Seller Financing: How To Create Your Own Mortgage Notes

FO 7 | Owner Financing

FO 7 | Owner Financing


Discover the power of owner financing and how it can allow you to add monthly cash flow without the headaches of having to deal with a tenant. Learn how to turn $30,000 into a $69,900 note that you can collect over time or sell after 6-12 months of seasoning. Another powerful tool to have in your tool belt! We also talk about the Dodd-Frank Act and the underwriting process and costs to stay compliant, as well as installment contract sales and contract for deed states. What states will you start your owner financing business in?

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Seller Financing: How To Create Your Own Mortgage Notes

Adding Owner Financing To Your Real Estate Empire

We’re going to get into something near and dear to me, which is seller financing. This is a topic that a lot of seasoned investors will be interested in. It’s also a very interesting topic for new investors. We’re going to talk about the deed of trust states. Deed of trust states is different than mortgage states. You’ve got states where there are judicial foreclosures as compared to non-judicial foreclosures. Let’s look at the deed of trust states.

Deed Of Trust

There are quite a few, Alaska, Arizona, California, Colorado, District of Columbia, Idaho, Maryland, Mississippi, Montana, Missouri, Nebraska, Nevada, North Carolina, Oregon, Tennessee, Texas, Utah, Virginia, West Virginia and Washington State. The essence of a deed of trust is you’re creating mortgage. You’re selling with seller financing. The third-party, whether it’s a title company or a closing attorney, holds the title for the borrower. The borrower has an equitable title on a property and is on the deed but it’s not the same as a mortgage. Where mortgage, you have to go straight to foreclosure. It’s going to be a judicial sale. This is a little bit different.

Deed of trust state. I’ll give an example here. I had a deal go bad in West Virginia. I spoke to the lady there and it was health reasons. She’s dealing with blood cancer. We agreed to just close deals. She didn’t want to cause any issues. I filed a certificate of release for $175 with my title company who had done a transaction with. I didn’t have to evict. If it’s a little less desirable where you have people still in here fighting with, you’re going to still have the victim. That process from state to state or from county to county, it can be different. That’s a whole other animal. For me, this was pretty simple. $175, I was able to then turn around and sell this property to another cash buyer. That’s a deed of trust states.

We’re going to go to my favorite installment land contracts or installment contracts, as many of you have heard them from them before. A lot of states do this but not all. The deed remains in the owner’s name in this situation. For me, in my company, JP Homes Inc, will still hold the deed. I am still the owner officially and I still hold insurance because it’s in my name. If you want to have your buyers, they can get insurance as well because they do become an equitable owner and have an equitable title in there. I still keep the insurance in my name in liability. If they go bad and let’s say they gave you $5,000 down, you’re just evicting them and you still own the property. It’s like running or a lease with an option.

Installment Land Contracts

Since it stays in your name, that could be a little way around the Dodd-Frank Act too. It’s a gray area or whether Dodd-Frank will regulate installment contracts or not, especially when it has been recorded. If they go bad, you keep that earnest money deposit. That down money, it’s nonrefundable. A lot of states do this. I do this a lot in Pennsylvania. You can do it in Arkansas, Arizona, Florida and Georgia. Arizona is interesting enough. It’s also a deed of trust state too. Quite a few of these or probably both, Georgia, Florida and Illinois. Beware of Cook County, Illinois and Chicago area. There are all kinds of different issues. There’s a lot of lenders that do not like lending in there and I can’t blame them. It’s probably extraordinarily difficult to foreclose. Whether you’re a note buyer, note creator, be very careful about it in Illinois. Even if it’s an installment contract in Cook County, Illinois, depending on the judge you get, it could be very difficult to get them out. Consult your attorney on that. Indiana, Iowa, Kansas, Kentucky, Louisiana, Missouri, Minnesota, Mississippi, Nebraska, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Virginia and Wisconsin all deal with installment land contracts. Each of them deals with them differently as well.

Every deal is going to be different. Click To Tweet

In Ohio for instance, which I’ve made installment contract on there, you must record the installment contract. You’re recording it, so it’s a little different. It does fall into that Dodd-Frank Act. I would assume because it is recorded. It’s a more gray area and a buyer has equitable title. Let’s go into some of the tax advantages to seller financing. Some of the tax benefits of the installment sale are that you’re not receiving all of those gains in that year. You may lower your tax burden depending on your situation. Consult with an accountant or an attorney or both on this. In general, you’re going to pay ordinary income tax on the interest you get each year on that mortgage. Let’s say it’s an 8%, 9% or 10% mortgage on that. The interest part of it is going to be ordinary income. The principle payment each year is taxed at a long-term capital gains rate. That is a nice advantage there. You’re taxed differently on this and it gets a little tougher for your accountant. It might cost you a little more for them to figure out your cost basis.

