Real Estate Owner Financing
By Charles Hopkins
Published 09/20/2007 | Real Estate
Owner financing often produces a winning situation for both the
homeowner who is selling the property and for the buyer who is
purchasing the property. Owner financing may be defined as the
situation when a seller is willing to help finance a real estate
transaction by creating a loan for the entire purchase if they own the
home outright or by creating a loan for part of the purchase price when
there is already an existing loan on the property.
There are several benefits to the seller and buyer when an owner
financed transaction is used. For one, the transaction may proceed more
quickly and easily than when conventional financing is used because
there are fewer companies, fewer people, and fewer steps involved. For
another, the seller is more apt to receive a higher sales price, and
the seller will receive payments and interest over a long period of
time. There are tax savings realized by selling under this installment
plan. Additionally, the buyer will realize savings by avoiding loan
fees and lender charges, and the negotiated interest rate will
generally be lower than the available interest rates from a commercial
lender. Also, for the 20% of prospective homebuyers who cannot qualify
for a commercial mortgage loan, owner financing is a wonderful way for
them to be able to own the home.
There are a few potential disadvantages to owner financing to
consider. For one, if the buyer defaults on the loan the seller will
have to initiate foreclosure proceedings. This can be costly, time
consuming, and require work that the seller might rather avoid. Of
course, after the foreclosure the property can be sold again, an
advantage for some owners and a disadvantage for other owners.
Additionally, the interest income generated by the loan will be subject
to taxes, which could be a disadvantage to a seller who is in a higher
tax bracket. Also, the seller does not receive cash for their equity
immediately, but rather will receive their equity in installment
payments over time. This is a disadvantage if the seller has need for a
large sum to be used in the near future.
Here are some tips for the seller and the buyer to consider when
negotiating an owner financed transaction. The seller should research
the buyer's creditworthiness and ask numerous questions to become
confident that the buyer can fulfill their obligation. The buyer should
provide a written explanation of any problems that appear on their
credit report. The buyer should research the local housing market and
the condition of the home to become confident that the home is priced
fairly and is without major problems. Also, the seller should verify
that the new owner is making all insurance and property tax payments. A
proof of payment provision should be included in the sales contract.
Lastly, the seller should require the buyer to stay ahead on payments,
even submitting post dated checks, so that the seller has confidence
that foreclosure will not become necessary in the future.
An owner financed home sale can be a winning situation for both
seller and buyer. It is important, however, that the seller and the
buyer do their due diligence in order to reduce possible risks.