Creative Real Estate Financing 101 - Part II

If you have negotiated for owner financing, you need to consider the terms.  There are a few things that will affect the terms and they are, an existing mortgage, seller’s needs, and flexibility of the seller.  Obviously the seller is fairly flexible if he is considering owner financing, however, you need to know HOW flexible he’s willing to be before continuing.  The only way to know is to ask.  This might be a parental home that was willed to them and they just want to get it off their hands.

Ask the seller if there is an existing mortgage.  If there is, ask him if the mortgage is assumable.  Most mortgages now are no longer assumable, banks fear the risk of foreclosure transferring a mortgage from one to another.  However, even if the mortgage is NOT assumable you can try to get a mortgage that would pay off the existing mortgage (at close) and then owner finance the rest.  If the owner  possesses 40% equity in the home, all you need a mortgage for is the remaining 60%.  Here’s how with that $100,000 home.

Cost: $100,000

Existing Mortgage: $60,000 @5.25% for 30 years = $331.32

Owner Finance: $40,000 @6.00% for 10 years = $444.08

Total per month:  $775.40*

*All numbers are estimates and only incorporate Principle and Interest.

By purchasing the house with owner financing this way, you will cover the mortgage, finance the rest and giving the owner MORE than he’s asking for the house.  In fact, you will give the owner $13,289.60 more.  This will enable you to negotiate with the seller to cover closing costs.

Also, if you can find out why the seller is selling, or even what the seller wants to do with the money.  For example, if the seller wants the down payment money for a cruise, make the suggestion of $5,000 cash and two cruise tickets in a nice cabin.  This will truly butter-up the seller and loosen him to your negotiations, and it lets him know that you do care about him as a person, not just a business transaction.

HOWEVER, you can treat your customers/tenants like people and not get emotionally involved.  With any business transaction, NEVER LET YOUR EMOTIONS CONTROL YOUR ACTIONS.  Yes, you may like the seller, but remember, the closer you get, the less likely you will want to negotiate and offer less.  Be friendly but do not befriend.

Related posts:

1. Creative Real Estate Financing 101
2. Creative Real Estate Financing 101 - Part III - Interest
3. Reverse Mortgages, Part IV - Estate Planning
4. 5 Ways to Make Money Investing in Real Estate