What Is Owner Financing?

two_way_puzzle_people_800_clr_4872This is the most common way to get a hundred percent financing. This is where the current owner agrees to finance all or some of the purchase price. If it’s just some, you can get the remaining amount from Cogo Capital or another local private lender in your market. If you have the financial or credit wherewithal, you could also go as far as getting conventional financing.

Common owner financing is where the principal will be paid at a later date, which is called a deferment. You can also defer the interest and stack all of the debt at the end where an exit strategy will occur. That exit strategy can be the sale of the asset or a refinance of the asset with either conven- tional financing or a new private money loan. We actually see this happen a lot in Cogo.

When a loan of 12 or 24 months comes due, we often get a phone call from another lender who wants to refinance and pay off the loan. When this happens we always call that borrower back to see if we can refinance the loan instead. We always want to keep and help the client be successful within the walls of Cogo and not with another lender.

Principal can also be divided into monthly payments, or the loan can be structured into interest only payments with the principal to be paid off in five years. This is referred to as a balloon payment. You can also pay interest and principal payments if you want to pay down the loan quickly.

When I negotiate seller financing, I rarely, if ever, negotiate a principal buy-down. If you look at the 30-year amortization of a loan and the amount of principal buy-down that actually occurs in the 60- month period of time, it is so insignificant that I would much rather do an interest only loan where my monthly payments are lower.

Now, in that five-year period of time, if I’m holding this property as a rental, the lower monthly payment gives me greater cash flow. I will rarely negotiate interest and principal payments unless the seller is willing to carry a 30-year amortized loan with a 10-, 15-, 20-, or even a 30-year balloon. In those cases, you absolutely want to write a principal interest pay- ment because you’ve got plenty of time to pay that thing down.

Prime example: I bought a duplex almost 10 years ago. I negotiated owner financing at 8 percent with the seller, and I’ve been paying on it for the last 10 years. Since the initial purchase we have brought the mortgage down from $165,000 to about $138,000. So over 10 years, 120 months, we’ve increased our equitable spread by about $34,000 because we had the principal buy-down. There is a time and a place to use that strategy, but it really boils down to the needs of the seller.

Lee A. Arnold


The Lee Arnold System of Real Estate Investing

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