Crack the Code: Owner Financing Makes Charleston Deals Work!
PAUL'S MARKET JOURNAL
The Owner Financing Guide to Charleston Real Estate
Last year, I found myself touring a charming downtown duplex with a repeat client of mine. The property was in pristine condition: the owner had meticulously maintained it, the units had flexible month-to-month leases, and my client had ambitious plans to transform it into a mid-term rental for higher returns. But there was a snag. Interest rates had just spiked from 5.5% to 7.5%, throwing my client’s financial pro forma out the window. On a hunch, I turned to the listing agent and asked, "Would the owner consider owner financing?" To my delight, he replied, "He would be excited about it."
For the past year and a half, I’ve been joking with people that my deals are as rare as a unicorn sighting: they’re either primary residence loans, all-cash offers, or owner financing arrangements (mostly true). With today’s stringent financing guidelines, commercial loans often don’t make sense unless you’re buying an owner-occupied property. This necessity for creative solutions has uncovered a goldmine of opportunities for owner financing in the Charleston area. Why? Because many Charleston property owners here either own their properties outright or have benefited from significant appreciation, resulting in substantial equity
How Owner Financing Works
The process of owner financing mirrors that of a traditional sale:
Contract: Write the LOI/offer and go under contract.
Due Diligence: Perform inspections and due diligence.
Closing: Schedule the closing, complete the title search, and finalize the transaction.
At closing, the buyer assumes all responsibilities for the property, while the seller’s role is merely as the lender. It’s crucial to understand that the seller is now the bank and has no other involvement. While I mostly speak as if the owner holds the entire note, there are variations. For instance, a buyer might use a primary lender for part of the loan, with the seller holding a second mortgage. Flexibility is key, but the principles remain the same.
Key Terms in Owner Financing
There are five major terms to consider in owner financing:
1. Loan Amount: For example, if you have a $1 million property, you might agree to an $800,000 loan, requiring a $200,000 down payment.
2. Interest Rate: I’ve negotiated 4-8% depending on the other offer & loan terms
3. Term Length: Commonly between three and ten years, depending on the owner’s preferences.
4. Payment Type: Decide between principal and interest or interest-only payments. For principal and interest, a 30-year amortization is common, with a balloon payment at the end of the term.
5. Prepayment Penalty: Determine if there will be a penalty for early repayment.
To play around with the numbers for owner financing, I like pointing people to this free online calculator
Why Owner Financing is a Win for Sellers
Owner financing, where the seller acts as the bank, offers several benefits:
Guaranteed Return: As the lender, you can secure a specific return on the amount loaned out. You’re lending on an asset you’re familiar with, increasing confidence in the new owner’s performance.
Recourse in Default: If the buyer defaults, you can foreclose on the property, retain the down payment and interest payments, and resell the property, potentially at a higher price.
Tax Advantages: By spreading the sale proceeds over several years, you can manage capital gains tax more efficiently. Instead of receiving a large lump sum and facing a high tax bracket, you receive payments over time, potentially lowering your overall tax burden.
Why Owner Financing is a Win for Buyers
For buyers, owner financing can be advantageous because:
Simpler Process: You bypass the bank, often resulting in lower interest rates and more flexible payment terms, such as interest-only payments during renovation periods.
Easier Qualification: While sellers still underwrite buyers (checking credit scores, assets, income, etc.), the process is generally easier than dealing with a bank.
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Feasibility in Today’s Market: Owner financing can make deals viable that wouldn’t pencil out with traditional financing.
How to Find Owner Financing Deals
Finding owner financing deals involves knowing how to ask. It’s a skill that can be developed, and I’ve found that about 50% of the time, sellers with equity may be open to this option if approached correctly. I’ve compiled a list of properties with significant equity to start your search. Stay tuned below.
Advice for Fellow Agents
Owner financing isn’t as daunting as it seems. It can be simpler than dealing with traditional lenders, and mastering it sets you apart. Often, I find myself educating the other agent on the opportunities and mechanics of owner financing.
But where do I start, Paul?
I’ve made it super easy and have compiled a short list of 278 properties currently on the market that have a significant amount of equity in the property. This list is available for my premium subscribers, click the button at the bottom of the email to sign up. This is where I’m pointing my clients to start their search to make deals happen in Charleston.
TL;DR
Owner financing presents a unique opportunity in the current real estate market, particularly in areas with substantial property appreciation like Charleston. It offers advantages for both buyers and sellers, creating win-win scenarios that might not be possible with traditional financing. By understanding the process and key terms, you can effectively navigate and leverage owner financing to achieve your real estate goals.
Although owner financing is a powerful tool, it’s just one of many in the savvy investor’s toolkit for making deals pencil in this market. As always, creativity and flexibility are key in real estate, and owner financing is a perfect example of how thinking outside the box can lead to successful deals.
I pride myself on identifying opportunities and crafting solutions that maximize value for my clients. Whether it's through owner financing or other innovative strategies, I am committed to helping you achieve your real estate objectives. My deep understanding of the Charleston market, coupled with a proactive and results-driven approach, ensures that you are well-positioned to succeed in any transaction.
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