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Owner Financing - Brief Overview

Who this is for:
  1. Anyone wanting to invest in real estate and earn high rates of return, passive monthly cash-flow, large up-front cash deposits. 
  2. Those struggling to get consistent returns from the stock market, rental property, or other investment strategies.
  3. Real Estate Investors not wanting to be responsible for maintenance and repairs.
  4. Current or previous landlords who are tired of tenant turnover, city violations, neighbor complaints, or tenants in general.
  5. Investors who never plan to move into the investment property.

Who this is NOT for:
  1. Anyone wanting to be a landlord and manage tenants.
  2. Anyone who at some point will want to move into the investment property.
Preferred Method of Owner Financing: Contract for Deed
Contract for Deed (otherwise known as “land contract” or “installment sale agreement”) is a simple way to structure owner financing of real estate. In short, a contract for deed is a contract between a seller and a buyer of real property in which the seller provides financing to the buyer for an agreed-upon purchase price and the buyer repays the loan in installments. The seller retains legal title until the balance of the loan is fully paid, at which time title would then transfer to the buyer.

 See Sample Case Study Here


Rental vs. Owner Financing 

 

Rental (Landlord)

Owner Finance (contract for deed)

FINANCIAL

  

Maintenance Expenses

You Pay

They Pay

Taxes

You Pay

They Pay

Insurance

You Pay

They Pay

Liability Insurance

You Pay

They Pay

   

Entry Fee

Deposit (tenant’s money)

Down Payment (high upfront)

Their Mindset

Short-term, Non-Ownership

Long-term, Ownership

Appreciation

Yours

Theirs

Depreciation

Yours

Theirs

RISKS

  

Move-Outs

Non rent during vacancy, turnover costs

 

Eviction Timeline

3-6 Weeks

6-10 Weeks

Guarantees

None

They can’t refinance or sell without you being paid in full.

Term

Generally 1 Year Lease

30 Year

OTHER

  

Who’s on Title

You

You

Refinancing

 

The purchase price is high over market value which generates longer-term income


FAQ's 
In simple terms, how does Keyrenter’s owner financing strategy work with a contract for deed?
        The seller of the property will offer the property for sale to a buyer who will then enter into an installment payment agreement.  The buyer will pay a down-payment which is usually $10-20K depending on the value of the property.  An amortized mortgage is established based on a purchase price generally 20-40% higher than market value, with the 30 yr amortized monthly payment typically at or slightly above market rents. The agreement and details are prepared by our title company and attorney experienced with contract for deed agreements. Ownership through contract (not title) is established for the buyer.  The loan payment is received monthly and any underlying payments (seller's mortgage, taxes, insurance, seller distribution, etc.) are payed via Keyrenter's escrow services for a completely hands-off investment for the seller.  
        A simple way to think of it is how a bank loans funds on a vehicle.  The buyer owns the vehicle only through contract until the loan is paid off, at which time the bank transfers the title to the buyer.  

Can the seller have a mortgage on the property and still offer owner financing?
        Absolutely.  In fact the method we have found to yield the highest cash return is to have a mortgage leveraging between 75-80% of value, which avoids mortgage insurance payments and increases cash flow.

Who services the note, and what does that entail?
        Keyrenter's escrow services will collect the buyers payment each month, process payments on the seller's mortgage, taxes, insurance, pays out the seller's cash flow distribution, and provides statements and yearly tax forms.  This provides real estate investors a hands-off solution and peace of mind.

Is the return on investment worth it?
        We have found that in many cases the return on investment for owner financing can be far greater than a traditional rental, without many of the risks and hassles of being a landlord.  Since amortized loans are mostly interest for the first half of the loan, the return for an investor can be substantial significant.  Also, the purchase price is often 25-40% above market value.  That said, it's not for everyone, and not for every property.  Owner financing works best for investors that do not plan to return to live in the property, are ok if the loan gets paid off eventually, and in areas of higher demand where people are wanting to live long-term.          
Is it legal?
        Yes!  In fact, this strategy has been used for a long long time, especially in the farming world which is where the term "land-contract" came from.  If you hear from a real estate agent or lender that they are not legal or legitimate, it is because they are not familiar enough with them.  We recommend you seek legal counsel from a real estate attorney who is experienced with contract for deeds.  Our real estate attorney is also an investor and his team specializes in title contract for deeds for many investors in Utah.  There are some other states do have limitations and stricter requirements with contract for deed sales.

When should I do owner financing rather than keep it as a rental?
        We can help build a financial comparison to give even greater perspective on the financial differences.  Most investors will go with an owner financing strategy as a way to increase their cash flow and return on their money, as well as reduce the hassles and risks of being a landlord.  

