Investing in financially distressed areas is a pretty popular strategy for real estate investors…
And for people starting out, it's probably the first one they consider. You pick up a property cheap, you fix it up, and you flip it for profit.
Simple enough, right?
On this week's episode of the REI Roundtable podcast, host Rob "The House Guy" welcomes two return guests back to the show: investor Jenna Hoover and attorney Jeff Watson.
Jenna's strategy is buying and selling in two of Pennsylvania's most financially distressed counties.
Watch the video on this page or listen to the podcast here to learn how Jenna uses this strategy to create win-win scenarios for both her and her clients.
Now, if you're also primarily investing in low-income areas, you know it can sometimes be a challenge to find well-qualified buyers.
In this week's episode, Jeff is answering all of Jenna's questions about owner financing as an alternative… And you get to listen in!
Not sure what owner financing is?
Sometimes people call it rent-to-own or lease-to-own, but the most straightforward answer is this:
It's when the seller becomes the bank.
And it's a strategy that some sellers use when people are looking to buy, but are having a hard time securing traditional bank financing.
Honestly, it can be risky. And Jeff says as much. But, like any strategy, sometimes the extra work is worth it. According to Jeff, the most important way to protect your investment is by qualifying the buyer.
Here's what he suggests:
- What's their background like? What's their employment status?
- Require at least a 5% down-payment upfront.
- What's their credit score? Are they paying their other bills on time?
- How much do they have in the bank?
When you're not relying on a bank, Jeff says you have to look at the buyer's big picture. If that looks good, then what's next?
Well, it depends on the way you're going to go…
If you own the house outright, you collect the mortgage payment, and it's treated as income.
If you have a mortgage on the house, a portion of the buyer's payment will go to the bank, and a portion will be treated as income.
Remember, the less you owe on the property, the more income you'll get from each payment.
That's why Jeff recommends putting any down-payments you receive directly toward the principal of the loan, if you're still holding one.
Jeff explains it this way:
Owner financing is a way of describing a term of a sale of a piece of property where the seller begins to take payments over time as part of the agreement to buy and sell the land. The seller becomes the bank. The payments are made by the buyer to the seller and then, the seller has to do the appropriate thing with that money. If the house is free and clear, they keep the money, if they've got to pay it back, they've got to pay it back.
In owner financing, the buyer holds the deed, and the seller holds a promissory note.
Then, ideally, the seller will collect the buyer's payments, and turn a profit each month, until the seller has paid off the mortgage.
But, no matter how well you qualify the buyer, sometimes the unexpected happens.
On a land install contract, when they don't pay, it's typically treated as an eviction with a couple of extra periods of time for them to cure it. Until they've paid for like five years or have 20% equity or more, then it becomes a foreclosure process.
One more important thing to note: Jeff says that, in most scenarios, an investor can't enter more than 3-5 owner financing deals per year.
That means that owner financing isn't really a growth strategy… It's something you do to get started, or you do it where it makes sense.
Think of it as creating win-win scenarios for both you and your buyer, while moving 3-5 steps closer to freedom!
Do you have any owner financing experience? Sound off in the comments below!
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