I LOVE OWNER FINANCING!
Personally, I have bought many properties with owner financing and even sold many properties with owner financing. In both cases I made or saved loads of money in my real estate investing business.
Recently I bought a duplex and 3 single family homes with owner financing and I actually make $1800 a month from these properties! The best thing was that I saved over $50,000 doing seller financing!
In this article, I’ll go over what you need to know about owner financing and how you can make loads of money using it as you learn how to invest in real estate.
When you are a real estate investor, you need to consider all available options for buying or selling new properties.
There are a lot of non-traditional methods of financing that offer different benefits whether you are a seller or a buyer. One of these methods is owner financing or also known as seller financing.
The process is not complicated and I want to show you the entire process, how to find seller financed deals, and how to do owner financing.
What is Owner Financing?
Owner financing is a financial arrangement between the buyer and seller of a property. The buyer negotiates the terms of the deal and pays the seller every month instead of applying for a mortgage loan with a lender.
Items to negotiate and how owner financing works:
- Purchase price
- Down payment
- Interest rate
- Number of years for the note
- If there will be a balloon payment
- Any owner financing concessions
- Title work details
- Who will pay the closing costs
- If you can refinance the property to pay off the owner financing early
If you happen to be a real estate investor planning to purchase a new property, owner financing can give you many opportunities you cannot expect to get from conventional mortgage lenders.
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You can even purchase the property for little to no money down because you are not working with a bank that has requirements. What you need to do is negotiate with the seller for better terms.
I wrote all about the art of negotiating your deals and you can find it here.
How owner financing words is fairly simple and just like you would get financing from a bank. The homeowners provide financing in loan form to the person buying the property.
This basic process often begins once the seller and buyer agree to the sale’s details through signing the real estate purchase agreement.
Once this is done, the promissory note will be used to outline the loan’s details complete with the repayment schedule and interest rate and enforce the promise of the buyer to repay the loan within the timeframe stated in the note.
The combination of promissory note and real estate purchase agreement is the common way to offer owner financing in real estate transactions.
Owner Financing Benefits for the Buyer and the Seller
Seller Benefits for Seller Financing or Owner Financing
- Much higher returns when you sell the property
- More potential buyers to choose from
- Can sell as is condition since banks don’t need to make sure the place is in good condition
- Balloon payment option to cash out after negotiated years (i.e. 5 years)
- Ability to get the property back if buyer defaults on the mortgage note
- Act as a bank and earn interest over the life of the loan
- Seller faster and close quickly
Buyers Benefits for Seller Financing or Owner Financing
- Faster closing since you do not need to wait for the bank to get the loan through and funded
- Cheaper closing with no bank fees, points, or approvals
- Down payment can be flexible depending on how you negotiate the terms
- Great for buyers who may find it hard to get a loan.
What is Owner Financing or Seller Financing in Real Estate and How Does it Work?
Owner financing is when the seller of a property is the one who offers financing rather than a mortgage lender or bank. Owner financed properties are paid for by buyers similar to how other properties are bought and sold. The only difference is that it doesn’t go directly through a bank. What happens instead is that the previous buyer is going to act as the bank that will directly receive the seller’s payments.
This process is not much different on the part of a buyer except that the terms of the agreement are much different.
This is because they can negotiate with the owner directly instead of a bank that has strict requirements.
All the other parts are basically the same for the buyer. They are given a timeframe and loan to buy a property even though there might be lower entry barriers compared to a traditional mortgage.
Seller financing in real estate is unique in the sense that it gives sellers incremental cash flow instead of a lump sum once the property sells.
How Do You Do Owner Financing on Homes?
When owner financing on homes, the seller doesn’t give any cash to the mortgage like how a mortgage lender does. The seller will instead extend enough credit to the buyer in order to cover the home’s purchase price, less down payment if there is any.
The buyer will then make regular payments up until the full amount is paid.
The buyer will sign the seller’s promissory note that spells out the loan’s terms including the repayment schedule, interest rate, and the default’s consequences. There are times when the owner keeps the house’s title until the loan is paid off by the buyer.
Many deals on owner financing are short term and the usual arrangement may involve loan amortization of more than 30 years yet the final balloon payment is due after 5 years.
The theory behind this is that after 5 years, the buyer must already have enough home equity or have had sufficient time to boost his financial situation to become qualified for a traditional mortgage loan.
How Do You Do Owner Financing for Land?
The process of owner financing for land is quite simple.
First, the seller will determine the payment amounts every month and the down payment.
Second, a down payment will then be given by the buyer.
Third, the seller is going to prepare the necessary documents and the buyer will have to sign them.
After signing, the buyer can start using the land or resale it to someone else
If you want to know more about buying and selling land, check out my article on how to invest in land here.
Where Do You Find Owner Financing on Homes for Sale?
There are several ways to find owner financing on homes for sale. These include the following:
Visit a public MLS or multiple listing service website.
Even though majority of MLS websites are meant for real estate agents, there are counties that provide access to the public.
If there is an offer of owner financing, this is usually indicated in the property’s comments section.
Talk to real estate brokers or agents.
If a home catches your interest, your agent may talk to the listing agent to know if it is possible to get owner financing.
The agent may also know a homeowner who is eager to make a sale and willing enough to explore more creative options for financing.
Take a tour around the places where you want to live.
Search for signs stating “For Sale by Owner.” Call these owners to know if they are open to the idea of owner financing.
Search for real estate listings for houses for lease with option to buy.
The lease option lets you purchase a property once the lease term ends if you are qualified for a loan.
