Let’s take a moment to talk about financing secrets when purchasing an investment property. We all know the standard way to purchase a property is to get a loan from an institutional lender such as a commercial bank. These lenders generally make loans based on any incoming credit of the borrower, and they generally follow standard lending guidelines which gives you little to no flexibility.
Now I’ve been down this road for several of my investment properties which is usually the way you need to start but as you become more experienced you start to learn some additional tricks of the trade. There’s nothing wrong with getting loans from commercial banks but what you do if you have bad credit or are currently out of work?
The financing technique I’m going to talk about is unknown to most new real estate investors and is what’s called ‘owner financing’. It’s one of the best sources of capital for your real estate purchase and in an ideal world, every real estate purchase you make would be with owner financing. It provides benefits such as low risk, an endless supply of funding, and great terms — what more could you ask for?
So what is owner financing? Basically it’s where the seller of the property deals directly with you instead of using a bank for the loan. The seller acts as the bank and essentially provides you a loan without charging points or unnecessary bank fees. For example, one of my Albuquerque properties is seller financed and I only put down 10% cash and created a note for the remaining 90%.
I wanted to close quickly since it was a good deal and I didn’t have to get preapproved for a loan, have my credit checked, deal with the slow process of working with a bank or a lending broker, or get charged unnecessary fees.
In summary, here are the advantages of owner financing:
- Easy qualification – you don’t need traditional lender income and credit approval to get a loan. Useful for people with poor credit or lack of provable income
- Cheaper costs – you don’t have to pay points, origination fees, underwriting charges, appraisal, credit reports, and all the other junk fees charged by conventional lenders which can add up to thousands of dollars at closing.
- Faster closing – an owner finance transaction can close in a matter of days. There is no lender approval or other delaying factors to hold you back.
- Less risk – large institutions or banks will allow you to make a late payment without hurting your credit rating. This is not to say owner financing will prevent that but it will definitely be more flexible censure dealing with an individual versus a bank.
Now in order to take advantage of seller financing you need to make sure the seller is even willing to take this route. If the seller is also a real estate investor, it’s likely he has several properties and can float you a loan versus an individual who’s looking to roll his profits into another property. I would say that 80% (if not more) of all sellers will either not understand how seller financing works or not be willing to do it because they need the money right away to invest in something else. If you happen to find a seller who’s interested in seller financing, I highly recommend you pursue it (assuming the terms are fair).
Remember, even if this is your first investment property purchase, it doesn’t hurt to ask the seller if he’s interested in carrying the loan. Regardless, be prepared to have a backup plan with a preapproved letter from your local bank or lending institution so you can move swiftly if the property is right for you.