There is the other downside to seller financing. For instance, say a property that you’ve owned for a while and you have written off the depreciation over the years, whether it’s 27 years, however long it is, you actually have to pay a 25% tax on the amount of the depreciation you’ve taken on that property year one when you sell that property. Let’s say you’re selling a property for $100,000 and you get $10,000 down, but you’ve taken depreciation worth about $20,000. You now have to pay a 25% tax. A lot of that down money, some instances, all of it could be washed in that year one. You might be getting it. It might go all to Uncle Sam. That’s something to think about too. That’s why selling with seller financing may not always be for everybody. Every deal is going to be different obviously. I want to get into something that’s separate from seller financing but is rarely talked about and is just an interesting subject and this is great. This is where new investors will appreciate this information.

Wet Fund States Versus Dry Fund States

We’re going to go into wet funds states versus dry fund states, to explain wet fund versus dry funds. Dry funds, let’s say I’m buying property in Phoenix, Arizona for $50,000. I’m going to resell this property to another investor for $75,000. When I go to closing, that $50,000, I don’t have to bring that in cash as long as my buyer is bringing their $75,000. Their $75,000 pays for my portion there and then I get the difference minus closing costs. It’s not going to be $25,000 net, title insurance, transfer tax if there is or stamps, whatever your state charges on a transfer property. That is dry fund states. Wet funds state like where I live in Pennsylvania and most states, you must bring your cash.

If I’m picking it up for $50,000 and sell it for $75,000, I’ve got to bring $50,000 to the table. My buyer then brings a separate escrow. Their $75,000 also comes in separately. There are two separate escrows. They’re not one. Your buyer brings theirs in. If you don’t have liquid cash, then you’ve got to borrow it. If you’re a wholesaler that uses transactional funding, that can get pretty costly. $2,500 per deal minimum usually and there are some times other charges on those as well. Sometimes you can use private lenders, find family members to lend you the money off of them, $500,000 or whatever you’re going to do, but it’s still money out.

FO 7 | Owner Financing

Owner Financing: If you’re an investor and don’t want to deal with the headaches of a rental or want to have income payable over a period of time instead of one lump sum, owner financing is a great way to do it.


If you’re a new investor and you’re looking to get into virtual wholesaling for the cheapest way possible, you don’t have a whole lot of cash on hand. The states that allow for dry funds are Arizona, Nevada, Alaska, California, Hawaii, Idaho, New Mexico, Oregon and Louisiana. Another important factor here too, these are dry fund states, but not all title companies participate. Some of them want two separate escrows. First American is a very difficult one. They’re used to traditional style real estate closings. Something that’s listed with RE/MAX, you buy it, you sell it. They’re used to those. There are other title companies that are far better that will allow you to not have separate escrows but allow you to use the buyer’s funds. Makes sure that you look and try to find one that will work with you on this. It’s very important and is something that could save you a lot of money. If you’re short on funds, this is the best way to do it.

Structuring Owner Finance Deals

We’re going over how you structure an owner finance deals. This is if you want to get into note creation. If you’re an investor and you want to sell some with owner financing because you don’t want to deal with the headaches of the rental or you want to have income payable over a period of time instead of all one lump sum, owner financing is a great way to do it. Once you find a buyer for the property, you need to have them fill out a 1003 mortgage application. We’re going to need a copy of the driver’s license for all the borrowers and the copy of two months’ bank statements, whatever bank statements they have, checking, savings or both as much as you can get. If they have retirement plans, whatever they have in savings, checking. You want to go to the two most recent pay stubs as well. What I like to do personally, I used to do underwriting back in the day. I like to do the debt to income ratio and come up with it. Basically what you’re looking at is you want to keep the debt 40% to 45% or below of all their gross income each month to make sure they can afford a mortgage. I like 40% or below. Once you’re below 40%, you’re in safer territory. Part of it is looking at their credit and seeing what they have out there with their monthly debt obligations are.

In large part, most of these people don’t have too much. Sometimes it’s a small credit card or a car loan. You’re going to want to get the employer’s information and verify employment. Most importantly, if you get into doing enough of these deals that are owner-occupied, you’re going to want to find an RLMO, Residential Loan Mortgage Officer to underwrite the deal for you. These guys charge anywhere from $500 to $1,000 per deal to do the underwriting for you and you’re official and good to go. I want to go over a sample deal. I’ve several sample deals to go over here. The first sample deal was a $29,000 sales price. We got $2,000 down. It wasn’t a huge amount down. The borrower has okay credit. Since they didn’t put a whole lot down, I had a pretty high mortgage rate at 12% due to the lower down payment and the credit just being okay. It’s a five-year term with principal and interest payment of $600.60. If you look at this payable over the five-year period of 60 payments, you would have received $36,036 plus the $2,000 down for a total of $38,036. All in purchasing this property closing costs, they are under $12,000 or $11,906.93. The net profit over the five-year period would be $24,039.07 for a total of 200% return on investment.

More importantly, I love this one, an annual return of 60%. Because this $7,207.70 is the monthly payments times twelve divided by the initial investment into the property. You have a great annual return on investment. Tell me who wouldn’t want that return and who wouldn’t want this return? Deal number two, a little higher value house, $69,900 sales price. I got $7,000 down, a $62,900 mortgage payable over fifteen years at 5.5%. The borrower had decent credit and a very good income. He was self-employed, which has made it harder for him to get a mortgage, but he did have a decent income and had plenty of money in the bank.

