As we look to build our real estate portfolio we need to learn what we can about the different ways to finance a property or other income-producing asset. Understanding owner financing can help us grow our portfolio. Understanding what to do in order to obtain owner financing can be an important tool in our quest to be a successful investor. Let’s consider some things we can do to utilize this important tool:
- Perhaps you have found a property where you don’t have the cash for a down payment, but your credit would allow you to finance the rest of the house. Talk to your seller. She may be willing to carry a note for your down payment. Let’s say she sells you the house for $100,000 and the bank is willing to loan 80% loan to value. The appraisal shows the loan can be made for $80,000 from the bank. The seller could finance the other $20,000. The key is to not be afraid to ask. You could amortize the loan and make the payments over time or arrange to make a balloon payment. Always be thinking of ways to get a deal done.
- Though not technically owner financing, lease options are a creative way to finance a deal. Look for an owner who is having a difficult time selling a property. (This really works in slower markets.) Approach the owner and ask them if they would consider a lease option. Let’s use the following as an example: Perhaps you could offer an option of $5,000 and agree on a sale price of $100,000. You agree to lease the property from the owner for $800 per month. Try to negotiate the longest possible time you can get to exercise you option. For our purposes let’s say that option is for two years.
You will then look for a buyer who will lease the house from you. Offer your buyer the opportunity to purchase an option from you. For example, your buyer leases the property from you for $1,100 per month and offers a $10,000 option. Now, let’s say your buyer exercises his option after one year. You would then exercise your $5,000 option. You would make $5,000 on the option and another $3,600 on the rents. Your total profit would be $8,600 for the year you were involved with the property. We didn’t even consider what you could have made if you offered the property at a higher price than what you had optioned.
- Finally, let’s look at what you could do with mobile homes with a property owner who would be willing to work with you. Quite often in older mobile home parks there will be homes that have been abandoned. These homes are often left with repairs and renovations needing to be done. They are often an eyesore in the trailer park. It is costly for the owner to do the repairs and costly to move the mobile home. This is where we can take advantage of a situation and make money. Ask an owner to allow you to take ownership of the mobile home with the stipulation that you will find renters or find someone to buy the mobile home from you. Quite often you will find owners who are willing to consider and execute such an agreement. You are now in for the cost of rehab and the owner has a decent mobile home in their park. You will then sell or rent the mobile home. You have just created an income or a profit.
Use your imagination and do not be afraid to talk to people and propose your ideas. These are some effective creative financing tools that allow you to use a seller’s money. Best of luck in your investing!