Owner financing is a fantastic tool for real estate investors who want to create strong cash flow and build wealth creatively. However, one key aspect often overlooked is how to structure these deals to ensure they perform well—and, just as important, can be sold for top dollar if needed. Kristin Gerst shared actionable insights on how to set up owner-finance notes the right way, so you stay profitable while maximizing your options. Here’s everything you need to know.
If you’re a real estate investor or a budding note creator, this guide will walk you through the process of building, managing, and selling owner-finance notes that attract top buyers.
What Is Owner Financing?
Owner financing is when you sell a property but act as the lender yourself. Instead of receiving the full purchase price upfront, you accept a down payment and monthly payments from the buyer. This creates an owner-finance mortgage note, also called a “note,” outlining the terms.
Unlike selling to a retail buyer using traditional loans, you’re offering favorable terms directly, which can open the door to buyers who might not qualify for a bank loan.
Common Terms You’ll Encounter
- Note: A document detailing repayment terms for the loan.
- Loan-to-Value (LTV): The ratio between the loan amount and the property’s value (e.g., $80,000 loan on a $100,000 property = 80% LTV).
- PITI: Stands for Principal, Interest, Taxes, and Insurance—the core components of a borrower’s monthly payment.
- Seasoning: The track record of consistent payments on a note, often six months or more.
Why You Need an Exit Strategy
Markets change, and personal circumstances can too. No matter how strong a deal looks today, you need flexibility in case you decide to sell your note later.
Here are some reasons you might sell:
- Freeing up cash for other investments.
- Reacting to a market downturn or defaulters.
- Needing liquidity for personal reasons.
Without proper structuring, selling your note might be difficult or fetch a low price. By setting it up correctly from the start, you’re preparing for anything the future might throw at you.
How to Build a High-Value Note
Require a Minimum 10% Down Payment
A strong note begins with a buyer who has “skin in the game.” A minimum 10% down payment reduces the chance of default because buyers are less likely to walk away from money they’ve worked hard to save.
In practice, accepting deposits as low as $1,500 (essentially a rental deposit) often leads to problems. But when someone puts down $10,000 on a $100,000 property, they’ve made a serious investment.
Stick to Low Loan-to-Value (LTV) Ratios
Selling a house to a buyer at full retail price might sound appealing, but it can hurt you long-term. Why? If the loan goes into default, the collateral (the property) won’t cover the loan amount after costs like foreclosure expenses or repairs.
Keep the note’s LTV at or below 80%. For example, on a $100,000 property, cap the note at $80,000. This limits risk for both you and potential note buyers.
Maintain Competitive Yet Profitable Interest Rates
Current interest rate norms for owner-finance notes range from 9% to 11%. While these rates are higher than a conventional loan, owner-financed loans are higher-risk, so the rate is appropriate.
Using a Residential Mortgage Loan Originator (RMLO) can help you determine the highest-allowed interest rate under federal “qualified mortgage” rules. This ensures compliance while maximizing your profits.
Set Realistic Monthly Payments (PITI)
Monthly payments should align closely with local market rents. If borrowers notice they’re paying significantly more than renting an equivalent home, they may feel overburdened and stop paying.
If the property is in an HOA, include those fees in the PITI to avoid surprises that could tank your buyer’s finances later.
Implementing the First & Second Lien Strategy
One effective way to add flexibility to your notes is by splitting it into two parts—a first lien and a second lien.
Why Create Two Notes?
Splitting the note allows you to sell the first lien for immediate cash while keeping the second lien for long-term income. For instance:
- First Lien: $75,000 at 9% interest for 30 years.
- Second Lien: $15,000 at 9% interest for 15 years.
This structure lowers the first lien’s LTV, making it more attractive to institutional note buyers. Meanwhile, the second lien becomes your profit center, delivering monthly cash flow long after you’ve recovered your initial investment.
Example Deal Breakdown
- Sales Price: $100,000
- Down Payment: $10,000
- First Lien: $75,000 at 9% for 30 years = $603.47/month.
- Second Lien: $15,000 at 9% for 15 years = $152.14/month.
If you sell the first lien for $67,500 (90% of $75,000 note value), you’ve recouped your investment while keeping $152/month in cash flow for 15 years. That second lien alone generates $27,385 over its lifetime.
Using Professionals to Protect Your Investment
Work with an RMLO
An RMLO ensures all loan documents meet legal standards and avoids violations of lending laws. Though you might think of skipping this to cut costs, knowingly doing so could make your note ineligible for resale.
Close with a Real Estate Attorney
A qualified attorney can create the agreements, manage deeds, and troubleshoot title issues. Don’t take shortcuts here. Errors in loan documents seriously reduce note value.
Hire a Third-Party Note Servicer
A licensed note servicer will collect payments, manage taxes/insurance escrows, and handle delinquency notices. It’s not worth doing this yourself. Servicers also provide detailed, professional reports that boost note credibility when selling.
Avoid These Common Pitfalls
- Using Land Trusts Improperly: Borrowers can’t get homestead exemptions or standard insurance policies when using land trusts.
- Skipping Title Policies: Without them, you’ll lack protection against unforeseen liens or title disputes.
- Failure to Record Deeds: Always record both the warranty deed and deed of trust.
Selling Your Note for Top Dollar
When you’re ready to sell, note buyers like Capricorn Mortgage prioritize these factors:
- Interest rate of at least 9%.
- Low LTV (preferably under 80%).
- Documented payment history for at least six months.
- Clean, correct paperwork (e.g., RMLO files, HUDs, deeds).
Typically, a well-structured note can sell for 88-92% of its balance. This means liquidity is just weeks away if you’ve planned ahead.
Conclusion
Owner financing can be a game-changer for real estate investors, but only if the notes are structured and managed correctly. From requiring minimum down payments to keeping loan-to-value ratios low, each decision you make affects the note’s future value.
Whether you hold onto notes for steady cash flow or sell them to fund other investments, using professionals like RMLOs, attorneys, and note servicers is essential. By doing the hard work upfront, you’ll have the best of both worlds—ongoing income and a strong option to sell when the time is right.
Ready to start structuring notes the right way or selling your existing ones? Work with a trusted buyer like Capricorn Mortgage to maximize your profits.
