Three questions we are constantly asked are:

  • What is owner financing?

  • Why is it your choice of investment strategies?

  • How does it work?

What is Owner Financing?

Owner financing occurs when the owner provides the financing for the buyer to purchase the house, instead of the buyer seeking help from a third-party.

Instead of having your buyer borrow the money from a bank or mortgage lender, the ownership themselves lends the money to the buyer so they can purchase the property. Thus, instead of the bank or mortgage lender collecting all money from the interest on the loan, as an investor we collect all that interest over the life of the loan.

Yes, you can sell houses and create mortgage loans as an investor.

Why is it our choice of investment strategies?

First, owner financing allowed me to start investing in real estate and build significant wealth over a relatively short period of time without having to possess a great deal of cash or have great credit.

Actually, most of the houses that I buy do not require any cash or any credit. Purchasing houses this way means that I have no limit on the number of houses that I purchase in any given year, or even throughout my investing career.

Second, this is the only investment strategy that allows every participant in the transaction to “win “(get their goals and or objectives met or exceeded). In any other investment strategy, the investor has to capture most or all of the owner’s equity to make money. That is not true using owner financing. Actually, the way that we buy houses gives the owner’s the opportunity keep their equity while I still make allot of money.

Three, buy and selling houses with owner financing is by far the most profitable strategy. Using this strategy, over the last almost decade, we have been averaging about 154% profit on every house we buy and sell. Not only do we average about 12.5% down payment (which is more than most fix-and-flips and wholesale deals), we then collect thirty years of passive income.

Why are owner finance deals good for the seller?

  • Seller can be paid more for their house. We can pay up to 7 – 10% more for the houses versus selling them with a realtor in a traditional retail transaction. Sometimes we can even pay more than the house is worth (under the right conditions and if purchasing it using the subject-to or wrap-mortgage transaction)
  • Seller can sell the house much more quickly. When time is of the essence, for example when facing foreclosure, we can purchase and close within a day or so (when purchasing with the subject-to or wrap-mortgage transaction)
  • Seller can gain freedom from the mortgage payments. Most of the time, the seller needs to sell their house not because of anything to do with the house rather because they cannot afford the payments. We can purchase the house and give them immediate relief from having to make the mortgage payments.
  • Seller does not have the make any more repairs. We generally buy the house AS IS, so the Seller does not have to make any repairs and or worry about the inspection.
  • Seller gains allot of certainty around closing. We generally do not require appraisals, inspections, surveys, and our closing costs are minimal and at a set cost. We save the Sellers a great deal of money when selling us their house.
  • Seller’s credit can be rebuilt even after the sale. For those Sellers that have been delinquent on their mortgage payments and we purchase the house using the subject-to or wrap- mortgage transaction, every month we pay the seller’s mortgage payment on time we are rebuilding their credit. It is possible that we might even add up to 100 points to their credit score per year for the first few years after we take over their payments.

Why are owner finance deals good for the buyer?

  • Buyer has opportunity to own a piece of the American Dream. For those buyers that cannot qualify for a traditional mortgage loan, for whatever reason, we give them the opportunity to buy their own home.
  • Buyer pays significantly lower closing costs. Traditional retail transaction costs can range from 12.5 to 16.0% of the sales price, the closing costs working with us is dramatically lower (generally around $2,000 plus taxes and transfer fees). The Buyer then can put more money down on the house or have more money to decorate the house.
  • Buyer can close faster. We can generally close our transactions within 10 to 14 days, compared to up to 50+ days for a traditional retail transaction.
  • Buyer can build up their credit. Every month they make their mortgage payment on time, the buyer builds up their credit score.
  • Buyer will be entitled to Federal (and possibly State) tax deductions. Unlike when renting, home owners can generally deduct their interest they paid on their mortgage plus the paid property taxes. This can amount to several thousands of dollars for the year.
  • Buyer enjoys the appreciation of the house. When the home values increase, the additional equity in the home accrues to the homeowners.
  • Homeownership builds stronger families. Several studies by Habitat for Humanity have outlined many powerful benefits of homeowners, the most striking is the difference in makes in the children of the owners. They are 116 times more like to graduate from college, 20% less likely to endure the pains of teenage pregnancy, earn an average of dollar more an hour at their jobs, 59% more likely to own their own home when they are adults, and they report a much stronger sense of self-esteem and life satisfaction later in life. Homeownership builds stronger families.

Personally, it makes me feel great just thinking that I am contributing at least a small part of these benefits for my sellers and buyers. I love watching families start dancing in the parking lot right after they have purchased a house – I cannot tell you how satisfying it feels being a part of giving someone that opportunity.

Why are owner finance transactions good for the investor?

Owner financing transactions allow everyone in the transaction to “win” (meet or exceed their objective for the transaction). With any other transaction, the investor is looking to buy a significant amount of the seller’s equity which results in a “win” for the investor and a “lose” for the seller. There is no judgement about this nature of traditional real estate investor transactions, it is just the nature of that beast.

