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How Do I Structure a Real Estate Rehab Owner Financed Note?

rehabInvestors are looking for ways to squeak profits out of fixing and flipping by using owner financing (with subsequent note sales) if they can.  My answer to this recent email may help to shed some light on what’s out there right now . . .

“I was wondering what terms to use in structuring an owner finance note for our rehabbed home in Scottsdale, AZ.  Here are the specifics on the property and what our goals are:

  • Home very recently comped at $205k
  • We need to recoup at least $175-180k as soon as possible so that we can continue our investment activities.


  1. What rate of return (IRR) do most note buyers look for?
  2. What down payment should we seek from a buyer?
  3. What interest rate should we charge?
  4. What price should we seek for the home?
  5. At what point in time should we set the balloon payment?
  6. What other information do you need from us?

Thanks for the help!” – Paul

Hi Paul,

Sounds like you have recently purchased and fixed up the property, or have you owned it for longer?

If the property is worth $205,000, then most note investors would probably not be willing to invest more than $135K in the property, keeping to an ITV (investment to value) of 65% or lower, if they’d buy it at all.  So, unless you have someone coming in with a large down payment, I don’t think that your objective of getting $175K out of it is likely using owner financing.

Perhaps you should lower the price to get someone who can qualify for FHA.

Tidbits to think about . . .

There are more buyers for your note when either you have owned the property for at least 12 months before selling it, OR, that you have seasoned the note (received at least 12 payments) before trying to sell it.

It can be possible to sell green (simo) rehab paper, but you need to have it underwritten and structured by the person that is going to buy your note… and it might look something like this:

  • 15-20% hard cash down payment
  • credit score at least 630
  • property value reasonable (it has to appraise) and the markup after rehab sensible (don’t try to buy at $50K and sell for $100K with $10K of rehab . . . doesn’t make sense)
  • 9% or better interest rate
  • fully amortized over 10-20 years (don’t make any balloon sooner than 7 years out)
  • need to fully document the buyer (1003, financial statement, credit score, etc.)

Even if you meet all of the above, your note will probably not sell for more than .60 to .80 cents on the dollar right out of the starting gate.  If these numbers don’t work, then consider seasoning the note for a while before trying to sell it, or sell a partial and get a little of your equity out at a time.

Hope this helps!  If you’d like a private consultation regarding the specifics of this or other scenarios currently on your plate, I’m available for hire on a case by case basis.

When banks say NO, I say YES!

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