Owner Financing Explained
By Sadiya Anjum
Owner or Seller Financing is a case where the buyer obtains a partial or full loan from the seller instead of a traditional lender or bank. Seller financing is simple enough to understand and comes with its own benefits and risks. The seller takes on the responsibility of a lender and the buyer makes direct payments to the seller over the loan period. This option may be used if the buyer for some reason may not qualify for a traditional mortgage, or the lender is not willing to finance a particular property etc.
How does Owner Financing Work?
This is a general outline of how owner financing functions. The seller accepts a down payment and provides a loan to the buyer directly. The details of this loan are included in a legal contract called a promissory note which promises the seller monthly payments for a fixed period of time. With the promissory note in hand the buyer is now in possession of the property; there are no lenders or banks involved. The promissory note has different names such as mortgage note, trust note etc. A second document which serves as security details out the right of the seller to repossess the property if the buyer defaults.
Which Property is Suitable for Owner Financing?
Owner financing is not very common among homeowners and it is usually employed by investors who flip properties. If a property is in a bad condition or the owner has a vacant home sitting on the market for a significant period of time, then he may consider owner financing. This kind of financing may ensure a quicker sale or the sale of a property which may otherwise be difficult to sell.
Another point to consider is mortgage or other liens on the property. Seller financing is most convenient when the property is free of any mortgages. But if there is a small mortgage due, the buyer’s down payment may help clear it. If there is a large mortgage due meaning very less equity, the buyer may consider taking over the seller’s payments but this is not very common and may involve some complications.
Benefits of Owner financing for both Buyer and Seller:
- Firstly the chances of making a quicker sale are higher.
- Closing may also be easier since one does not have to wait for the mortgage to be approved by a lender.
- Buyer can save money in the form of origination fees and other lender fees.
- Paperwork is comparatively less extensive.
- A large down payment may not be required and the appraisal may also be skipped.
- Buyer and Seller can work out the terms of the agreement together – a certain degree of flexibility involved.
- Seller may obtain a higher price if he meets the terms of the buyer.
- Seller may secure future income in the form of interest payment.
A large reason for homeowners’ hesitancy to try owner financing may come from the lack of immediate cash which may otherwise be obtained. This can easily be solved by ‘simultaneous closing’. The seller basically sells his promissory note to a note buyer immediately after closing. The seller gives up the benefit of obtaining monthly payments in the future to them. The terms and interest rates of the promissory note remain the same and this transaction does not affect the buyer.
Difficulties with Owner Financing
Even though there may be certain obvious benefits with owner financing, people are still hesitant to try it. Part of the reason is how complicated it seems. It is true that a lot of research has to be done before attempting owner financing. In fact, payment terms and other such details would be best drawn up by an attorney or other such professional who has experience in this subject.
The seller may question the buyer’s ability to make regular payments. Creative solutions can be tried to assuage the seller’s doubts such as making an advance on the first few monthly payments or providing the seller with a year’s worth of post dated checks. If the buyer does default at some point, the seller can repossess the property. The major problem with owner financing lies in the fact that the seller is not a lender. So he may not know the functioning and handling of loans. But with proper research, protection with the help of the security and some professional guidance, owner financing may prove to be highly advantageous.
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