The Challenges of Wholesaling Owner Financed Properties
Investors wholesaling homes have been prompted to search for owner financing deals from the beginning, but while potentially highly profitable, can also come with their own unique sets of challenges and dangers, especially in the current housing market.
Wholesaling seller financed homes, lease options, rent-to-own deals and properties with owner carry back mortgages or other types of assumable financing can open many doors for real estate investors. Owner financing means not having to obtain new bank financing to make acquisitions or flip houses, and even if simply flipping real estate contracts can make the resale side far easier.
Today these deals can be incredibly valuable and attractive to new wholesalers getting started with limited resources and little or no cash of their own or credit. Similarly they can also help veteran investors to take full advantage of current market conditions and ramp up their volume to make even more money.
These strategies have come around full circle to being very popular again due to tight mortgage credit and the roller coaster ride home values have been on over the last seven years. However, while seller financing deals may appear to be a dream come true and offer the ability to turn around homes faster and easier with little to no money down there are potential kinks that can trip up investors causing them to lose money and time, and see their reputations bruised if they aren’t aware of them.
So what’s wrong with wholesaling lease options or homes with seller financing?
Many see these as being zero risk deals as little or no new money is injected and normally nothing reflects on personal credit. However, there are two main threats in the current market that real estate wholesalers should be aware of.
1. Ability to Resell
Whether wholesaling lease options or owner financed contracts investors need to complete thorough due diligence to ensure that properties can be flipped, and on the terms promised. Today the marketplace is ridden with underwater homes and properties with a large variety of liens on them. This can prevent resale or refinancing, or at least soak up so much equity that it isn’t feasible or profitable. So make sure you know exactly what issues may affect title prior to signing.
2. Ability to Refinance
Many of those wholesaling lease options or properties with seller held private mortgages don’t give a second thought to the ability of end buyers to refinance down the road. They are in, out and paid well before then. However, if end renters or buyers aren’t on a plan to fix their credit and are carefully documenting their payments they could find it impossible to refinance into a long term loan before a private mortgage balloons or lease option expires.
This may not immediately and directly affect your own wallet, but it can affect long term performance. The more you do to educate and help both sides make it a smooth, profitable transaction, even when you are out of it the more they will share you and send you referrals.
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