This section is all about how owner financing works and what steps you will have to take in the owner financing process as an investor.

 

 

This section covers benefits and risks to owner financing one of your investment properties. It also covers some of the risks in investing period

 

 

 

This section has some tips on how to make the right decision when purchasing an investment property, and how to make good decisions that will yield strong results

 

 

 

Owner financing is very simple. Think of the way someone would purchase a home with a conventional loan. The person is pre-qualified based on income, down payment, and credit history. This person then purchases the home by paying the down payment at closing, signs the paper work and takes possession of the home by having a deed issued in their name. They also pay taxes, maintenance fees, etc. depending on weather or not they are escrowing them or not.

 

In an Owner financed transaction everything is the same except for the fact that the owner acts as the lender in the transaction. The buyer still pays the down payment, taxes, etc. at closing. The deed is still transferred into their name. The only difference is that there are no loan origination fees or other lender based fees at closing.

 

Another difference is that an attorney will have to draft the final settlement documents stating the terms of financing, but the title company handles that just like they would handle any paper work in a standard transaction.

 

While owner financing is a great way to sell your home in a tough market, or to earn some interest on your investment; it doesn’t work for everyone. There are only two ways to owner finance a home

 

1. You own the home out right with no mortgage and no liens on the property

2. You have one of very few assumable loans with no liens on the property

 

If you are in situation number 2 you will need to do what is known as wrap around owner financing, which is where you get permission from your lender to do the owner financing and have the buyers name on the deed.

 

In most owner financed transactions the terms are pretty simple. The buyer usually pays around 10%-20% down at an interest rate of 7.0-9.0 percent (the interest rate depends on the market rate). The buyers also have the option of escrowing their taxes, maintenance fees, and insurance. But they are obligated to pay all of the above.   

 

As the financier you can also finance the home for them anywhere from 1-30 years if you would like. The idea for the buyer is to own a home while repairing their credit, and to acquire a conventional loan as soon as possible so they can start paying a lower interest rate. As the seller you can include an early pay off penalty if the buyers want to re-finance before the set date in the contract. This insures that you will collect as much interest as you would like.

 

 

 

There are many ways to invest in Real Estate and make money. The most popular way to do that today is by “flipping” a home. I am sure you know what flipping is, but just in case it is where you purchase a house well below market value, repair or improve the house and then sell it for a substantial profit in a short period of time.

 

Flipping is an excellent way to quickly advance your Real Estate portfolio and to make a large amount of money doing it. The problem with flipping is that in today’s market it is just not likely that you will be able to sell the home you purchased for the profit you’re looking for. The Real Estate market is at an all time low, and even though that means you can buy houses for dirt cheap, it also means that you are going to have to compete with those dirt cheap houses when it comes time to sell your investment. There aren’t many consumers who can afford a home right now with un-employment at an all time high, and credit tighter than ever; so the people who are looking are being mighty selective. This lowers your odds of selling your investment greatly compared to an average market.

 

How can you make your house stand out above the crowd? This question brings me to benefit number 1 of owner financing. Owner financing allows you to be one out fifty instead of one out of two hundred. The reason people are looking for owner financing is because they cannot get a conventional loan, which means owner financing is the only option they have to own a home.

Very few people are offering owner financing, so that limits your competition to only the homes that are offering owner financing. In this market there are more people who CANNOT get a loan, then those who CAN so you are going to get more interest in your home.

 

The next benefit has to do with the same principal as benefit number 1. The fact that you are now only competing with other owner financed homes means that you are less likely to be haggled on price and that you might even be able to ask for a higher price for your home depending on its actual value and just how good a job you’ve done selecting this investment property.

 

Benefit number 3, in my mind is the biggest benefit of owner financing your investment property and that benefit is MONEY! Not only will you make a profit on selling your home just like a traditional flip, but you are also going to make interest on every payment your buyers pay while you are waiting for that big lump sum of cash.

          

As an investor I am sure you understand that there are always risks associated with your investment.

With owner financing the risks most common with any investment are there and then some.

The first risk you are going to have is the same with flipping in general and that is that you will put all of your money into the wrong house and it will not sale. Maybe you put your money into the right house and factors beyond your control prevent it from selling.

