|Goldmine In Offering Financing To Buyer-Occupants
I am going to share with you why you can make a ton of money by offering financing to owner
There's no lack of prospective homebuyers who'd love to get into a home without going through the
loan qualifying process. There're plenty of reasons for that: employment history, credit problems,
lack of down payment funds, self-employment, etc.
If you're in the business on buying and selling homes, understanding the motivation of people you do
business with is crucially important for your success.
When you put your seller's cap on and advertise your properties for sale, you will have to deal with
both investors and buyers who want to occupy the homes you have.
Investors Are Motivated By a Gain
The main difference between investors and homebuyers is - investors are profit motivated. They are
looking for a gain.
This gain will come either from the monthly cash flow, or from the resale of the property, or both.
Therefore, investors really watch out and negotiate harder for payments and prices they'll have to pay
Those who invest in rentals must have very favorable financing terms to guarantee them low payments
and acceptable monthly cash flow. Others, investing in rehab properties are concerned with making a
big gain on re-sale.
If they don't see the gain in the near future, the numbers simply won't work and they won't be interested
Homebuyers Are Motivated By A Dream
It's an American dream of home ownership. Specifically we're talking about the buyers who applied for
home loans but have been rejected, or those who haven't even tried to apply because they don't believe
they can get a loan.
They really want to switch from throwing money away on rent to building equity and having something
of their own. Pride of ownership is important.
Knowing that nobody can ask them to leave and sell the house from under them is important. The
opportunity to remodel the house to their liking is important. The opportunity to tell their friends
and relatives "they bought a house" is important.
Because homebuyers are not profit motivated (at least not immediately), they are much less concerned
with payments or price. They don't have to worry as much about making "positive cash flow"
on a house.
They're actually concerned with both price and payments, but mostly to the extent whether or not
they can qualify for a loan and then afford the payments.
The most important thing for them is the fact they can buy and own the house.
Therefore, our job as smart investors becomes to offer such buyers that opportunity. As I mentioned
before, it's an item in low supply and a relatively high demand.
Profiting From Financing
When you help home buyers who can't get a mortgage loan on their own to get into a house you get to
make a hefty profit.
Because, as I mentioned before, when you are providing a commodity in scarce supply you can ask
and receive a premium on the price and payments.
Is this fair deal for all parties? Absolutely.
You are offering the opportunity to these homebuyers that doesn't exist for them otherwise. The
only other choice they have is to wait until their credit situation changes and until they save
money for a down payment.
This alternative is actually much more expensive for them than doing business with you. Waiting and
saving could easily take them 3-4 years. In the area with growing housing prices it means they could
be paying $30-50,000 more for the same house you can sell them today quite a bit cheaper.
On the top of that, they will likely be paying escalating rents during those 3-4 years it takes them
to get to the point of being able to qualify for a loan.
Upsides Of Offering Financing To Buyer-Occupants
The upside of this strategy is your monthly cash flow is high because you collect high payments.
In fact, in my opinion this is the #1 strategy that allows a beginning investor to replace $3,000-4,000
a month income from employment with the steady monthly cash flow from investment properties in the
shortest period of time after just 4-5 deals.
I have homes in my portfolio that produce a monthly cash flow of $500-$700-$1,000. That's NOT the rent
I collect, this is NET profit I get to pocket after paying my monthly mortgage payments.
How many of these little money making machines would you need to replace your monthly paycheck from work?
The second biggest upside of providing financing to homebuyers is very high overall profit. It's not
unlikely to be able to squeeze $30,000, $40,000 and even $50,000 profit from a single transaction.
With these size profits you don't need too many to do pretty darn well financially.
These kinds of profits are almost never possible if you were to try selling to investors, because they
also want to make a profit. They want to buy at a discount, they want low payments so they can have
positive cash flow from the rent they will collect.
This high profit margins are not possible either when rehabbing and retailing houses for cash because
of the costs involved: realtor commissions, vacancies, closing costs, etc.
Downsides Of Financing Buyer-Occupants
There're 2 downsides in owner financing. The main one is - while the monthly cash flow is great, you
don't typically get a lot of cash at the time of sale. Just a few thousands is it.
If you need money to pay the bills or to go on vacations you are out of luck. You typically have to
wait for a year or two until your buyer qualifies for a new loan and pays you off.
Only then will the BIG check will come.
The second downside to owner financing is - you stay in the deal for a long time - 1-2-3 years,
sometimes even a little longer.
That exposes you to the market fluctuations. If you get stuck with a lot of properties in a bad
market downturn - you could potentially get hurt.
Gap in Education About Owner Financing
In my 10 years investment experience I find that very few investors actually do this - finance
homebuyers. As a result, very few of them manage to quit their jobs.
For years they buy investment properties, rent them out and continue to be dependent on their
paychecks that keep them from the ultimate freedom. That freedom is delayed by 15-20 years or hard
work managing rentals.
FOOD FOR THOUGHT:
Recently I had a man in my office. We were negotiating the terms of the sale of a 4-plex building I
own. We sat and chatted a little bit before we got down to business. Turns out he's been buying
rental properties part time for ...get this... 20 years!
The sad thing is he only has a portfolio of 10 of them. And even sadder fact is he still WORKS for
Just think how many years of opportunity did he miss because he didn't know how to build up his cash
flow faster to the point where he could quit the job and focus on real estate only.
I often wondered why this was the case. Over the years I realized there's a gap in education in the
area of how to maximize profits by offering owner financing on houses.
Most of the investment materials focus on buying properties: how to find them, how to finance them,
how to negotiate the purchase terms, how to navigate contract clauses, etc.
Very few, if any, go into details on how to maximize overall profits and monthly cash flow.
Yes, it's important to know every trick in the book about buying homes. If you don't know how to
buy - you have NO business. Yet, if you don't know how to sell with maximum profits and how to
create great monthly income from the houses - you will NOT succeed or it'll take you forever.
FOOD FOR THOUGHT:
Let me give you another illustration. Some time ago, I went to meet with the owner of a house. This
was a very nice, brand new, never lived in $200,000 home that the owner has built to rent it out as an
Well, this beautiful house has been sitting there, in that new subdivision for the last 3 months
after it's completion with no renter in sight. In the meantime the owner has been making $1,500/month
payments on the mortgage.
Even though it was not offered "For Sale", when I called the owner and she heard I bought houses -
she suddenly didn't feel like trying to rent anymore. This property could easily generate at least
$300/month in cash flow and about $30,000 eventual profit over the course of next 1-2 years, if the
owner knew how to attract a buyer for the home who couldn't get a loan.
This owner was an example of someone who had all the financial resources (the money and credit -
$35,000 down payment and $150,000 bank loan) - yet lacked basic non-financial resources.
The knowledge - how to put it all together, how to make it work - was not there.
Yes, you may still have the hang ups about not having the money or credit. But money and credit isn't
always the answer. Having money and credit could help you make MORE, but only after you mastered the
skills of making money without money.
Alex Gurevich is an active investor in Austin, Texas. He publishes a Free online newsletter "Real
Estate Magic" read by over 5,000 real estate investors around the globe. He's written a
course "Supercharge Your Cash Flow" to teach real estate entrepreneurs how
to maximize their monthly income and overall profits with single family homes.
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