The most profitable deals are almost always going to be selling to just homeowners. Click To Tweet

The principal and interest payments of this are $682.63 per month plus we’re escrowing taxes and insurance of $162.03 a month. I’m charging the loan servicing fee of $30 a month, which would be payable to me initially. Once I have it serviced with a third-party servicer, they’ll receive that $30 per month. I want the buyer to pay for that. I don’t want to be paying for that. If you look at the principal and interest payment over 180 total payments. It’s $122,873.40 in total. We spread this out over time. You have a great return on this. If you decided you wanted to keep this and service it for the entire 180 payments, you would make $5,400 on servicing as well, the total end on this property for $33,500, which was purchased plus the rehab costs.

The ROI for the fifteen years would be 367%. The annual return is 24.45%, which is $81.91, which is $682.63 monthly. I did not include the servicing fee and net divided by 33.5%. You get 24% return, which is tremendous. Sample deal number three and these are going to keep getting better. This one is potentially the best or one of the best of all the samples. We purchased this property and this was in New York for $16,218.44 all in closing costs. We sold it for $35,000. We got $20,000 down. After doing the double close, we’ll receive $1,723.32 profit upfront. This is upfront money we got after their $20,000 down. We have no money into the deal. Technically everything is infinite profits. To make this a little more simple, I’ll always use the return based on this. We created a $15,000 mortgage on this. We sold it for $35,000 at 8% and they wanted short-term payoff. They’re paying it for 24 months. Their monthly principal and interest payments are $678.41. Over the two year period, we will receive $16,281.84. The total net profit on the deal is $18,005.16 at 111% return on investment, annualized return of 55.5%. You’re seeing just how powerful these returns are and the seller financing.

Sample deal number four, this was a property in Western Pennsylvania. I bought it for $10,569.30 all-in. The buyer put down $11,200, so we’re profitable from the start. We’re just a little under $1,000, $884.74. We sold it for $30,000. We held a mortgage of $20,000 payable over five years at a rate of 10%. The monthly payment is $424.94. The total paid over a 60-month period with $424.94 would be $25,496.40 plus the initial $884.74 profit. Your total net profit over the five-year period is $26,381.14. It’s a 250% return on investment. Even though this is truly an infinite return on investment, but I’m always going to base off the initial purchase price. It’s an annual return of 48.2%, which is $5,099.28 per year divided by the $10,569.30 of the initial investment. In total, I want to let you know where I am with this. I’ve received 46 payments since its inception as a mortgage. I keep all the interim mortgages because why wouldn’t I? Why would I want to sell it when all the profits are pure?

Sample deal number five years. This is one I purchased from the county. This was a tax deed sale that I bought from the county. I paid back taxes plus put a couple of little bit in repairs. I was $5,657.81 into the property. I sold for $25,000. I got $5,000 down from the buyer, so I was out of pocket $657.81 from chumps. I was barely out of pocket anything. I created a $20,000 mortgage at 9% payable over 60 months with a principal and interest payment of $415.17 per month. Plus, we have tax and insurance escrow added on there. She pays around $520 and change per month. The principal and interest over the sixteen months would be $24,910.20. The return on investment would be 529%. What I did to come up with this number is the $24,910 plus the $5,000 she put down divided by the initial $5,657.81.

FO 7 | Owner Financing

Owner Financing: Owner financing has so many different exit strategies, it’s unbelievable. This is one of the most powerful methods of investing.


The annual return on investment on this one is 88%. These returns are unbelievably high. They are a tremendous and large part because the dollar figure is low. If you run in these inexpensive properties to end-buyers, occasionally some of these I sell to investors as well that keep them as cashflow rentals. The most profitable ones are almost always going to be selling to just homeowners, people who can live there. You just can’t beat these returns. Most of them I do on installment contracts. I’m not even recording the deed. If something goes bad, if they go bad, I do this all over again with somebody else. Maybe I have to clean it up a little bit, but the return is infinite on this property already. There are no costs for me going in. If I have to put a pink carpet, clean it up a little bit, maybe repair some damaged wall, it’s all going to be pure profit again on the next person. Hopefully, I’ll get a nice chunk of change down again and do the same thing or maybe I decided to turn it over on a property or decide to turn around, sell it as is. I’m tired of the property and I want to cash out.

You have so many different exit strategies, it’s unbelievable. This is one of the most powerful methods you’ll find in investing out there. I highly recommend to anybody to get out there whether you’re new, whether you’re an experienced investor, get into owner financing. It is just such a valuable tool to have in your tool belt and you have such tremendous returns. If you had these in your stock portfolios, wouldn’t your jaw drop? You can create a portfolio of these properties, which I have, where I’m continually receiving these returns on it year over year. That’s on top of the rentals I have on top of the wholesale deals that we have. It’s a powerful resource, something that I recommend anybody out there to get into owner financing. I hope you enjoyed this episode. If you have any questions, feel free to reach out to me.

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