Three questions we are constantly asked are:
What is owner financing?
Why is it your choice of investment strategies?
How does it work?
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.
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?
Why are owner finance deals good for the buyer?
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:
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.
Let’s take a look at a couple case studies of real life deals that I have done in the last several years:
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
|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|
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).
|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|
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 $801 a month (for the last 95 months).
|Amount to bring the loan current||$(6,600)|
|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|