Looking for the diamond in the rough
When searching to buy investment property, it is a rarity to come upon a residential house where the seller will offer some form of owner financing. It is more common in commercial real estate, especially for rental buildings with over five units. However, whenever you come across the opportunity, by all means avail yourself of the chance to obtain some amount of paper being given by the owner to sweeten a deal.
The key advantage to owner financing
Any money you don’t have to put up yourself when you buy investment property offers you the opportunity to increase your leverage on the purchase. And if you don’t have to borrow from a bank (or worse, a hard money lender) then you will be saving your credit line possibilities for further down the road. And if an owner is willing to take back mortgage paper for at least some part of the purchase price, you will be ahead of the game. Even if that amount is small, or not a first mortgage, it will benefit you. Every little bit of leverage goes a long way. Of course, if you can obtain a first mortgage from the seller, even better still.
Costs to obtain owner financing
You can expect to pay for the seller’s attorney’s fees for preparing the mortgage. However, you’d be doing the same thing (paying attorney fees) if a bank was involved in granting you a mortgage. If a seller is willing to offer a first mortgage, you can expect to negotiate a break in interest rate if you are paying market rate or slightly more for the property’s purchase price. Conversely, if you have negotiated a great price on the building, expect to pay a slightly higher interest rate on the loan than a conventional bank mortgage would currently offer.
The leverage game
While owner financing helps you greatly in increasing your overall financing leverage and future options, don’t waste your time making it your number one pursuit when searching to buy investment property. It is still an elusive task and will take an inordinate amount of your time. It would be better to use your time more wisely – time that could be spent on more fruitful property searching. Don’t pass up a great deal simply holding out to obtain seller financing. But if you do manage to come across a willing seller offering some amount of owner financing, by all means, don’t pass it up.
You’ll negotiate just as hard as you would normally – but now you’ll be negotiating not just on price, but overall terms of the mortgage as well: interest rate, amortization schedule, and payoff term. Expect any owner financing to be short term – usually 1 to 5 years, but with amortization based on 15 or 30 years, with a balloon payment at the end of the overall term. Like with commercial paper, you’ll eventually have to refinance the overall remaining mortgage amount at the end of the term.
photos courtesy of awarenesshomefunding.wordpress.com, 4thavenuepropertymanagement.com, inside-real-estate.com, ehow.com, greateraustinhomes.com