There are also sellers willing to put a part of your rent to the down payment to give you some savings.
In case the seller wishes to move the house fast, you might want to ask of owner financing is possible.
Use the power of word of mouth.
Make sure that your family and friends know that you are planning to purchase a property with owner financing.
Check out the local newspaper and online classified ads to find deals on owner financing.
You can also post an ad of your own to reach out to potential sellers.
What Contract for Owner Financing Do You Need?
Unlike bank financing, one of the biggest challenges of owner financing is that you or your attorney need to create some contracts.
However, it is also a good opportunity since the terms in conventional mortgages and lender notes rarely offer any advantages to the buyer.
Below are some of the primary contracts you need to execute a successful owner financing deal:
Seller financing addendum
A big part of the owner financing purchase process is going to be standard.
This means that you can use the standard sale and purchase agreement in your place once you put the property under contract.
However, you need to include the addendum that will have a clear explanation to the seller of all terms of the seller financing agreement. You can request your attorney to prepare this for you early on.
The addendum’s details must be the exact terms you want. The seller may agree to some of these terms but they may also not agree to others.
This means that you can leave out or include the terms according to the negotiation you had.
Deed of trust or mortgage and promissory note
The promissory note is a contract outlining all terms you negotiated in the above seller financing addendum.
The term debt usually refers to this contract. This basically states the amount you owe to the seller and how you are planning to pay this back.
The deed of trust or mortgage is a contract connecting your promissory note to a property pledged as security or collateral for the debt.
Even though a mortgage includes many terms, this basically gives seller the right of foreclosing and taking back the property if you fail to keep your promises.
Is Owner Financing a Good Idea?
Owner financing is a good idea for buyers in several ways. From the perspective of a buyer, owner financing is a great alternative to applying for a traditional mortgage loan.
The usual 20% down payment may be too much for some people so it is an attractive idea if the owner is willing to accept a smaller amount.
Since banks and lenders are not involved, there might be fewer fees to pay and lesser closing costs.
Having a poor credit may make it difficult to receive a mortgage approval. By bypassing credit unions, banks, and other lenders, you can also save yourself from strict approval requirements.
If you used to struggle with payments, owner financing is something you might want to look into.
On the other hand, sellers who agree to finance a home purchase may benefit from the use of the loan as a source of additional income.
It is basically similar to real estate investment but this time, a bit more personal. The loan’s promissory note can also be sold to an investor to receive a lump sum payment.
Seller Can Reclaim the Title Just Like a Foreclosure
When the seller finances the home purchase, the seller can retain the title of the property until the loan is paid off by the buyer.
Whatever the situation might be, the seller can always reclaim the property if the buyer doesn’t pay the bills.
Among the challenges of selling a house is renovating it and preparing it for the market.
With owner financing, however, there is a higher chance to sell the house as it is. Once everything is said and done, the seller can keep a bigger amount of cash from the sale.
If the owner finances all or part of the home purchase, sale completion can be made in a shorter period of time.
This can benefit the owner who wishes to sell the house fast and the buyer who doesn’t want to wait for conventional lender to approve the traditional loan.
Typical Owner Financing Terms
Here are the typical terms you may encounter if you are applying for owner financing:
This is basically the purchase price less the down payment. If you agree on $100,000 and the down payment is $10,000 then the loan amount is $90,000.
Banks usually give the “going” rate which is the average currently for all banks. They also increase or decreased the rate because of your credit score and ability to repay the loan with the risk the bank will take. The owner financing is typically higher than the going rate because of the buyer to not have to go through a bank.
In the case of traditional mortgage loans, a real estate investor usually has 15 to 30 year amortization to completely pay off an investment property. Meanwhile, in owner financing, there is no need to have such a long period of amortization since sellers don’t like payments that dribble in more than 3 decades. A property investor can expect a much shorter period of amortization that is usually 5 years.
Even though owner financing is considered a method to finance an investment property that doesn’t need a down payment, sellers typically ask for down payment. To investment property sellers, the down payment is the amount the buyers will lose in the event that they default. The seller can ask for a down payment of 5% to 25%. If you are the buyer, you don’t have to worry about pricey down payments since owner financing usually offers some room for negotiations.
In balloon payment, the whole remaining balance will be due in full at a specific timeframe before the amortization period comes to an end.
The investment property seller may accept the payment schedule of 5 years but wants the balloon payment once the 5 years come to an end.
It means that sellers don’t want to drag out the monthly payments beyond the 5-year mark.
If you are a real estate investor who wants to purchase an income property through owner financing, you need to pay off the remaining balance. It can be with cash or you can apply for a new loan.
Advantages and Disadvantages of Owner Financing
The main benefit of owner financing is the fact that it offers a faster process unlike bank loans that involve numerous procedures.
Monthly payments and down payment can also be negotiated because you will deal with an individual instead of an institution.
In case you don’t get approved for a bank loan for whatever reason such as low credit score, owner financing can become a very attractive option.
On the part of the seller, the advantage is that ownership will remain with him until the loan term ends. He can get higher interest rates as well.
The disadvantage of owner financing for buyers is that interest rates might be higher compared to banks.
Buyers might also need to pay large amounts as balloon payment. In case you don’t have available cash during that time, you need to borrow once again.
The risk for the seller is that in case the buyer fails to pay, the legal process must be initiated in order to recover the loan amount and make him leave the property.
Owner financing is an ideal choice for home buyers with the ability to make direct monthly payments to a seller instead of a bank.
This arrangement is more flexible and eliminates the cumbersome process and hassle associated with bank loans.
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