Let’s talk about the fundamental concepts you need to understand before getting into owner financing and the broader investing world. There are some core things you really need to grasp before moving forward: The owner financing concept.

What is owner financing?

At its most basic level, instead of buying a house and getting a mortgage from Wells Fargo or Bank of America and paying them monthly, the buyer gets the deed but pays the seller each month. The seller holds the note for the purchase. This is a tool we really like using in investing because it offers many great benefits.

Now, owner financing is really an umbrella term that covers several different strategies. Let’s look at what I call the owner financing tree:

Wraparound mortgages are one type of owner financing. Here’s what that means: you purchase a property with some financing, let’s say from your local community bank, so you have debt on that property. Then you sell it to someone else with owner financing. For example, if your original debt is $80,000 and you sell it for $100,000 at a higher interest rate for a longer term – that’s a wraparound transaction. These are amazing for making a spread on interest and equity, really maximizing your money from each deal. We’ll have another video specifically about wraparounds, so keep watching this series.

Then there’s subject-to, which is another type of owner financing. Let’s say a seller owes Bank of America $80,000 and wants to sell their house. Instead of coming up with cash to pay off Bank of America, subject-to essentially means taking over payments. But never say “taking over payments” to your seller – that implies an assumption occurred. Subject-to is not an assumption – you don’t take over the liability. The seller stays on the mortgage, but the property title transfers to you. So while the deed goes from Joe Homeowner to Jeff Investor, Joe’s name stays on the note and deed of trust with Wells Fargo.

Free and clear is your basic owner financing transaction. Think about Betty who bought her house in 1943 and has owned it forever but decides to sell. If she doesn’t owe anything to banks, she just has the deed – that’s free and clear. She can owner finance to whoever she wants. Like we saw before, the buyer pays the seller directly. If Betty agrees to sell for $80,000 with $850 monthly payments for 15 years, that’s a free and clear owner financed purchase with no bank involved. Now, let’s talk about liens.

Liens

Lliens is crucial because we need to know how they work and what can be done with existing liens. Simply put, a lien is debt on a property. What makes liens special is that this debt has to be paid before you can make any money from selling the property.

Now let’s talk about types of liens in more detail. A mortgage is the most common type of lien we’ll see. When there’s a mortgage, it gets filed with the county as a public record. This filing establishes who gets paid first when the house sells – and it’s always the bank getting paid before the seller gets any leftovers.

Types of liens

There are several different types of liens we encounter. While mortgages are what we see most often (unless you’re specifically looking for free and clear properties), let’s look at some others. Mechanic’s liens happen when someone does work on a home. Say you have a $9,000 plumbing issue fixed, but you decide not to pay the plumber after they complete the work. Well, that plumber can go to the county and file a mechanic’s lien, which means they must get their $9,000 before you get any money from selling the house.

You really need to watch out for these liens during title searches, especially with subject-to deals where we’re taking title but leaving the existing debt in place. Missing a lien can really mess things up. Imagine you take over an $80,000 Bank of America loan on a $100,000 house, put in $10,000 of work, and then discover there’s a $20,000 plumber’s lien you didn’t catch. That needs to be handled one way or another – either through payments or paying it off, maybe even negotiating abbreviated payments.

Then we’ve got tax liens – both federal and property taxes can put liens on property. Don’t get too scared of federal tax liens though. I’ve bought many houses with federal tax liens. People often confuse them with property tax liens, which absolutely must get paid – the taxman always gets their money.

But here’s something interesting: if the seller claimed a homestead exemption on the property and they have a federal lien from unpaid income taxes, you can actually get that dropped off. The homestead Protection Act says that if they’re not making money on the sale (like selling for $80,000 when they owe $80,000), the Fed will drop the lien. You might need an attorney’s help, but it can be done. I’ve picked up lots of deals other investors passed on just because they saw a tax lien and assumed it couldn’t be handled.

Child support liens

Child support liens are another common one we see. These are interesting because they’re actually against a person but pass through to any property they own. If someone owes $8,000 monthly in child support and falls behind, they can put a lien on any property they own. When they sell, that money has to get paid to the ex-spouse, homestead or not.

Now let’s talk about lien position – this is crucial. The only thing that determines lien position is when it was filed – the exact date and time. This matters a lot for foreclosures. Let’s say Bank of America files a mortgage January 12th, then a plumber files a lien February 7th, and then they get a home equity line of credit a month later. We’ve got three liens – the first to Bank of America, second to the plumber, and third to Wells Fargo. We call these either first, second, third positions, or first and subordinate liens.

Here’s what happens in foreclosure: if the buyer stops paying Bank of America and they foreclose, those other two liens – the mechanic’s lien and the HELOC – get completely wiped out.

That’s the risk of taking a subordinate position. When someone ahead of you forecloses, you get nothing. This is really important in owner financing because we’re often dealing with lien positions when we’re buying and selling properties.

What happens with liens ?

Let’s continue with what happens with liens and some vital business advice. When we buy a house and agree to keep making payments for the seller, we set up a lien with a deed of trust to secure performance. But remember – Bank of America or whoever has first lien position stays in control. If you don’t pay them, or if your servicer messes up (which shouldn’t happen if you choose partners wisely), and Bank of America forecloses, everything else gets wiped out. You lose all potential profit.

Here’s another scenario: say our buyer keeps paying Bank of America but stops paying Joe the Plumber, who agreed to $500 monthly payments. Now Joe can foreclose, even though he’s in second position. This gets interesting because while the first lien to Bank of America stays in place, that third lien – the HELOC to Wells Fargo – gets completely wiped out in Joe’s foreclosure. They won’t see another dime.

