Recently I was asked “How will property values ever come back up if the appraisers keep discounting values for the declining market and the cash Buyers want the lowest price possible?”
The answer of course is…..get the Lender out of the equation. No Lender. No appraisal needed. Higher sales price. What you talkin’ bout Willis?
Let me explain. REOs and short sales still dominate the market in my area and are still bringing values down. What’s strange about this is the fact that inventory is very low and sales are at an all time high but values are still being depressed by…….Lenders.
So…the “No Qualifying Owner Financing” is making a comeback. Investors are realizing that Buyers will pay a premium not to have to deal with Lenders. And the Investor can get a much better return on their money by holding a mortgage than they can renting the property out.
In fact, in my market, you can expect to get 10% to 15% more for your property if you’re willing to “hold paper”. How do I know this? Because my sellers are doing it.
Here’s an example of how this works out for a Seller.
Seller paid $85,000 cash 4 months ago. The intent was to rent it out for $1,100 a month. After expenses he would net about $750 a month. After 5 years the property may be worth…….well we don’t know do we? We do know if it were rented with no vacancies and no repairs (like that will ever happen) he would have received $45,120 in income. Roughly a return of 53% over 5 years.
Instead, what if he sold it for $120,000 with $25,000 down @ 8.75 with a 5 year balloon? By the way this property would appraise for $110,000 to $115,000 right now. It was purchased right because my buyer made offers on 14 properties at the same time. He ended up getting a deal on this one,
OK back to my example. With Owner Financing the payment would be $750 a month (same as the Net rent). After 5 years the balloon payment is $91,000 AND he would have received $41,500 in interest payments. $25,000 + 91,000 + 41,500=$157,500!! This a profit of $72,500 or a return of 85%. Roughly 30% better than renting AND he doesn’t own the property which means no maintenance or management.
Now folks these figures are not exact but they give you a real good idea of how owner financing works for the Seller.
And the Buyer? Well they can get a good house with a non qualifying mortgage and very minimal closing costs. It’s a win all the way around. The only loser? …Lenders!!
What say you?
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I say that ROCKS the HOUSE! I have a feeling that it will still get harder and harder to obtain a mortgage so this type of financing will become uber popular. About 50% of the homes selling at trustees sales here are NOT going back to the bank. They are going to private investors or parties. That number was only 2% last summer (08). Somethin is up ;)
Makes sense to me. This is what we did back in the early 1990s. . . . . I'd advise the sellers to get a credit report for the buyer, even if the buyer had to pull it with the seller witnessing it. Owner financing is making a come back. Not so much in our area.
In October, owner financing represents only about 1/2 of 1 % or less.
Hi Bryant... it makes very good sense, but I think it will take a while for folks to overcome their natural resistence to change and embrace a different approach to financing.
This a fantastic opportunity for the investor. With loans getting harder and harder to come by, this makes a lot of sense for an investor to carry the paper if they are able. No 90 day flip rule either! Obviously they would need to do their due dillignece on the buyer, whatever that looks like for each situation.
I say it's Friday night and those are too many calculations at this hour, but I trust you!
I'm beginning to see some signs that this is coming our way here as well.
Hun...
After the year we've had I think I've lost a bit shock value. This post should leave me feeling differently. But, I just don't :)
TLW...ROAR!
I have a cash investor and I was strongly recommending he do just this. Forget about renting, but carry the note.
BB - Lenders have stopped lending on co-ops in my area, it seems like not just a good alternative, but the only alternative.
Even with the buyer not being qualified, it's still an acceptable risk. The seller has $25,000 up front and if the buyer stops making payments the seller can foreclose on the house and keep the interest. Win-win.
Lenders are the losers...yeah!
This is a great example of how this works. I just reblogged another article on ths same topic...think I am going to have to add this to my blog as well to cover the same story from a different but similir viewpoint.
Thanks for this BB
John
Bryant, You know how much I love owner financing and sounds like I need to make the move to Florida and help get some owners some serious cash flow from their property. Oh, wait you have hurricanes and humidity. I guess I will just have to watch you have all the fun.
Great post Bryant. Makes absolute sense. Let's get rid of these lenders.
If the owner can carry, Why not? Inform, educate and have at it..
Gene
I haven't noticed a huge uptick in our number OFFERING owner-carry but I have seen a HUGE increase in the number of folks wanting owner-carry. Unfortunately most of our sellers are not in the position, needing the funds in order to move on.