Owner Financing can be a win for both parties.
Sellers like owner financing because they can make money upfront, positively cash flow monthly, and collect the equity when the buyers refinance without all the hassle that comes along with being a landlord.
The main benefit of owner financing for a buyer is that the buyer will now be able to obtain a previously unobtainable loan for the house.
Finally, since the loan is between two people, the terms are easier to negotiate and there is more flexibility between the two parties. The closing period for owner financing properties can be as quickly as 24 hours and can have lower closing costs than a conventional loan.
Owner Financing | Example
Property Value: $175,000
Sales Price: $175,000
Down Payment: $15,000 (includes $5,000 for closing costs)
Note Value: $160,000
Interest Rate: 9%
Balloon: 4 year
Once the terms are agreed upon, the signing of the documents will take place in front of a notary and the paperwork will then be filed at the courthouse. In many instances (though not required), owner financing deals will be closed at a Title Company.
Owner financing offers a higher interest rate for the buyer and, while generally amortized over 20-30 years, many of these owner financing notes will have a balloon date within 3-7 years. This balloon plus the higher interest rate is in place to motivate the buyer to refinance the loan as quickly as possible.
Once in place, I recommend using the services of a third party note servicing company, whose role is to collect the payments, pay the priority lien holders first, and give the remaining amount back to the seller. If the buyer defaults, the note servicing company can assist with the foreclosure proceedings. Another benefit is that the third party servicing company can also provide the principal and interest tracking and provide both parties the end of the year tax documents required.
Owner Financing | Conclusion
In conclusion, the owner financing selling strategy has become more popular as obtaining traditional bank financing is becoming increasingly more difficult to do. For an owner, obtaining an owner financed property may be the only way to own a home, it comes in the form of higher interest payments. However, if both parties mutually agree to the terms, then owner financing is another option for people to take part in an otherwise unobtainable real estate transaction.
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