Other real estate transactions rely on only one component of the transaction to make money: traditional equity. Traditional equity is the difference between what I paid for property plus any repairs and or upgrades and what I received when I sold the property.

With owner finance transaction, we rely on all four components of the transactions to make money. This allows us to pay the seller the vast majority of their equity, which allows them to “win” while we earn our money on all four components of the deal, allowing us to “win” as well. Let me explain:

  • Traditional equity. We capture the difference between what we paid for the property and the subsequence repairs versus what we sold the property for.
  • Owner finance equity. We can generally sell our houses for 7 – 20% above the market, because people will pay for not only the house but also the financing. We call this difference the owner finance equity.
  • Interest rate spread. We may purchase a house with an underlying mortgage with a 5.0% interest rate, and then sell the house and carry back the mortgage note with a 9.0% interest rate. The difference between these two are our interest rate spread, and is the most powerful generator of profit for owner finance transactions.
  • Maturity spread. We may purchase a house with an underlying mortgage that has a loan that matures in 22 years, while we sell the house and carry back a mortgage with a loan that matures in 30 years. This last 8 years is our maturity spread, during which time we collect the entire amount of the principal and interest payment on our loan as our cash flow without having to payout anything to the underlying mortgage lender (since it is already paid off).

When we take advantage of all four components of profitably, we have historically generated well in excess of 100% profit from every house we have purchased, on average.

Case Studies

Let’s take a look at a couple case studies of real life deals that I have done in the last several years:

Bentree Drive, Fort Worth

This is an example of a house sold within the later part of 2017 where the owner had a mortgage on the property.

An investor friend of mine called me in November 2017 and explained that he owned a house that he needed to sell. He knew that I could pay him more money for the house than if he had sold it on the retail market.

He purchased the house from a local wholesaler, remodeled the house, and took out a 30-year mortgage. He was paying the mortgage and was anxious to sell it and limit his exposure in the house. I drove out to the house and looked at it, it was in great shape.

The mortgage lender reported that the principal balance was $119,435, the interest rate was 4.625%, the principal and interest payments were $617 a month, the maturity was in 355 months, and the loan was current.

The investor presented an appraisal valuing the house at $160,000 and he stated that he wanted $15,000 as a down payment and would allow me to take over making the mortgage payment. He told me that he needed that amount of money so that he could send the money to his home to help his sister with a medical issue. I agreed to those terms.

I put the house under an option contract, allowing me to find a buyer before I closed with the investor selling the property.

I knew that my wife, who runs our sales department, had a buyer that really wanted to purchase a home in Irving since it was close to their business. We called them and set up an appointment the next morning. As soon as we showed them the house, they told me that they wanted to buy it.  These folks wanted a house close to their business, but since they were self-employed (they ran a bookkeeping and tax service) they could not qualify for a traditional mortgage loan.

We sold the house for $149,900, with $15,000 as a down payment, carried back a mortgage loan of $134,900 bearing an interest rate of 8.50% for 360 months (30 years), with an principal and interest payment of $1,037

At closing, we collected the $15,000 down payment, and every month since they we will collect $1,037 from the buyers and pay the sellers $726, and we keep $311 a month. After 20 years I will have paid off the sellers in full, and the last 10 years I will collect $1,037 and keep all the month

So, let’s look at the total value of this deal.

Down payment  $15,000
Payments (first 240 months, $1,037 — 726 per month) $174,200
Payments (last 120 months, $1,037 per month) $124,400
Total value of the transaction to investor $313,600

Everyone won on this transaction:

  • The seller was paid more than fair market value (retail) for the house.
  • The seller was able to avoid investing any money in the house for upgrades and repairs.
  • The sellers are able to collect a much higher interest rate on their investment than if they had collected cash and placed in the bank.
  • The buyers were able to buy the house of their dreams, without having to deal with all the hassle and expense of obtaining a traditional mortgage loan.
  • The buyers invested another $50,000 in upgrades and expanding the house, creating their dream house. (They never plan on selling this house, so they are not concerned about their investment versus the relative prices in the neighborhood.)
  • The buyer was able to raise their children in a house they owned, enjoying the tax and other benefits of ownership they could never realize while renting.
  • The investors that worked with me were paid.
  • We were able to donate $31,400 to charity from this one property.
  • And as the investor, I generated $311 a month passive income.

Rochelle Boulevard, Irving

This is an example of a deal done within the last couple of years where the owner did not have any debt on the property.

In June of 2016, a gentleman called the number on a bandit signs one of our students placed the weekend before. We set up a meeting with him the next morning and met he and his wife at their house in Irving, Texas.

The father told us that the house that we met them at was the house that he and his wife raised their family and had paid off the house (there was no debt on the house). Since that time, they retired and moved to a ranch in Uvalde, down in the Hill Country of Texas. Even after they moved out of the house, their children remained living in the house for the last couple of decades, without paying rent.

