Inflation & Recessions: Success Using Owner Financing
There’s a lot of talk about what’s going to happen if inflation starts to show up in our economy.
With Owner Financing I have found you will not be affected negatively.
The question is, “What is the market?”
The CASH MARKET and OWNER FINANCE MARKET are two completely different markets.
When the recession of 2008 hit I was able to take advantage of both markets. I took back 35% of my owner financed homes. I was able to recapture any appreciation that had happened from the time I bought the house until the time they moved out…some had paid for up to 6 years and then simply disappeared.
When the recession hit, the prices of houses in San Antonio dropped about 15% to 20% in the nice areas and about 10% to 15% in the lesser parts of town, where fewer buyers could qualify for a loan. Then they raised the credit score bar from 580 to 650 to qualify for a long-term government backed loan. Now, NOBODY in the LESSER PARTS OF TOWN could qualify for a loan and the prices dropped 30%.
House prices dropped back to the times I was writing about in my book MY LIFE & 1,000 HOUSES (I was writing about my real estate dealing between 1996 – 2008).
Here’s the BIG weird dynamic…
- What happens to rents when no one can qualify for a loan to buy?
- When people can’t buy, what happens to rents?
- Do rents go down? …or do rents go up?
Rents go up!
The Owner Financed Value
Suddenly, in the recession, I was buying houses for what I used to pay for them 12 years ago. I was buying with other people’s money (OPM) and then owner financing those houses to renters who wanted to own. I based my sales price on the rents. If a person can pay $850 for rent, then I’d back into my sales price based on that monthly rental payment. The goal was to sell this renter a home for the same monthly payment they were paying for rent.
For the full effect of this example, know that I acquired the property and am “all in” for $35,000.
So, I want to sell my property and I want to establish a viable Owner Financed Value… I establish that the rents in the area for this particular type of house are $850.
– $100 property taxes
– $ 50 for Insurance
=$700 left over for Principle + Interest
It’s easy to establish very accurate rent numbers online. You can do it in minutes while sitting in front of a house if you have a smart phone or if you have a laptop with a link to the internet. Use RentoMeter.com, Trulia.com and Zillow.com for starters.
$700 payment means the buyer can afford to finance $70,000
(If you use the terms 10.5% for 20 years)
The exact amortization payment is $710.66….close enough!
So if the buyer can afford to FINANCE $70,000, what is the sales price?
Add 10% as a general rule.
$77,000 is the sales price!
So if the goal is to move a person from renting at $850 to buying at $850…
What happens to my sales prices if rents are going up?
That’s right…during the recession my owner financed houses were appreciating as far as I was concerned.
It was the perfect storm; Prices on little houses were falling because no one could get a loan. I was buying those houses with Private Money (Money from Private Lenders) at rock bottom cash prices. But the OWNER FINANCED VALUE of the houses was rising like a rocket because the rental pool was flooded with demand! My spread was getting bigger at both ends; I was buying for less and selling for more.
To top things off, I was getting much better buyers than I had ever seen, and the buyers were better payers and had more down payment than I was use to getting.
REMEMBER: Back then we DID NOT have to get an appraisal to sell a property with owner financing – period! Today, as long as the buyer is a qualified buyer; meaning the buy has enough income to make the payment – Qualified Mortgage (QM). As long as it’s a QM we don’t need an appraisal.
I hate being a landlord so much; I think I’m going to stick to my owner financed model through the upcoming turmoil. I’m thinking, I won’t get rich but I won’t go under either.
My losses to inflation will be offset by the houses I get back and by my ability to double my money when I buy in the down times. Also Rents will go up to the market value and people will still WANT to buy homes even more.
To believe in this model you have to believe at least 2 things;
#1. People would rather own a home if it costs the same as rent.
#2. There is a line of renters waiting to buy your home if the current payer fails.
And perhaps there is a 3rd thing you need to believe in….
#3. Wealth comes from chaos
About The Author: Mitch Stephen has sold over 1400 homes and is the author of “My Life & 1,000 Houses, Failing Forward to Financial Freedom”. He uses the technique of “Owner Financing” to create cash flow without the hassles of landlording.