Are you a homeowner that wants to sell, but can’t seem to find a buyer? You could try sweetening the pot for potential buyers by offering owner financing. This puts you, the seller, in a similar position to that of a bank or lender in a conventional mortgage. By this agreement, the buyer agrees to pay you a monthly sum instead of one large sum that they would have usually gotten through a mortgage with a traditional lender.
This can have a lot of benefits for you and the seller but before you jump in, it’s vital that you understand how owner financing works and whether it’s right for you.
Owner financing is just what it sounds like. Instead of a buyer getting a loan from the bank, the seller lends the money to the buyer for the purchase. This is fully codified in a promissory note, which details the interest rate, repayment schedule and consequences of a default. Much like a regular mortgage, the buyer sends mortgage payments to the seller who gets to earn interest on the loan, probably at a better rate than he could get elsewhere. This note can also be sold off to another investor, at any time.
These owner financing arrangements are usually short-term, normally no more than five years with a balloon payment due at the end. The idea is that the home will have gained some value by then to improve the buyer’s position. Be warned though, these types of arrangements can seriously backfire, if you’re not careful.
If you think owner financing could be a good option for you, read on to see how you can set it up.
Start by having an appraisal of your property done to gauge it’s value. To protect against any unpleasant revelations in the future, have it fully assessed by a qualified contractor that can look for defects and a certified home appraiser that can give you the current value. Knowing the exact value of a property is important for both parties in the transaction, sellers need to know how much they will receive in the sale and buyers need to know the amount they’ll be paying over time. Having an appraisal done, satisfies both parties that the price is a fair one.
Finding buyers who will be interested in owner financing won’t be hard, what will take some work is properly vetting them to find the right ones. With each potential, buyer, take the time to properly understand why they want or need owner financing. He may have a poor credit rating; he can’t get a mortgage from the bank or hasn’t been in his current job long enough to qualify but really needs the home now.
Before agreeing to anything have the buyer fill out a loan application and properly investigate all the information included in it. Run a credit check, look into previous employment history and do anything else a normal bank would do before approving a loan.
Just as a regular bank would do, set a down payment to be paid upfront as a security. This also gives the buyer a stake in the property. So, they’ll be less likely to run away at first sign of financial trouble. The difference is that the homeowner has more leeway in negotiating the right amount, without worrying about government and banking regulations. You’re doing the buyer a huge favor by accepting owner financing. Especially, if you ask for a down payment of less than 10%. So, you should feel free to ask for an interest payment that is higher than usual.
Now you need to agree to what the monthly payments the buyer will be making to you. Owner financing is meant to be short-term and typically lasts 5 years with interest amortized over 15 or 30 years. But with a balloon payment, that ends the loan in a much shorter time. If you decide to go ahead with this, make sure everything is spelt out clearly in the final documents. So, there is no misunderstanding. You might want to consult an attorney or financial advisor, so you can be sure everything is done correctly.
Handling your own financing, can seem risky. To reduce the chances of risk, hire any outside professional help you can, to protect yourself. You should consult your attorney before any final documents are signed. You could even hire a real estate agent to help in closing off the sale. It will also be a big help to hire a loan servicing company. They can draw up the mortgage, mail statements to the buyer, collect payments and administer the mortgage.
Owner financing carries a degree of risk. But it can prove very helpful, for both parties and serve as a great alternative to the traditional buyer-seller process.