Here are some different versions of how to determine the Owner Finance Value to sell your homes:
COMPLETE RENTAL FORMULA without REPAIRS:
R-(T+I) X 115 + 12% = OFV
Rent – (Monthly Taxes + Monthly Insurance) X Multiplier that equals 10% for 30 Yrs + 12% for a Down Payment = Owner Financed Value – OFV
COMPLETE RENTAL FORMULA with REPAIRS:
R-(T+I) X 115 + 12% = OFV – 50% of the Repair Estimate
Subtract 50% of the repairs if the BUYER is going to do the repairs
R-(T+I) X 115 + 12% = OFV – 100% of the Repair Estimate
100% of the repairs if YOU are going to do the repairs yourself
To get the ADJUSTED OWNER FINANCED VALUE - AOFV
IN THIS EXAMPLE THE RENT IS $1,000/mo:
$1,000 – ($100 + $50) = $850
…$850 = how much the renter has for a PRINCIPLE + INTEREST payment
115 = @10% for 30 yrs (+/-)
$850 X 115 = The amount the renter can borrow @10% for 30 yrs if they have $850 for a P&I payment
115 is a Multiplier I use so that I don’t have to have a financial calculator to figure out how much a BUYER can borrow at 10% for 30 years if they have $850 for PRINCIPLE + INTEREST payment.
If you had a Financial Calculator and used the 4 variables in an amortization schedule you’d use
MONTHLY PAYMENT AMOUNT ($850)
INTEREST RATE (10%)
TERM (30 Yrs)
BALANCE …and then solve for the balance – $96,858 ….$97,000
If we take $850 X 115 we get $97,750 …Close enough in the formula that arrives at the owner financed Value – OFV
In fact, the difference is in your favor as the seller.
The multiplier 115 is “Close Enough” in calculations dealing with house values of $250,000 or less.
$67,900 PROFIT On $23,000 HOUSE
- I use private money to buy my houses
- I pay my Private Investors / Lenders 8% interest only 5 yrs.
NOTE: Bank money is 4% to 6% but you’ll sign a personal guarantee.
There’s even ways to get 0% loans: Go to Podcast - Mitch Stephen, author of the book My Life & 1,000 Houses
and listen to my interview with Ari Page: Fund N Grow.
- This private loan is s NON-RECOURSE loan…collateral only
loan…no personal guarantee.
- I give the Private Investors / Lenders a pristine 1st lien guaranteed by the title company
- Private Investors / Lenders agree (In the loan docs) to
let me wrap his note when I sell and offer Owner Financing
to my buyer.
- I always borrow at least $2k more than the amount necessary
to buy or to buy/fix. This goes in my pocket and is tax
deferred until a major event; I get paid off or sell the
note and payoff my loan. Why $2k?…
Finding houses isn’t free.
- I sell the property with owner financing. My private lender
is in 1st Lien position. My buyer owes me money on a note so
I’m in the 2nd Lien position. My Buyer/Occupant pays me, I
pay Private Investors / Lenders.
My Buyer/Occupant doesn’t pay me, I still pay my Private Investors / Lenders.
- I collect a healthy down payment that goes in my other pocket; 10% minimum.
- The “Tax Payer of Record” (the owner) is my Buyer/Occupant.
- The Private Investors / Lenders and myself are lien holders.
SELLING THE NOTE EXAMPLE:
- I contract to buy a HOUSE for $23k all in.
- I borrow $25k @ 8% interest only, 5 yrs = $167/mo.
- I sell the HOME for $57k w/ $5k Down.
- I finance the $52k balance @ 10.5% for 20 years = $525/mo p&I pmt
I owe $167 pmt/mo
I collect $525 pmt/mo
POSITIVE CASH FLOW $358/mo
*In this example I’m selling the note before collecting even
1 pmt but normally you collect some, if not a lot, of pmts
before you sell the note.
- I sell the $52k note owed to me
(and it’s incoming pmt stream of $525/mo) for $46k CASH +
I keep the last 60 payments.
The difference between what I’m owed ($52k) and what I sell
the note for ($46k) is NOT a discount. It I a trade; I’m
giving up $6k today for $31,500 tomorrow.
It is a time value equation. If I put the $6k in the bank
at 10.5% for 20 years, it will be with $31,500.
- I use the $46k CASH pay off the $25k I owe my Private Investors / Lenders.
I keep the difference;
$46k-$25k = $21k in my pocket.
and I’m still owed the last 60 payments of $525
(15 years from now)
60 x $525 = $31,500
So let’s look at the 7 incomes:
(1). $2k when I bought
(2.) $5k when I sold to my buyer/Occupant
(3). *We could have made monthly cash flow but didn’t in this example
(4). $21k net from the note sale
(5). $31,500 start collecting $525/mo in 15 years.
REMEMBER; you paid off the loan with the proceeds from the
note sale, so you have no debt; you are collecting $525
and pocketing 100% for 60 months.
(6.) $8,500 LOAN SERVICING FEE:
You have an opportunity to collect the payment as the
“co-Note Holder” with your note buyer: the note was
for 240 months…your note buyer bought 180 pmt you
kept 60 pmts of the note…you are “co-Note Holders.
You BOTH have an interest in the note. You can charge
a fee for that work if collecting and keeping track.
You can pass that fee along to your Buyer/Occupant
if you state so in the original sale/closing docs.
A fair fee would be $35/mo
$35 LOAN SERVICING FEE.
240 months x $35 = $8,400
You can also hire a note servicing company and get out of the collection game
(7). Late Fees
In this example no late fees are collected
DO THE MATH:
+ $2k Borrowed Equity
+ $5k Down Pmt
+ $0k Pmts collected
+ $0k Late Fees collected
+ $21k NET on Note Sale
+ $31,500 Back-end of the note(60 pmts)
+ $8,400 Loan Servicing Fee
$67,900 TOTAL COLLECTED
on a house I found for $23,000
The TOTAL COLLECTED could be much higher if we’d have
collected a few years of monthly payments.
The TOTAL COLLECTED would be drastically higher if
this was a 30 year note instead of a 20 year note.
The TOTAL COLLECTED in this example assumes that
all the payments were made on time and no LATE
FEES are collected
In my humble opinion, OWNER FINANCING is the best strategy
on the planet for an average joe to acquire cash flow and wealth.
This is all accomplished Dodd-Frank and S.A.F.E. Act
compliant using a Residential Mortgage Loan Originator