At the foreclosure auction, Joe might take possession or sell to an investor. But be careful about buying second lien position foreclosures! Here’s why: when Joe forecloses, yes, the HELOC disappears, but that Bank of America mortgage is still there in full. If nobody bids at auction, Joe gets the house but still has to deal with Bank of America’s first lien. Lien positions are everything in owner financing, so really understand this stuff. Now let’s look at some crucial business tips for getting into investing

Tips for getting into investing

First – never put your own name on contracts. That’s asking for personal liability. I always sign as Marion, member/president/vice-president, representing my company. The only exception might be working as a bird dog with experienced investors when you’re starting out. That’s a great way to make money early on – finding deals for established investors before you have all your systems in place. But even then, everything goes through their LLC or mine.

Here’s a big one that I think sets me apart: you are a real estate investor. Not a wholesaler, not a fix-and-flipper, not a landlord – you’re a single-family real estate investor. There’s this concept from “Good to Great” called the Hedgehog Principle, focus on what you’re good at. Many companies get distracted by bright shiny objects. Like if a seller has a pile of silver, you might be tempted to invest $100,000 in that. But you’re not a silver investor, you don’t understand how silver works.

A lot of people misinterpret this and say “I’ll focus on being a good wholesaler” and pass up deal after deal. At least 80% of my deals have been picking up after other investors who couldn’t close because they didn’t know multiple strategies. You need a bat belt in this business, different tools for different scenarios. Study the Creative Cash Flow series and learn from others about niches you don’t know. Remember that your focus is making money in single-family real estate.

Let’s go through some common acronyms we use as shorthand in the investing world. They might seem confusing at first, so let me break them down.

Common Acronyms

ARV – After Repair Value. Say you get a lead on a house that needs $25,000 in work. ARV tells you what it’ll be worth after you put that money in and fix it up. We base pretty much everything in our world on ARV, sometimes along with rental comps.

Speaking of comps – that stands for comparable. We’re comparing your house to others that have sold in that neighborhood with similar features: square footage, year built, number of bedrooms and bathrooms. This helps determine our ARV, assuming the house gets fixed up right. You want to look for houses that sold in the last 60-90 days with similar rehab to what you’d do. If you’re putting in granite, look for comps with granite. When you find three good examples showing that three-bedroom houses with granite, hardwoods, and updated bathrooms are selling for $150,000, that tells you what your house will be worth with those upgrades.

LTV – Loan to Value. If you’ve got an $80,000 loan on a $100,000 house, you’re at 80% loan to value. This relates to basis, which has different interpretations. You’ve got cash basis – how much actual cash you put in yourself. Then there’s total basis – all money invested through lending, cash, whatever.

Example

You find a house with $50,000 owed on it, needing $20,000 in work to be worth $100,000 ARV. If you buy it subject-to for $50,000 (keeping the existing mortgage) and put in $20,000 cash, your cash basis is $20,000, but your total basis is $70,000 ($50,000 mortgage plus $20,000 cash).

This basis versus ARV comparison helps you decide which deals are good. You’ll hear terms like “cents” or “percent cents on the dollar.” In our example, we’re at 70% of ARV – our basis is 70 cents on the dollar. I might tell someone “I contracted this house at 70 cents.” Let’s talk about why owner financing is so attractive. There are many benefits, and while there are some cons, it’s become my niche for good reasons.

Benefits and Con of Owner Financing

First big advantage – no dealing with tenants, toilets, and trash. Unlike landlords who get calls at all hours about broken toilets, even with a property manager, owner financing frees you from those headaches.

Another major benefit: set actual returns. Here’s a common mistake I hear, especially from new investors. They’ll say “I’m making $450 monthly on my rentals” because they’re paying $550 for the mortgage and collecting $1,000 rent. But what happens when the AC breaks and needs a $5,000 replacement?

Your yearly profit gets wiped out. If you’ve had the property two years, you’re really only making $225 monthly when averaged out. With owner financing, when I say I have $450 cash flow, that’s real – it’s going straight to my pocket or business expenses. Like I joke – when’s the last time you called Wells Fargo about a broken back door? They only care about getting paid, and as owner financiers, that’s our position too.

Now for a con – lost appreciation. If you sell a house with owner financing for $100,000, get $10,000 down, and $756 monthly payments, that’s what you’ll get for the next 30 years or until they sell or refinance. With rentals, you can raise rent as market values increase. Plus, inflation means your fixed payments become worth less over time – that’s time value of money.

But here’s why I love this niche – not many people do it. It’s like swimming upstream while everyone else chases 70-75 cent deals. I can buy at 95 or 100 percent and still make great money. Over 80% of my deals come from cleaning up after wholesalers who didn’t recognize the opportunity.

The barrier to entry is low because financing is included in your purchase. You just need to understand how it works and explain it to sellers. We’re going to teach you every detail I’ve used to reach the point where I can vacation in Japan for a month and still buy five houses.

About foreclosures – they’re both good and bad. First, it’s crucial to be ethical and only put people in houses they can genuinely afford. That said, even worst-case scenarios aren’t terrible. Say you sell for $100,000 with $10,000 down – after paying a realtor, you net $7,000 upfront plus monthly cash flow. If the buyer stops paying after three years, yes, you’ll have hassles and costs, but you get the house back. Often through a deed in lieu of foreclosure, which saves time and money. Then you can resell at the new, higher value, getting another down payment and starting a new 30-year note with higher payments.

There’s plenty of legal stuff to navigate – Dodd-Frank, state laws, compliance issues. Work with an attorney who knows owner financing, not just any lawyer. It’ll cost more but provides better protection.

Finally, this offers unlimited, non-recourse funding. You don’t need bank approval – just convince the seller to accept payments. When done right through an LLC with proper disclosures, your liability is minimal. Owner financing is an excellent way to start in real estate, especially without much initial capital. While you want to buy condo or apartment next time, think about owner financing.