One of the most popular questions that I get from my students is “Where do I get money for the down payment?” In this article, I am going to discuss one strategy we employ to find that elusive down payment: Owner Financing.
Owner financing is confusing to many newbie investors, as well as seasoned investors. It is referred to by other names, such as seller financing, holding paper and private money mortgage. Owner financing is simply a loan provided by the seller to the buyer. Buyers use this to assist in the financing of their deal, and agree to make installment payments usually on a monthly basis over a specified time frame until the loan is repaid.
Read the AUDIO version of this blog on ‘Owner Financing’:
Let me give you an example how Owner Financing works.
In our first deal, we had no credibility and even less money, but we located a property that had potential. The property was listed for $750,000, but had been listed on Loopnet for over two years. We approached the seller and asked if she was willing to hold paper as pat of the down payment. We agreed on a $600,000 sales price, with 10% cash down from us, 10% seller financing and 80% bank financing.
There are several factors that are needed in a deal to be able to utilize this strategy.
- You need a motivated seller. We had one, a couple that was burned out and ready to retire.
- You need a broker who understands owner financing and can convince the seller to consider it. I would use the word educate rather than convince because there are benefits to the seller.
- You need the participation of a bank who is willing to lend money on a deal with owner financing. Our deal met all of these conditions, and we closed on the deal.
We were able to control an asset that was valued by the bank at $600,000 with only approximately $80,000 out of our own pockets. This is one of the main reasons why owner financing leads to achieving massive wealth. Most successful real estate investors have heard of the term OPM, (other people’s money) and by being able to control the most amount of properties with the least amount of money leads to an explosion in wealth creation.
One note: Leverage works in the other direction. If your investments begin to falter, then your losses will also compound.
Fast-forward three years.
We have just refinanced this first deal. The bank appraised the property for $800,000, and we were able to distribute $180,000 to ourselves. The power of leverage allowed us to purchase a property with $80,000 of our own money, and with excellent management, we were able to increase the value of the asset and recoup our initial investment. Our rate of return going forward on this investment is infinite, and that is the goal with all of our investments.
What happened to the note with the seller?
We decided to offer the seller $10,000 if she would extend the note an additional five years. She agreed, and the length of the term of the note was now eight years. Our timing on this refinance may have aided us in the seller’s willingness to extend the note. Christmas was right around the corner, and maybe the seller wanted some cash for Christmas presents. We’ll never know, but it makes for a good theory.
The moral of the story.
“To create wealth in real estate, create value and think outside the box.”
The most common phrase I hear from other investors is “You can’t do that.” Most people are stuck inside the box. Change your mindset to “How can I do that”, and force your mind to come up with creative solutions.
If we had listened to the naysayers, we would have never landed our most recent deal, a 281 unit $11,000,000 asset with NO money down. The seller offered to hold 20% as the down payment, and the bank provided 80% financing. If you look for opportunities instead of problems, they will begin to appear.
You too can access this wealth building strategy. To learn more, visit our website or contact us.
Please leave us a comment below and let us hear of your success with owner financing. We are always looking for creative and unique ways to expand our portfolio and our lives.
By Gino Barbaro, Co-founder, Jake & Gino
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