When it comes to running a real estate investing business and actively purchasing or wholesaling properties, there is a significant amount of work that goes into seeing the transaction all the way through and actually closing on the deal. Anyone who’s been at this long enough understands that only a certain percentage of deals that go under contract actually end up making it to the closing table, and even the deals that DO make it to the finish line often experienced unforeseen delays, extensions, or possibly even re-negotiations.
Of course it is our job as investors to refine our systems and processes in order to increase the likelihood of executing on our commitments to a property seller, but things will arise during financing or inspections that are often out of our control, especially in commercial multifamily real estate which is what we specialize in. Whether it’s infrastructure concerns uncovered through due diligence, income discrepancies identified in seller deliverables, or last but not least, the biggest killer of all real estate deals… appraisals and bank financing. The bank is where real estate deals go to die…
Now, we aren’t against bank financing by any means. In fact, long-term low-interest bank loans are the ideal form of debt on any real estate project. We personally have commercial loans out on 4 of our mobile home parks valued, $7 Million in real estate. However, we have also had to buy parks for cash or on seller financing because the bank didn’t approve the asset for one reason or another, and there is a long list of reasons why not meet the bank’s underwriting criteria, however, that doesn’t mean it’s not a good deal.
Of course, over time, you build relationships and track records with lenders and mortgage brokers and get access to more loans and better rates. However, the deal still has to meet the bank’s criteria, which is often far more strict than your deal criteria. THIS is where understanding how to present and arrange seller financing is crucial, especially when you are buying off-market properties direct-to-seller.
We’ve personally purchased over $1.2 Million in income-producing real estate with owner financing. (3) MHPs in multiple states totaling over 100 units. For our sales process, we have our acquisitions department present owner financing with every seller lead. The Seller may not be overly interested from the start, but it plants a seed to revisit as you enter into the due-diligence and inspection phase.
Before we dive into this, I want to clarify that from a title and legal standpoint, there are essentially 2 types of Owner Financing, and the one you execute will be dependent upon the state that the asset is in. You should consult with your legal representative before entering into any Seller Financing arrangement.
Before we distinguish between the two different types of Seller Financing, let’s quickly define and summarize what Seller Financing is:
Owner Financing is a method for purchasing real estate in which the Seller finances a portion of the purchase to the Buyer, typically in lieu of a bank loan, with similar terms except that Owner Financing typically comes with a shorter term length. Again, this video applies to all real estate asset classes, but we are in the commercial multifamily space, so a common structure for us is a 10-30% down payment, 3-6% interest rate, 1-5 year term, with a balloon payment at the end, at which point we refinance with a commercial loan after having had some time to stabilize and add value to the property.
The biggest differentiator between the two types of Owner Financing is the point at which the actual physical deed transfers to the Buyer. So the two types of seller financing are as follows:
Bond For Deed: The deed of ownership doesn’t transfer to the Buyer until the END of the agreement, after the terms have been fulfilled in their entirety, and the Seller has received the full purchase price (plus interest) for their property. This is also commonly referred to as a Contract for Deed, Land Contract, or Installment Land Contract.
Owner Finance / Note and Mortgage: With a straight Owner Finance arrangement, the Seller conveys the Deed to the Buyer at the BEGINNING of the agreement and creates a note or mortgage that goes on file at closing, becoming a first position lien holder. Once the Buyer has successfully completed Due Diligence and the Seller has received the down payment from Escrow, there will be a promissory note in place and deed of trust or warranty deed just like a traditionally financed closing.
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