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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.

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