One of the biggest turn-offs when it comes to selling a house is dealing with all the middlemen – especially the banks and lenders.
But what if you were able to sell your property without these middlemen ever entering the equation?
Sounds great, right? I’m talking, of course, about owner financing.
I’m talking, of course, about owner financing.
Both the seller and the buyer can benefit tremendously from owner financing. But the system does have its drawbacks. So, today, we’re going to ask (and answer) the question: is owner financing right for you?
What is Owner Financing?
Owner financing is exactly what it sounds like:
The owner provides the financing. It’s also known as “creative financing” or “seller financing.”
Normally, the buyer makes a down payment to the seller, then follows up with installment payments on a monthly basis for a specified time at an agreed-upon interest rate.
What’s really happening here is that the owner is acting as the bank and – even though legal ownership has changed hands – the payment is sent to the previous owner instead of a bank.
If the owner can finance the entire mortgage, or if the owner can lend the difference between the buyer’s approved mortgage amount and the price of the home, then the two parties may enter into owner financing.
Because the loan is secured by the property being sold, the property can be repossessed or foreclosed on by the seller exactly as a bank would in the event of a default.
An Owner Financing How-To
Before we look at the advantages and disadvantages of owner financing, let’s delve a little into the specific process one should take when they prepare to owner finance a home.
- Ready your house for showings. Clean everything spotless, remove all clutter, and make whatever minor repairs are needed to get it into selling condition. If necessary, repaint the exterior to enhance your curb appeal.
- Get in touch with your local property tax department. Figure out what the listed value of your property is and the listed values for other similar properties in your neighborhood. Get in contact with local real estate agencies and ask for sale prices on other comparable homes to yours. Keep track of all the figures you receive.
- Determine your price range. Use the data you received to figure out your high and low sales price range. Set your asking price at the highest average price for your area. Don’t go too high, or you’ll have difficulty selling.
- Write up your private mortgage terms. Include when the payment will be due, the grace period you’re willing to give the borrower before you charge a late fee, and what the late fee will be.
- Run background and credit checks on potential buyers. Notify all potential buyers that you plan to run checks and obtain signed disclosures from them before doing so. Weed out undesirable buyers after examining the credit and background checks.
- Negotiate with your buyers. Look at your high and low price points when you consider offers, and accept the offer closest to your high price. If you have qualified buyers, make counteroffers.
- Draft a sales contract. This contract contains all the terms of the sale agreement between you and the buyer, including the purchase price and contingencies. Contact your attorney to have the contract looked over, or have your attorney prepare a contract for you. You and the buyer must sign the contract once it’s ready.
- Schedule a meeting with your selected buyer. At this meeting, you should discuss the mortgage terms with your attorney or real estate agent present. Think about compromising on some of the terms if necessary, like the payment due dates and penalties. Decide what your interest percentage will be. Establish a down payment, if any, and set a due date for the payment.
- Contact an attorney to prepare the private mortgage, deed, and legal document used to transfer ownership. Include all of the terms you and the buyer agreed to. Make sure you make no mistakes on the mortgage or deed to avoid it being voided by your state laws.
- Find a notary and sign the mortgage and deed in front of them. Both you and the buyer should sign the mortgage and have your signatures notarized. Call your local bank or local recorder’s office to locate a notary.
- File the deed and mortgage in the county recorder’s office where the property is located to complete the sale. Your attorney should file the documents for you if you used their legal services.
- An owner trying to sell his or her home in a buyer’s market may offer owner financing to sweeten the deal and persuade a buyer to close the deal.
- Owner financing can be an interest-earning investment, in which the seller can negotiate a higher interest rate and selling price.
- An owner could choose which documents could be used to secure their interest until the loan is paid in full, including mortgage, land sales documents, deeds of trust, etc.
- An owner may be able to obtain a higher purchase price or sell the house while avoiding performing repairs.
- An owner may provide financing to a buyer that would otherwise have no options.
- Owner financing can cover closing costs, which typically require cash that some buyers lack.
- The buyer can request special conditions for the purchase, like the inclusion of household appliances.
- The buyer does not have to qualify for a loan through lending institutions.
The Drawbacks of Owner Financing
Aside from all that owner financing has to offer both buyers and sellers, there are some troubles both parties could run into.
For sellers, your money is still tied up in real estate. You do not receive a lump sum and leave. Some sellers would rather leave the industry altogether once their homes are sold, but they’ll still be in a real estate business-related agreement for a few more years.
And if the buyer defaults, the seller is left with the task of selling the house all over again.
For buyers, because the seller might not report your arrangement to credit bureaus, your timely payments won’t improve your credit score.
These are, however, terms that either party can demand to be added to the purchase contract and can be negotiated over long before closing.
Will You Try Owner Financing?
If you, the seller, would like to try an alternative route and have the considerable finances needed to provide owner financing – do it. The pros definitely outweigh the cons.
If you’re a buyer hearing about this process for the first time, you may very well decide you want to find a seller willing to offer you owner financing.
And if you’d like to learn more about the entire home selling process, or anything else related to real estate in the Austin, Killeen, or Ft. Hood area, contact me today!