[Dec/2022-Archive-Jun/2022 | RE] The Art of Seller-financing – my life & 1,000 houses
Chap 7 Landlord vs. Owner-finance (Exit Leg)
Normal RE investor – rental model
Hard to control cost tenants / etc.
Become a bank to not repair houses (no repair/maintainence cost)
Landlording vs. Owner-financing
Landlording
Tenant need to stay long time (low turn-over) and pay
Chap 10 – What’s RE Lien Note?
Chap 11 – What’s owner financing?
Acquisition leg vs. Exit leg’s owner financing
Wrap around mortgage
Think thru every entity in the deal
End-buyer / Lender / Myself / Seller
Key clause: if myself defaulted, lender doesn’t foreclose, but instead “step into my position” of the buyer.
Example:
Buy: $50K, 8% IO for 5-years, $333/month
Exit: $100K with 10K down, and 10.8% 30-year fixed
Chap 12 – Deal First, Money Second
Chap 13~19
Core Belief : Renter paying $1k to rent would rather pay $1k to own
Traditional values (based on comps) vs. Owner-Financed Values
The more demand you can create, the higher price you can sell (create demand by payment terms)
In rent – important to check “apartment rents”
Mom&Pop are not aggressive in apartment rents pricing, apartment rents are
Chap 20~23
Buy it – Don’t fix it, Owner Finance it
Mark up the price by offering financing options
Owner-financing to landlord
They can fix it
Avoid Dodd-Frank : it’s commercial loan not consumer loan
Case Study #1
PP 15K, private lender 17K at 8% IO for 5 years, non-recourse
Mortgage insurance $100 for private lender
Sale Price $38K, 3K down, owner-finance $35K at 11.99% for 144 months.
As-is where-is
Buyer fixed up the property, now the new ARV about 85K. Then sell the note without discount! (After seasoning half year and saw improvement)
Private Lender term
5 year 8% IO, 0% down, non-recourse
Why IO:
More cashflow in early end
Keep things simple, not amortized
Sounds like private lenders are retirees who wants to keep principle and spend interest – that’s also why they want 5 year terms
Non-recourse
There’s a choice – private lender at 8% non-recourse vs. bank at 4.5% with personal guarantee
More comfortable for author non-recourse
How to handle Balloon
1. Renew (understand retiree);
2. Another Private Lender;
3. Replace with “low interest rate” bank loan;
Get 4-5 community banks, use owner financed notes as collateral
15-20 year fully amortized at prime rate +0.5% (ideal target)
Rebuttal round #1
Round-robin style of negotiation, inform the worst provider, tell them to do better, than move upward
Eventual result
Initial rate: 4.5% (prime+1)
5 year ADJ
9% interest rate cap
15-year fully amortized
No convenants
i.e. they cannot call loan due based on any ratios
i.e. DTI / Appraised vs. Loan Balance
Sell note
After 5 year, note is “well seasoned”
Collateral appreciated more, easier to sell
Worst case : deed the property back to lender and finish it
You earned positive carry in the middle!
Most old retiree don’t want the house, they want the interest
This will shaken private investor confidence, don’t do this
Private Money is Key!
Affordable neighborhood works best
Typical number
Owner-Financing Exit: 10.5% for 20-30 years
Borrow 8% 50K, Owner-finance 10.5% 100K
Because we want owner-finance monthly payment to be approximately the monthly rent, higher priced house (i.e. 300K house with 2K monthly rent) wouldn’t work with interest rate like 10.5%
Chap 24 – Expensive houses
Expensive houses, more difficult in acquire + owner-finance
Acquisition
Method 1 – subject-to: get the existing mortgage at maybe 4-6%
Need attorney expertise, otherwise very damaging
Method 2 – Just institutional loan yourself
Get buyer (big downpayment) very helpful
Then owner finance at maybe 6.5-8.5%
Example:
Buy at 150K (hard money loan – short term)
Owner-finance to someone 330K with 100K down Get 230K note at 8% for 30 years
Use the note as collateral to get a 75K loan @ 5.5% for 10 years
Collect cashflows
Overall this is harder to do!
Sweet spot is properties less than 130K or less, means buying around 65K
Chap 25~27
Case Study #2
Buy: 38K PP, 1K Bird-dog fee, 2K extra for self, ARV 110K. At least need 20K to fix up (maybe a cheap region)
Financing: Private Lender: 41K @ 8% IO 5-years
Market to buyer strategy: bandit signs
Buyer type: contractor with rehab skill + some down payment
Buyer: 65K @ 11% for 15 years + 12K down payment
Note Exit: House is fixed up, Valuation=110K, sell the remaining of note
Recession-proof
In author’s opinion, Fair Banking Act (removal of red-lining) is a cause of 2008 crash
Owner finance is recession-proof because in 2008 crash, financing was removed for a lot of buyers, making owner finance as exit more popular
Regulation
Dodd Frank – do owner-financing on scale need “RMLO” (Residential Mortgage Loan Originator) – become one or hire one
Shortage of RMLO (with interest in owner-financing) and attorneys who understand it
Action step (by author)
Get reputable RMLO
Agree to price
Follow on compliance
Deal flow
Chap 28~35
Existing four ways of getting paid
When we buy the property (more funding from private lender)
When down payment from buyer
Spread in cashflow (due to wrapped mortgage)
When selling note
Fifth source of revenue: escrow servicing fee
There’s admin cost involved with payment collection
How to admin?
Newbie friendly – loan servicing company
$35 per monthly payment
Or in-house
Minimize the discount when selling notes (sixth source of profit)
Baseline: sell the 90K note for 80K today. This is unoptimized.
Idea 1: 90K balance fresh note, sell the first 200+ payments for 80K, keep it to yourself.
This creates enough “spread” between collateral valuation vs. the balance
Idea 2: Hold for 5 years, sell without discount
Collateral might have appreciated and there’s paydown, so could be enough spread in between
Idea 3: Seller payoff the note (refi after 7.5 years, which is avg mortgage life)
Chap 36~43
Selling houses
Retail/Whole-tail – MLS
Reputation doesn’t matter
Wholesale – cash-buyer list
SMS
Reputation matters
One-off mindset doesn’t work well
Owner-financed selling
Craigslist / Postlets.com / Personal Website / Bandit Signs / Front yard signs
25 bandit signs over 10-15 properties, get ~100 phones calls per day
Case Study #4
Buyer is investor, good contractor, not lacking money
Consummate the sale once buyer spend $20K in rehab, before that, lease option
Work quality by city inspector (green slip)
Once have collateral up, have a good note
ARV $85K
Note buyer pool – use “good deal” to add someone to stable
Case Study #5 – Hoarder House
Case Study #6 –
Manufactured home
Wheeler Estate
Willingness to finance gives a manufactured home value of $0 some value
Don’t move mobile home – it might cost more than the house
