Owner Finance Flashcards
Owner financing requires that the seller take on
the default risk of the buyer
Owner financing can provide extra
income to the seller in the form of interest.
Sometimes, owner financing is known to help
a property sell more quickly in a buyer’s market.
Owner financing is most common in what kind of real estate market?
A buyers market
Owner finance can offer the seller
monthly cash flow that provides a better return than fixed-income investments.
An owner-financing deal should be facilitated through a
promissory note
The promissory note outlines
the terms of the arrangement, including but not limited to the interest rate, repayment schedule, and the consequences of default.
The owner(seller) also typically keeps the property title until
all the payments have been made to protect himself against default.
In a wrap around, Instead of applying for a conventional bank mortgage
the buyer signs a mortgage with the seller and the new loan is not used to pay off the seller’s existing loan.
Wrap-around loans can be risky for sellers since
they take on the full default risk on the loan.
Alienation clauses are common in most mortgage loans, which often prevent
wrap-around loan deals from occurring.
A wrap-around loan structure is used in an owner-financed deal when
a seller has a remaining balance to pay on the property’s first mortgage loan.
A wrap-around loan takes into account the remaining
remaining balance on the seller’s existing mortgage at its contracted mortgage rate and adds an incremental balance to arrive at the total purchase price.
In a wrap around, generally, the seller will want to negotiate the highest possible interest rate in order to
make payments on the first mortgage and also earn a spread on the deal
What are the types of acquisition transactions
- Cash(cash, private or institutional loan
- Seller Financing(buying on terms)
With debt - Subject to(taking over payments on the underlying lien)
Owner Finance Documents
Deed - Ownership
Note - Terms of loan
Deed of trust - Security
Wrap documents
Deed
Seller > Investor > Buyer
Note
Investor
Buyer > Investor
Deed of trust
Investor
Buyer > Investor
Seller finance documents
Deed
Seller > Investor > Buyer
Note/Deed of trust
Buyer > Investor
Subject To Documents
Deed
Seller > Investor
Note
Seller
Deed of trust
Investor > Seller
Benefit of someone giving me money
Make 6% interest rate collateralized by real estate(18 times more than a CD rate)
Any legal instrument in writing which passes, affirms or confirms an interest, right, or property and that is signed, attested, delivered, and in some jurisdictions, sealed. It is commonly associated with transferring title to property.
Deed
Types of Deeds
General Warranty Special Warranty Quitclaim In lieu of Foreclosure Trustee’s Sherrif’s
General Warranty Deed
warrants ownership forever
Special warranty deed
Seller warrants during a period of ownership
Often, the special warranty deed is issued when the real estate is sold in a tax sale.
Quitclaim Deed
Seller conveys whatever interest they may have in the property
grantor inherited the property, but wants to sell it for the cash, she doesn’t want to guarantee something that cannot be known with certainty, and, thus, to limit her liability, she sells only her interest in the property — whatever it is
Deed In Lieu of Foreclosure
Seller conveys ownership to lender to avoid foreclosure
Trustee’s Deed
Trustee warrants title thru foreclosure
Sheriff’s Deed
Warrants title thru foreclosure
Encumbrances
A burden, obstruction, or impediment on a property that lessens its value or makes it less marketable
What are some encumbrances
Purchase money mortgage Unpaid taxes Mechanics Lien HOA Lien Child support lien Reverse mortgage Civil Judgment Hospital Lien Criminal
Role of title company
Intermediary Manages legal docs Collects/Disburses money Provides title policy Records legal docs in the county
Process of RE transaction
Purchase contract signed Inspection Appraisal Underwriting Closing Recording
What does a mortgage payment include
PITI
P I - Principal and Interest
T - Property taxes
I - Homeowners insurance
Fixed Rate Mortgage Loan
Interest rate that stays the same over the term of the loan
Adjusted Rate “Arm”
Interest rate adjusts over the term of the loan
Interest only
only includes interest payments that doesnt include principal payment
Negative Amoritization
Payment is less than the interest earned, causes the principal balance to increase each month
Prepayment penalty
Earned if paid prior to term
Ballon payment
Outstanding principal payment is due and payable on a given date prior to full term
Mortgage escrow account
An account separate from the mortgage account where deposit of funds occurs for payment of certain conditions that apply to the mortgage usually property taxes and insurance
Mortgage escrow account includes
Property taxes
Homeowners insurance
- Paid annually on the day of purchase
Private Mortgage Insurance
Why is it important to collect the Escrow Analysis Statement from the seller once we get the property under contract?
Shows the monthly mortgage payments we will be collecting and paying
What are some advantages for the seller to work with us?
No closing costs Debt relief Sell quickly/as is Rebuild credit Landlord issues
Buying houses that need repairs is okay as long as
We can adjust the sales price to account for the condition or repair that is needed
Deed of Trust
agreement between seller and investor. Trustee holds property until borrower pays off the debt. Investor keeps title to the property and maintains full responsibility for the premisses
PITI
Principal
Interest
Taxes
Insurance
Debt to income Declaration(DTI)
If you can prove that you’re not responsible for payments and you show 2 payments, then it will come off the debt to income ratio
What % can you get in cost segregation in your first year on a property?
Up to 50%
For every 100$ net cash flow, how much can be charged in assignment fee?
