Which is better Owner or Bank Financing - Posted by William Nicastro

import · March 16, 2001, 8:23am

Posted by Al on March 16, 2001 at 09:57:17:

William. Nine times out of ten, owner finance beats bank financing. Look at the deal you described. You are going to pay what looks excessive up front costs with either of the bank financing options. With owner financing you get the opportunity to negotiate the terms. offer him less. Get what you want. Even a slightly higher interest rate, usually beats the up front costs. If the income from the property will cover the owner debt servicing, you are usually way ahead.

import · March 16, 2001, 8:23am

Posted by William Nicastro on March 16, 2001 at 09:23:10:

I have an opportunity to buy a apt complex with either bank or seller financing.The bank will give 10.365% 25yrs 2 pts
balloon in 10yrs.Broker fee 3pts.15% down.The will give 12%
20yrs.No balloon.9% down on a wrap around.Some say get new
finacing because the bank is easier to deal with.i just don’t know the bank cost of creating the loan is expesive
presently but in time sellers is more interest.
please help.

import · March 16, 2001, 9:35am

Re: Which is better Owner or Bank Financing - Posted by JPiper

Posted by JPiper on March 16, 2001 at 10:35:20:

Owner financing is almost always better in my opinion?.but it depends too.

Take this situation for example. You call this a ?wrap around?. That describes a lot of different types of financing, all of which have one problem or another. Are you knowledgeable enough to handle the risks in a ?wrap around???

If this is a contract for deed?you won?t have the deed. With bank financing you will. Is this worth something to you? It should be. Not having the deed presents a risk to you.

How are the underlying payments handled? With virtually any form of ?wraparound? presents a risk in terms of the payment of the underlying loan. What if you pay the seller, and the seller doesn?t pay his underlying loan? Do you know how to control this risk?

The term ?owner financing? is sometimes used loosely?and sometimes is NOT descriptive of the type of deal you?re involved in. I would say that?s the case here.

Aside from this, ?owner financing? is going to always be cheaper in terms of upfront costs. Even if the rate is higher, this may still be worth it. In this case, I would say it definitely is. In fact, my guess is you can get this rate somewhat lower with some negotiation.

You can almost ALWAYS negotiate a discount of early payoff on any type of owner financing. The LEAST likely to do this though in my opinion is the ?wraparound?, because they are the MOST apt to have the least equity in their deal.

One point not mentioned below is that with an owner you may well have the ability to renegotiate your loan terms if you get into difficulty?.something that I would believe is more difficult with an institution.

But the guiding principle in THIS particular situation in my mind would be what type of ?wraparound? this is, and whether YOU have the ability to control the risk that may be present in this type of financing.

JPiper

import · March 16, 2001, 9:03am

Re: Which is better Owner or Bank Financing - Posted by Ed Garcia

Posted by Ed Garcia on March 16, 2001 at 10:03:52:

William,

Each deal speaks for it self. In this case you have an opportunity to get financing with a smaller down payment, and that is amortized for a longer period of time with no balloon payment, if you take the sellers financing. However in doing so, your monthly payments will be considerably higher. Remember you’re coming in with 6% less down, a higher interest rate, and are amortizing the payments for 20 years rather than making a payment based on a 25-year amortization as you would with bank financing.

As you can see the bank has structured the deal safer for themselves, and you as well, because you will have a larger cash flow to protect your investment.

One answer to your question would be what are your intentions with the property?
If you’re buying it for cash flow, then you will have very little. If you are buying it to resell then the sellers financing is obvious.

William, for me to properly answer your question, I would need to know more about how good your buy is? What the numbers would be on the cash flow? If the property would have any up-side potential, such as, are you buying it with below market rents etc?

One thing is for sure. You can cut a better deal with the seller on the interest rate, who’s wrapping the loan, I’m suspicious that they’re making a little more than they should on the rate differential. I think you can cut them back to at least 11%. That still won’t match payments with the first deal, but will be helpful.

Ed Garcia

import · March 16, 2001, 8:57am

Re: Which is better Owner or Bank Financing - Posted by Bud Branstetter

Posted by Bud Branstetter on March 16, 2001 at 09:57:28:

Owner financing may have the following advantages:
No qualifying
Not on your credit report
Quicker
*Substitution of collateral
*Subordination of collateral
*exculpatory possibility(no personal liability)
*no DOS clause

These are some of the reasons but the main one is that almost always the holder of that note will discount for early payment, additional payment etc. They may reduce the interest rate or restructure. On those with a “*” you will not find a bank or lender that will do them. You could ask for a 10% discount if payed off the first year or anything else you want in exchange for the higher interest rate.