I've had a couple of offers to buy - with owner financing - a property I own. However, I need to mortgage this house so I can have capital to buy more investment properties. Web searches have been mixed on ability / availability. Help me please, texags.

You're basically asking the lender to approve the person who is buying your house. They're counting on that person to pay you to cover their money. I'm sure you know this but that's why you won't find a traditional lender or a good interest rate. I've purchased two properties that were owner financed but the owner already owned it outright. If you find someone who will do this come back and update us. I'm curious how that works.

If someone can't get their own financing to purchase a property, they will never be able to agree to the terms that I would need to cover my risk. I would find another buyer.

I make more money owner financing than selling outright. Back to the original question....

If you owner-finance the house, you are selling it. In other words you don't own it anymore, you just have a Deed of Trust (lien) on it, which gives you the right to foreclose on default. You can "mortgage" what you don't own.

There is something called a Contract for Deed, that might get around this. I don't know enough to speak intelligently about these. You would need a good attorney to pull it off.

Your only asset is a Note Receivable, which you can try to put up as collateral, but very few banks would be interested in such a thing, especially if tied to a Single Family residence. A Private (hard) Money lender might do it, but their required interest rate will probably be higher than what you are going to earn on the note.

aggiebrad94 said:

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I make more money owner financing than selling outright. Back to the original question....

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This is an erroneous conclusion that many small investors fall victim to. I don't know anything about your situation, other than what you have shared. Here's what I do know:

- You don't have an endless supply of invest-able cash, which is why you need the mortgage. If you did, then this would certainly be true, because you'd be converting an asset back to cash, which you don't have a place to reinvest.
- You believe that the opportunity to re-invest your cash will yield a lesser return than you hope to realize on the seller finance note. If that's the case: Have you done the math on what happens if after 1 year, the buyer defaults and has torn up your house? Can they declare bankruptcy and restructure your note? What are the legal fees for BK and/or Foreclosure going to cost you?

For Fun and everyone's edification, lets say its a $150,000 house. For a Base Case: You seller finance it for 10% down and a 12% Rate for 15 years. It pays off in Month 18.

+ $15,000 Down Payment
+ $23,865 Interest Earned
+ $ 5,300 Principal Paid
- $10,500 Sales Costs (7%) for 1st Sale
+$129,700 Payoff

Total after 18 months: $163,365

Now, after 12 months, he defaults and you have to foreclose, fix up, and re-sell for cash in Month 18:

+ $15,000 Downpayment
+ $16,000 Interest Earned
+ $ 3,400 Principal Paid
- $10,500 Sales Costs (7%) for 1st Sale
- $15,000 Damage Caused by Tenant (New Paint, flooring, etc)
- $ 3,000 Legal Cost to Foreclose
- $10,500 Sales Costs (7%) for 2nd Sale
+$150,000 - Sales Proceeds in Month 18

Total After 18 Mos. = $145,400 (plus a lot of Gray hair)

Now, let's sell the house for cash and use leverage (6%, 15 yr.) to buy 2 $150k houses that net (rent - ownership costs) $800/mo:

+$150,000 Proceeds
- $10,500 Sales Costs
- $ 9,450 Interest Paid
- $ 1,600 Loan Closing Costs
- $ 2,000 Leasing Costs
+$24,000 Net Rent from both homes (15 mos. of rent)

Total after 18 Mos. = $150,450

I would say your assertion is only true in the best cases.

I'm sure you've done all this math, but this is for some of our readers who see over-simplified one-liners on Texags and take them as gospel truth.

Or (They don't even make the first payment)

+ $15,000 Downpayment
- $10,500 Sales Costs (7%) for 1st Sale
- $15,000 Damage Caused by Tenant (New Paint, flooring, etc)
- $ 3,000 Legal Cost to Foreclose
- $10,500 Sales Costs (7%) for 2nd Sale
+$150,000 - Sales Proceeds in Month 18

Total = $126,000

I see you've listed all the negatives but why not list out the return when the note performs for 15 years amortization?
I have done just about everything you can do in Real Estate and although owner financing is not the sexiest it's the best return IMO. I currently have 12 performing real estate notes but am very cautious to whom I extend credit to. My company is the lien holder and I make sure they have insurance and pay their taxes - that simple.

I owner finance plenty. We typically get 10% down and buyer/borrower pays closing costs. Buyer/borrower is typically all in around 13-14% down. These are typically properties under 200k sales price in DFW. Interest rates are usually above 9%.

I own rentals as well. Stay away from contract for deed in Texas unless it's non owner occupied.

You sell your upside with seller finance, but you also offload the overhead of repairs and maintenance, protesting property taxes, capex, etc

Copp said:

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I owner finance plenty. We typically get 10% down and buyer/borrower pays closing costs. Buyer/borrower is typically all in around 13-14% down. These are typically properties under 200k sales price in DFW. Interest rates are usually above 9%.

I own rentals as well. Stay away from contract for deed in Texas unless it's non owner occupied.

You sell your upside with seller finance, but you also offload the overhead of repairs and maintenance, protesting property taxes, capex, etc

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I guess my question is why would any buyer take that deal unless they were too risky for a bank?

Many buyers/borrowers aren't bankable. Doesn't mean they don't have the income, means they aren't packaged up all pretty the way banks want. We still process through a RMLO and have to prove they have the income to repay the debt being extended. If banks won't lend to them, they look to investors like us that will.

wilhunting said:

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I see you've listed all the negatives but why not list out the return when the note performs for 15 years amortization?
I have done just about everything you can do in Real Estate and although owner financing is not the sexiest it's the best return IMO. I currently have 12 performing real estate notes but am very cautious to whom I extend credit to. My company is the lien holder and I make sure they have insurance and pay their taxes - that simple.

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Cool. I'm curious. Have you ever had a loan go bad? Foreclose? Collected out of Bankruptcy Court? I've never met a lender who isn't "cautious to whom they extend credit." Unfortunately, sh-t happens to good people thats out of their control, and loans go bad.

Debt as an investment vehicle has a set upside, but unlimited downside. Its not like a stock that if things go well you will make good money to offset the risk of things going poorly. The best possible outcome for debt is that the note pays as agreed. There is a subset of private lenders who believe that the best outcome is to collect a downpayment, some payments, and then foreclose and do it again, but that's a different business model.

We are just Aggies helping Aggies understand the risks they are facing in a new venture. However, if you are wanting to have a resume measuring contest, then fine, I've underwritten, financed, purchased, and/or brokered over $2Billion in real estate transactions including office, retail, industrial, hotel, multi-family, single family, farm, ranch, and land properties. But none of that really matters here.

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