2k
When buying a deal, what are some of the benefits you get
Appreciation, Cash Flow, Depreciation, Principle Pay Down, Leverage, Hedge Against Inflation
How do you calculate cash on cash return
Annual Money Received(Cash flow, rents, etc) / Money put in(Private, Personal, Commercial)
3 Reasons why a seller wont sell on seller finance
they don’t understand
need cash now
not motivated
What are the 7 steps to an entry fee
- ) Cash to the seller =
- ) Arrears, liens etc =
- ) Cost of acquisition =
- ) Closing cost =
- ) Renovation =
- ) Maintenance =
- ) Marketing =
What are the 4 pillars
Motivation
Timeline
Price
Condition
What are the top 3 things an acquisition manager needs
Training
Examples from other people
Feel a culture of belong other than just a job
What to say to wholesalers when they ask what i do
We are long term investors and we have negative cash flow on all our deals. We always spend more money than we make at the beginning because we are in it for the long haul
How much is an air bnb management cost
20%
Appraisers more often than not will
stay in the same Area and go back in time, then leave the area within the current time
For multifamily high demand high appreciation areas are
calculated by a multiple of 1% of the purchase price
2300 in rent = 230k pp
For multifamily low appreciation low demand in areas the multiple goes by 2%
calculated by a multiple of 2% of the purchase price
4600 in rent = 230k pp
What should you do when comping a property’s build date
Stay in the same build generations
What are the 5 things you need to do a loan mod
- ) application (every lender has their own) 2.) income docs
- ) bank statements
- ) tax returns
- ) 4506c (can pull transcripts)
- ) hardship letter
If seller in bankruptcy
Judge has to approve sale
What will kill a loan mod?
a vacant prop w/ utilities turned on
2 types of foreclosures
Sheriff sale foreclosure / trustee foreclosure
How many steps are there to Rapport building
7
What are the steps to building rapport
Show desire to understand Speed Matching rhythm Empathy & compassion Active Listening Genuineness Paint a pic of Pain Strength and my support
How many parts are in the Sandler submarine?
6
What are the 6 parts of the Sandler submarine?
Building rapport Up front contract Pain Budget Decision Fulfillment
Up front contracts(Don’t go past the foyer without agreement on the upfront contract!) statements and questions include
- If we find we are a good resource for you, let’s continue the conversation and if not, we part ways as friends? Sound good?
- Buyers are liars, sellers are worse, so that’s why I don’t immediately give out offers.
- Even though I didn’t bring a contract, I want to see if we’re a good fit for each other.
- I imagine you’re busy; I am too. If we were able to work out a good situation for you, what would be the next step? The reason is that we only buy # per week, and I have some other appointments. It’s really important that I spend my time with people ready to move forward. I’d rather revisit this later if this isn’t the right time. I can check back in 2-3 weeks.
- Most investors are just going to just give a low offer, my team has up to 5 reasonable options for you. So, I want to present it to everyone, so we don’t have to repeat it. Is there anyone else that needs to be included before we start?
- (If seller says they’re the only decision maker.) Thanks for telling me. A couple days ago, I spoke with another seller who said they were the only decision maker. Then she said the worst thing after an hour: let me go bring it to my husband. As long as that isn’t the situation here, I’m good to go.
- (If seller says other decision makers aren’t available right now.) Oh, that’s perfect. I have another appointment that my team double-booked for me, so let me come back when (other decision maker) is back and we can all talk.
- If I come to the house and we create a good situation for you, are you ready to move forward?
Pain(Use in conjunction with the bonding & rapport section. “We’re extracting fuel/ammunition.”)
- It doesn’t seem like you’re ready to sell.
- What are you going to do/what happens if you don’t sell? What’s the next move?
- You’re a glutton for punishment.
- You don’t seem to have a motivation to sell this house whatsoever.
- I don’t know if we can help you.
- I don’t think you want to sell to me or anyone.
- Sounds like you’ve got an emotional connection to this house.
- It sounds like if you didn’t sell for another year, that wouldn’t be a good deal to you.
- Looks like if you kept this house for another year, it wouldn’t be a big deal for you.
- What is it costing you to stay in the property? (actual cost or opportunity cost of what they are not doing)
- So you’re spending your hard-earned money to keep this property afloat? Wow…
- If you could use that money to buy/pay for X, in order to do X (memories for kids, etc), isn’t that a better use for your money?
- How will not making decision on this property cost or benefit you in 30 to 60 days?
- Why would you even consider selling to an investor or anyone else?
- What happens if you do (evict, re-lease, etc) with the tenants, and the property is torn up?
- Since we can’t come to a solution before I leave, what are you going to do with this property?
Fulfillment(Closing and coming up with the money.)
What if I told my partner that we need to come up to $$$$? Would that get you excited?
Lease Option
give you the right but not obligation to buy the home when the lease expires.
Lease Purchase
obligates each party to the typical terms of a residential purchase agreement upon the expiration of the specified lease term
Ideal LP/O candidate
Someone who is aspiring to become a homeowner but isn’t quite ready financially.
Home maintenance in LP/O
Depending on the contract the person renting may be responsible for maintaining the property and paying for repairs
Does rent go towards the principal in a LP/O?
Yes, a portion of the rent being paid is applied to the principal
How many benefits are there to seller financing
13
What are the 13 benefits of seller financing?
Cash flow, Depreciation, Appreciation, Pay down, Tax write offs, Raise rents, Zero/Lower down payments, No credit requirements, No/Lower interest Loans, No W2/Job history, No income verification, No tax returns, Capital preservation
3 things to do with the seller asks for too high of a downpayment
Negotiate better
Cash Out Refi
Morby Method
What are the 4 main pillars of a real estate business
Acquisition
Disposition
Admin
Lead Generation
In lead gen, the integrators role is to
Keep track of KPIs
In lead gen, what questions should you be asking as an Integrator
Do we have money to spend?
Where is that money best spent to help us reach our business goals?
What are the lead sources/cost?
Never argue downpayment
On the 1st conversation
When comping properties you should stay within(years)
Same build generation
Can you go under contract before probate?
Yes
How many months in AZ can a lien be on a property without being renewed
6 months
