Risks of Owner Financing and How to Minimize them
By Sadiya Anjum
Owner financing can be extremely beneficial and may sound promising when you are selling your home. But know that the seller is taking on the role of lender and hence faces certain risks.
Perhaps the largest risk the seller faces is with the simple trust that the buyer will make proper payments on time. You may protect yourself with various clauses but the bottom line is that having to resort to any of these clauses is going to be stressful and may cost you money.
The seller is usually guaranteed with a clause regarding foreclosure if the buyer fails to make payments or defaults completely. Foreclosure itself has many problems associated with it. To begin with the whole procedure could take several months and sometimes even over a year. The process will also cost a lot of money and foreclosed properties hardly ever fetch the full price. In addition problems arise if the property’s value has declined. There is also no guarantee with the condition of the property. A buyer facing foreclosure may hardly pay attention to the condition of the property. So if you repossess the property major renovations may be required.
But risks does not mean that one has to completely reject an idea otherwise we may never land up doing anything in our life. The best way to deal with risks is to prepare and protect yourself ahead of time, i.e. before a deal is closed. Firstly make sure that you have an attorney who is experienced in owner financing to draw up the deed for you. If you are opting for owner financing then it is a given that you have done your research thoroughly; so make sure that you understand the details completely.
Although credit checks are not mandatory it would be wise for you to get one done. It is not a smart idea to trust someone even if they promise to be really good now irrespective of what their past looks like. The down payment you accept should be substantial as it will make the buyer think thirty three times before defaulting if he has invested good money.
Make sure that the earnest agreement includes clauses specifying timely payment of taxes and continuation of homeowner’s insurance. You may even seriously consider buying tax registration coverage from a title company so you may be informed if taxes have not been paid.
Take precaution by including a ‘due on sale’ clause indicating that if the buyer intends to sell the property then you must approve of it in writing. Include clauses specifying action or penalty payment if the buyer delays payment. If you would not like to deal with a balloon payment clearing the loan early, consider a prepayment penalty clause.
A good way to ease your troubles of checking the mailbox expectantly every month would be to consider a third party collection account. This service provides benefits like receiving monthly payments, providing tax statements etc. The costs of this are not high and can be easily split by the buyer and seller.
You must remember that not all your conditions will be accepted right away. It may take some negotiation, compromise and alteration of some clauses. It is best to have an attorney to see you through this safely.
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