 

Another risk you are running is that maybe the owner stops paying you and you have to go through the process of evicting them. This process can be very painful depending on how ugly it gets with the buyer. If they refuse to leave you will have to take legal action, and even after you get them out they may destroy the house. This is where the down payment comes into play, the down payment is kept in case something like this happens and you have to make repairs after the buyer leaves.  This process can also benefit you because you will be able to keep everything they already paid you and put the house back on the market.

 

The next risk has to do with the same principal as the last, and that would be that they don’t keep insurance on the house and it is damage badly or maybe even burns to the ground. This risk can be avoided by staying on top of the buyers and making sure they keep proper documentation for the home, and you can even insure it yourself just to be safe. The buyers could also fail to pay taxes or maintenance fees which you would have to pay out of pocket if the situation got out of hand. Again if you stay on top of things this should not happen. You can even escrow these payments so you know you’re getting them every month with the rent, so to speak.

 

One huge way to reduce risk is to work with the best Realtor possible. If this Realtor knows what he is doing he will be able to help you pick the right property to reduce the risk of not selling. He will also be able to screen your potential buyers to make sure you have the best possible chance of a clean transaction. Your Realtor can check your buyers credit history, job history, and many other aspects of their financial history to give you an idea of what kind of buyers you’re dealing with.

 

Another huge advantage would be to work with a Real Estate attorney. This attorney can help you with wording documents in ways to protect you, and he can also advise you in the best ways to protect yourself legally if something were to go wrong.

 

 

 

 

As with anything in you do in life, the way you start something will ultimately decide how well you finish. This is ultra true when it comes to flipping a home. You have to pick the right property, in the right area, for the right price. You also have to be very careful when doing upgrades because you may not see a return worthy of your investment in the end. When purchasing your investment property you have to consider three main things in order of importance

 

1. Location, Location, Location!!! Where your home is located will determine how desirable it is to live in, which will determine what you can sell it for. If you buy a huge house, with a million upgrades in a lousy area it will not sell for good price, and you are more likely to attract unstable buyers who may default on the loan.  The main factors considered in location will be the schools the home is zoned for, the quality of the neighborhood, and how close it is to shopping, work, etc. You are going to have to pay more for a nicer location, but you will also see a bigger return. You do not have to buy in the fanciest neighborhood in town. The trick is to find the best area for the price you’re looking to sell the house for. If you’re looking to flip a $500,000 executive home, it better be in a high class area. If you’re looking to flip a $130,000 starter home than it just needs to be safe and near good schools.

 

2. Layout and design of home. Obviously the home needs to be appealing to buyers in order for it to sell. Things that catch buyers eyes are the builder, layout, and upgrades. For example an all brick house built by David Weekley will sell for a better price than the same exact home built by Village builders with only one side of brick. It is important to pick a home that has a desirable layout and that either has upgrades or the potential for upgrades that will fit your budget. The biggest part of the layout will be the kitchen and master bathroom since this is what people most look for in a new home and these two things are the most expensive to upgrade. So it is important to pick a house that already has the right kitchen and master bath in place.

 

3. Last but not least is price, and by this I mean the total amount of money you are going to spend from the purchase of the house all the way to the end when it is sold. It is your responsibility to create an accurate budget for yourself including the cost of taxes, maintenance fees, insurance, and every other expense all the way through so you know for sure exactly what your going to need to complete this deal. A lot  of people panic when the money out of pocket starts to pile up and they push to sell the house very quickly because of the added stress. This can cost you a large amount of money on your return, and can easily be solved with simple planning. Another thing to consider when it comes to money out of pocket is the total amount of money you are going to spend on the purchase of the house and any upgrades you may do to it.

 

For example House A is built in 2000 and has a large amount of upgrades like tile, wood floors, granite counter tops and a very desirable layout. It is priced at $155,000, and you would not have to spend anymore money on it for upgrades, only a few repairs to get it on the market

 

House B was built in 1988, has a desirable layout but is lacking in the upgrade department and needs the exact same repairs as House A. House B is priced at $125,000 and would need some upgrades to net the same return as House A.

 

Your job in this scenario is to compare prices and make an educated determination as to which house is going to be the best investment and net you the highest return. It might be that House B can be purchased and upgraded for far less than the price of House A and still sell for a comparable price, thus netting you a higher return. The opposite could also be the case, so plan wisely, and know when to walk away.