The New Value of Houses-Owner Financed
BACK INTO AN “OWNER FINANCED” PRICE USING LOCAL RENTS AS YOUR BASELINE
Here’s the problem with using MLS Data and doing Current Market Analysis (CMAs) to find an After Repaired Value (ARV) in an area that has crashed price wise; Your values are going to come in way lower than the values WE should be using. When I say WE I mean those of us who wish to OWNER FINANCE houses.
Because the banks are NOT lending the prices of properties are dropping dramatically. To buy a house today you need perfect credit or cash. In middle to lower income areas, there is no perfect credit to be found and there certainly isn’t enough cash on hand to buy a home outright.
To go out and get a authentic appraisal and/or do your own CMA based on new loan or cash sales will only result in very low ARVs because, in large part, only investors like you and I are buying houses today. When looking to see the value of properties as far as WE are concerned, WE should be looking at what properties RENT for… NOT SOLD FOR. WE (again…as those who wish to Owner Finance properties) are only competing with RENTS.
Does it behoove a tenant to Buy one of our houses? Is the tenant paying the same to own as they are paying to rent? 81% of the renters in the marketplace would rather own than rent but don’t think they can get a loan.
When we offer to Owner Finance or properties to those who cannot qualify for a loan we solve the one and only thing stopping them from buying. This is the magic of the market today for you and me! It is the perfect storm; Housing prices have dropped because institutions have stopped lending. The price goes right back up when WE decide to lend. WE just have to stay in sync with what rents are.
And by the way, what happens to rents when people cannot buy? They go up don’t they?
A 3 bedroom, 2 bath apartment rents for $950. You find a home in that area you can buy for what seems like a very low price. Let’s say you can buy this home for $30, 000 and by the time you include $2, 000 to put into your pocket and do a little cleanup and painting you’d be into the house for $40,000.
$40, 000 is our BASIS (what we have in the deal).
This is how WE back into a sales price based on the rents:
Take the $950 rent and subtract out the tax and insurance expense; what you’d have to pay for taxes and insurance if you owned a house in the area.
Let’s say in this case the taxes were $100/mo and the insurance would run about $50/mo.
-$ 100 Taxes
-$ 50 Insurance
WE see that this tenant can afford to pay $800 for principal + Interest and by the time they pay another $150 for taxes and Insurance their payment to own is equal to what they were paying for rent. So what does that make your sales price? As luck would have it (or by the terms I chose to use) it’s pretty easy math:
$800 = $80, 000 financed amount @ 10.5% for 20 years.
Check it out on your own amortization software or smart phone application…
$80, 000 @ 10.5% for 20 years = $798.70/mo
…CLOSE ENOUGH! – RIGHT?
This formula works when you plug in the terms of 10.5% and 20 years (240 months).The fact that the actual appraised value is much lower or that the Tax value is way lower does NOT concern US in the least. Those criteria are exactly what’s allowing US to proliferate. Remember; in this market, because lending institutions have stopped lending, we only compete with rents… how much does it cost a person to live where?
WE are selling payments and position…NOT PRICE.
Does a person want to pay $950 and be in the position of a RENTER?
…or would a person rather pay $950 and be in the position of an OWNER?
What do YOU think? What would YOU want for your family?
The separator is… DO THEY HAVE A REASONABLE DOWN PAYMENT????
Because most of your prospective buyers won’t have good credit, WE count on their up financial commitment as the glue that holds the deal together.
A person who gives around 10% or more is probably very serious about keeping their home and making their payments for the long haul.
Forget convention! This is NOT your Daddy’s economy or Daddy’s real estate market. THIS IS A NEW TIME! Those who get this dynamic can almost double their money at will and earn 10.5% or more on that money to boot!
What are you waiting for? Go find a house!!!