Owner financing is something that many sellers reject out of hand, not because it’s a bad idea, but because so few people understand the benefits associated with owner finance. Most people don’t sell homes frequently—they may move two or three times in their adult lives. Their knowledge of the real estate market is restricted to the more conventional method of the buyer going to the bank and getting a mortgage.
It’s only when a seller finds that they’re struggling to sell their home, for whatever reason, that they start looking at other options. Now that traditional lenders have tightened their guidelines, owner financing is becoming a more appealing option for many sellers.
Why Try Owner Financing?
We are operating in a buyer’s market. Anything that makes a property more accessible and more appealing to a buyer is a good option. Owner financing does exactly that, because it makes it easier for the buyer to access the property. With owner financing, all or part of the purchase price of the property is carried by the person selling the property. The buyer makes a down payment, and the rest is taken care of by the seller. If the property already has a loan against it, that does not matter, except for the fact that the existing lender might accelerate the loan when the property is sold if there is an alienation clause (this rarely, if ever, happens).
The buyer then makes payments to the seller. There is no need to get involved with any banks. If the property does not have a loan against it, and the seller has clear title, then the seller could theoretically carry all the financing. The buyer will pay installments to the seller, gradually taking on the seller’s equity. The seller and the buyer are both protected by law, because the security instrument becomes a matter of public record.
As a seller, there are many benefits to this type of sale. Typically, owner-financed properties enjoy a higher sale price—sometimes going for more than the full list price. In addition, the seller could benefit from lower taxes, because income is reported as installments over a calendar year, rather than one lump sum.
Owner finance agreements usually have a higher interest rate than other kinds of investment, and the payments from the buyer come as a predictable monthly income, rather than a lump sum that needs to be managed carefully.
The Risks With Owner Finance
There are some risks associated with owner finance, however. Firstly, as the seller you are taking on the responsibility for checking the credit of the buyer, and you take on the risk of the buyer defaulting. Yes, if the buyer defaults you can seek possession of the property, but that will leave you with legal fees, and having to find another buyer. If there is a loan out on the property, or you have other payments due and rely on that income, then this puts you in a difficult position.
If you can afford the risk, then owner finance can be lucrative, but make sure that you understand exactly what you are doing, and that you have a sound budget before you sell in this way.