Is Owner Financing Right For Me? - Part 2
When To Use Owner Financing
From the seller's point of view:
If a property isn't selling, due to a tight credit market, difficulty in getting traditional lending, lack of potential buyers, or the property being considered substandard
If the seller wants a high-interest asset-backed security, Owner Financing turns a property into a high yield bond, one you can foreclose against if you don't get paid. Then you can sell it again!
If the seller doesn't need the sales proceeds to buy a new house
If the seller wants the equivalent of rental income without the responsibility for taxes, maintenance costs, insurance, security, and the other usual obligations of a rental property owner
From the buyer's point of view:
If the buyer can't get financing or afford the purchase price
If the buyer wants a low down-payment or special payment considerations
Owner financing is an option whenever both the buyer and seller want to avoid dealing with the rules and regulations required by the standard lending and closing approach.
How Do I Owner Finance?
Because Owner Financing is rare, the seller will have to mention it in the property listing: Owner Financing, Owner Will Carry, Flexible Terms, etc. From there it's just negotiation of terms. You'll need to write up a Promissory Note clarifying the payment schedule, what happens if buyer defaults, and what property is securing the loan.
If you are the buyer, just ask if the seller will finance the sale. Sometimes they will.
In either case, plan to consult a real estate lawyer to make sure the arrangement protects both parties and covers everything that needs to be written down.
Owner Financing Or Rent To Own
Both Owner Financing and Rent to Own seem similar on the surface. Both methods allow a buyer to make monthly payments to the seller towards paying the sales price, avoiding lending institutions.
Owner financing means the seller loans the buyer money, making it easier for the buyer to afford the property. The whole point is to expedite the sale through flexible terms, avoiding standard institutional lenders and closing. The buyer receives the title immediately.
In a Rent to Own deal, the lessee locks in a possible purchase price for a short term of a few years. The lessee pays a premium above their normal rent that could be applied to either the future purchase's down payment or closing costs, as determined by a mortgage lender. This method uses standard institutional lenders and closing. Ownership lies with the lessor until the buyer pays the purchase price in full.
Many buyers are reluctant to take on a Rent to Own arrangement because the lessor holds the title. Only a small amount of the rental goes towards the purchase price, and more of it goes towards closing costs than many buyers would like. Since the lessor owns the property, he or she can evict the lessee for any number of offenses, at which time the lessee would lose any "paid in" money. The owner/lessor could face foreclosure, and again the lessee would lose any "paid in" money. While Rent to Own does allow a "try before you buy" approach to real estate, it carries more risks than Owner Financing.
Owner financing is a creative approach to financing a property purchase. Both buyer and seller can avoid the bank, the traditional closing period, closing costs, set down payment and other normal aspects of selling a house. Sellers can better attract potential buyers for hard-to-sell properties. Buyers can negotiate terms that they can afford. Properly done, this is win/win for both buyer and seller, and proof that property sales can be cooperative and not adversarial. While this type of financing has its challenges and risks, for a certain group of informed buyers and sellers this method can work out well.