Am I responsible for repairs?
        No.  The buyer is responsible for all repairs and maintenance since they own the house.

Who pays the my mortgage company?
        The mortgage is paid by Keyrenter's escrow service using the payment from the buyer.

Who pays taxes?
        The seller pays taxes but is reimbursed by the buyer.  Our escrow service will match the buyer's monthly tax escrow payment with the seller's escrowed tax obligation.

If my property is in an HOA, how pays the dues?
        Since the buyer now owns the property, they are now responsible for all payments to the HOA.

Are buyers really willing to do owner financing through contract for deed?
        YES, many are wanting to own a home and not have to be uprooted again and again as many have experienced with renting.  They want to own but for whatever reason (usually credit or self employed) are unable to currently.  Often times they plan to refinance the note in 5-8 years but still are unable to.  There are many contract for deed notes that last 20-30 years simply because the buyer is comfortable with the payment and are not able or willing to refinance.  If that is ever the case, this continued cash flow and return can be great.

Can I convert a lease option into owner financing?
        Yes, many lease options (learn more) are converted to owner financing for the same reasons they are not able to get a traditional loan.

Can I offer an interest only loan?  
        Yes, there are interest only owner financed loans which help lower the buyer's payment and further increase the seller's return on their investment.

How much down payment should we require?
        We will typically ask for a 6% down payment.

What is the term of the buyer's note?
        We typically structure a 30 year amortized loan with no balloon requirement.  The loan can be refinanced by the buyer (which pays you off) once the buyer is able to, and the value has caught up with the purchase price/loan balance.  Often times this is 5-10 years out.

When will I be paid in full?
        If the buyer is ever in a position to be able to refinance the loan, and the value has caught up with the loan balance on the note, at that point you could be fully paid off.  Or if the buyer pays the loan in full by making each installment payment.

Should I hold a reserve fund?
        We require that at least 2 months of monthly expenses be held in escrow so that our escrow service can always keep any applicable underlying mortgage and other payment obligations current.  

What happens if the buyer stops paying?
        First of all, defaults from a buyer are not nearly as likely than with a rental since the buyer has a lot of skin in the game (down-payment, home ownership, etc.) which they would loose completely if they default and have to give the property back.  If this were to happen, most investors see this as a great opportunity since they now keep all the down-payment funds, interest collected, and the cash flow they received for the period of time.  They then place the property back up for owner financing and start again.  In fact, many investors hope their buyers will default at some point.
        If the buyer stops paying, we file appropriate notices and move towards a forfeiture and seek to take the property back either by working amicably with the buyer or eviction.  The main reason we prefer a contract for deed over other owner financing strategies in Utah, is there is no requirement for a judicial foreclosure.  The timeline to receive the property back is usually around 2 months, or about a month longer than an eviction with a rental.

Are there any risks?
        There are always some risk involved with any investment.  Fortunately the risks in real estate never include "loosing everything" like many have experienced in the stock market.  Here are some of the risks with owner financing:
        - Buyer stops paying:  We discussed this above and have seen that this is far less likely than with a rental.  This risk for a rental is far greater.
        - Due on Sale Clause:  All mortgage loans have a clause where if title transfers, or you "sell" the property the bank has the option to call the loan due and payable.  Experienced real estate investors will tell you that banks never call the loan due as long as the payment is being made consistently.  They simply don't have a reason to.  Also, with contract for deed, the title is not transferring which further reduces the likelihood of the loan being called. 
        - Dodd Frank:  If a seller offers owner financing more than 3 times in a 12 month period, they may be subject to additional requirements.  Typically this means further buyer screening requirements and disclosures, which our process and agreements are already prepared for.  Most Dodd Frank requirements are applicable to other types of owner financing, and not so much with contract for deed, which is another reason for this preferred strategy.

What are Keyrenter’s fees?
        *  $0 - To help you find an investment property, since we get paid by the sellers.
        *  $0 - Attorney's Fees
        *  50% of the down-payment from a buyer.  This covers the process of finding, qualifying, structuring the loan, etc.
        *  $400 (average) Seller Owner's Title Policy - Paid to title company at closing
        *  Buyer also pays $400+recording fee - Paid to title company at closing
        *  Loan Servicing: $75/month
                - Includes: Receiving of buyer's payment, payments to all other entities, escrow services.
                - Includes: Late notices to buyer if ever applicable.
                - Includes: Buyer Guarantee ($1,000 value).  In the unlikely event of a buyer default, we will pay for the forfeiture and eviction. 
                - Includes: 2 drive-by exterior condition checks per year.

What guarantees does Keyrenter offer?
        - Buyer Guarantee ($1,000 value).  In the unlikely event of a buyer default, we will pay for the forfeiture and eviction.