The father wanted to have his children learn independence and learn to be on their own. The only way that he knew to do that was to kick their adult children out of the house, but the mother would not allow him to do that. She was not going to risk their relationship. So, he decided the next best thing was to sell it and have the buyer kick them out of house. We would achieve two goals at once, get their money from the house and get their children to finally move into their own place.

We reviewed the condition of the house, we both agreed that it needed about $20,000 in cosmetic work and was going to be worth about $120,000 after the repairs were done. I asked the seller what they would do with the money if I paid cash. He responded they would put in the bank and we agreed they would only earn about 0.50% interest rate in a savings account or certificate of deposit, at the very most.

I offered to pay the sellers $110,000, by the sellers giving me a mortgage bearing an interest rate of 5.0% payable over the next 20 years (or 240 months), with a monthly principal and interest payment of $726 a month. After a very short conversation, the sellers agreed to sell me the house based on those terms.

Within a month we found a nice family that wanted to buy the house. The husband was a construction contractor (self-employed) and could not obtain a traditional mortgage loan. We presented the terms we were selling the house for and he and his wife quickly agreed.

We sold the house for $160,000, with $8,000 as a down payment payable at closing, and a second payment of $3,000 towards the down payment to be paid within 3 months (when they get their income tax refund), and carried the mortgage loan of $148,900 back bearing an interest rate of 9.50% for 30-years, with the principal and interest payment of $1,252.03.

Now I collect $1,252 every month from my buyer and pay the underlying mortgage lender $617, and I get to keep $635 a month for 355 months. After I pay off the underlying mortgage lender, then I keep the entire $1,252 a month (for the last 5 months).

So, let’s look at the total value of this deal.

Down payment (both payments) $11,000
Payments (first 355 months, $1,252 — 617 per month) $225,400
Payments (last 5 months, $1,252 per month) $6,300
Total value of the transaction to investor $242,700

Everyone won on this transaction:

  • The investor was able to able to earn more money selling the house versus selling the house on the retail market.
  • The seller was able to quickly sell the house and minimize his exposure expenses for while the house was on the market.
  • The buyers were able to buy the house of their dreams, without having to deal with all the hassle and expense of obtaining a traditional mortgage loan.
  • The buyer was able to raise their children in a house they owned, enjoying the tax and other benefits of ownership they could never realize while renting.
  • The investors that worked with me were paid.
  • We were able to donate $24,300 to charity from this one property.
  • And as the investor, I generated $635 a month passive income.

Riverhead Drive, Arlington

This is an example of a deal that we did several years ago where the owner had a mortgage loan on the property.

In May of 2011, I received a phone call from a lady that had a rental property being managed by a realtor*. Over the last seven months, the realtor had been collecting the rent and not paying the mortgage. The house was posted for foreclosure within a couple of weeks. She asked if I could help her.

The mortgage lender reported that the principal balance was $78,300, the interest rate was 5.00%, the principal and interest payments were $482 a month, the maturity was in 265 months (just over 22 years), and the amount required to bring the loan current was $6,600.

I agreed to buy the house by agreeing to bring the loan current and make all future mortgage payments on the mortgage loan held by the owner. The owner agreed and we went to closing.

After closing, I owned a house worth about $100,000 by paying only $6,600, and the house already had the financing in place (the owner’s mortgage loan).

When we brought the loan current, immediately the seller’s credit increased. Every month we make her payment on time, we increase her credit score. And we prevented a foreclosure on her record. She definitely “won” on this transaction.

Later I showed the house to a new family that was tired of paying rent and wanted a piece of the American Dream, living in their own home with their family. He is a construction contractor and is not able to qualify for a traditional mortgage because he is self-employed.

We sold the house to them for $112,000, with a down payment of $11,200. We originated a mortgage in the amount of $100,800 with an interest rate of 8.86%, payable over 30 years with a principal and interest payment of $801 a month.

I used the down payment from my buyer ($11,200) to reimburse me for paying the amount to bring the underlying mortgage loan current ($6,600), so I was cash flow positive by $4,600 when I sold the house.

Now I collect $801 every month from my buyer and pay the underlying mortgage lender $482, and I get to keep $319 a month for 265 months. After I pay off the underlying mortgage lender, then I keep the entire $801 a month (for the last 95 months).

So, let’s look at the total value of this deal.

Amount to bring the loan current $(6,600)
Down payment $11,200
Payments (first 265 months, $801 – 482 per month) $84,500
Payments (last 95 months, $801 per month) $76,000
Total value of the transaction to investor $165,100

Everyone won on this transaction:

  • The seller saved her credit from a foreclosure, and we have been building it back up for the last six years.
  • The buyer was able to raise their children in a house they owned, enjoying the tax and other benefits of ownership they could never realize while renting.
  • The bank is being paid in full, saving them the cost of a foreclosure which has been reported as high was $50,000.
  • The value of the neighborhood was stable and did not decrease due to a foreclosure, hurting the values around the house and decreasing the taxes the city and county can charge because of lower values.
  • The investors that worked with me were paid.
  • We were able to donate $16,500 to charity from this one property.
  • And as the investor, I generated almost $320 a month passive income.

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