Investor) Benefit:
You benefit financially by securing a steady, long-term, passive income. Since you’re taking on risk by financing the buyer’s loan, you can charge a higher interest rate, usually around 9 percent. The seller’s original mortgage you’re paying off typically has an interest rate around 5 percent, so the difference between them (aka the interest rate spread) is pure profit for you. Once you repay the original loan, you keep the entire monthly payment, which can continue for years in a 15, 20 or 30-year repayment plan.
In most transactions, you don’t need a lot of cash or dilute your credit score by getting a bank loan to take over a mortgage and ownership. You can finance as many homes as you want this way, unlike “fix and flip” or “buy and hold (rent)” strategies where you need to have enough cash (or a loan) to buy homes to repair and sell or rent out. You incur none of the headaches associated with being a landlord or dealing with contractors and construction delays.
You also “win” by knowing your path to prosperity is helping others in need. We can teach you how to become an entrepreneur and take control over your future, build wealth and prosperity for yourself and your family and feel at peace knowing your path to success leads others to their own successes.
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