Video – 3 Pitfalls to Avoid with Owner Financing

So, you’re looking at doing owner finance real estate deal–really enticing except you need to be careful.

I’m going to give you a couple of things to watch out for when you’re looking at owner finance deals. Chances are that you’re looking at transaction and the seller is offer to finance it for you. The thing I want you to be careful of is that a lot of owners will actually offer you to deal at a higher price than maybe a bank with finance to deal at, and it’ll offer you terms on the financing in order to move the deal over to you.

First, the most predatory owners will work at deal where they sensually price the deal take your down payment, and then put you in to a financing structure that essentially is going to burn you out. What can happen is the cash flows that the investment generates may not be enough to adequately service the debt that you owe the owner, the real estate taxes, the operating expenses in a vacancy as well as when you have to cloud a pocket to invest in the property in order to reposition or re-tenant it.

Some owners are going to take advantage of you. What they’ll do is they’ll try to get you into situation where they can take your down payment, see you default and then take the property back. That’s the most predatory a form of owner financing and wants your watch out for that.

Now, the second thing on owner financing is it can be attractive if you’re having problems of getting credit or borrowing money from a bank. You see an owner offering to finance the deal for you that can be attractive, you do want any careful there because sometimes if the banks not willing to lend on the deal it may be a bad deal. You want to take a look at your underwriting and if you have other investors or friends that are active in the commercial real estate base that you can talk to, you might want to go to them and share your numbers to see sort of sanity check your numbers to see whether it’s actually good idea or not.

The third thing is, with owner financing which you can running to is a lot of owners will like to build in a balloon payment, they like to do a shorter term on the loan it could be one years, two years, three years, five years. What they want to do is get their money back out of the deal within the short period of time. Now, if you don’t negotiate enough time for yourself on this terms, what it can end up happening is you get another deal, you invest your money, put your time and energy in. You get the tenant’s working the cash flow plays which may not be in the position yet to get the appraised value that you need in order to refinance that property and cash the owner out. You will either be forced with having to renegotiate the debt with the owner, so changing that financing structure or you may have to go and sell the property and get rid of it early.

You want to make sure you have a very clear refinancing structure or sale plan when you are working with an owner who is offering you financing. Ultimately, make sure you’re talking to someone that is really sanity check your deal, you just don’t want to get in to something where you’re handing over money to someone in getting in to a money loosing opportunity. It’s made bad deal for you, might be a good deal for the owner could be a bad deal for them. Ultimately, could be a bad experience for you they can knock you out a commercialize investing all together.

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