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Is Seller Financing for You? Part 1

Over the years I have received calls from sellers that had a piece of property (residential or land) that had been on the market for some time but had not sold. The seller could not tell me why he/she thought it hadn’t sold. In a lot of cases, it was a blame game on the realtor.

After talking with or meeting the seller, most of the sellers were either asking too much for the property, the property was in a bad area, needed repairs, needed updating, or a combination of any of these.

However, there were some homes that were priced right, in a nice area, and was in good shape. Some of the sellers were frustrated because there were people wanting to buy their home but could not qualify for various reasons, viz., credit, a recent job change, recent divorce, etc.

To some of these sellers, I asked, “Have you ever considered owner financing?” And most of the responses were, “What is owner financing?”

Owner or seller financing simply means that the current homeowner puts up part or all of the money required to buy a property. In other words, instead of the buyer taking out a mortgage with a commercial lender, the buyer is borrowing the money from the seller. Buyers can completely finance a purchase in this way or combine a loan from the seller with one from a bank.

For the financed portion, the buyer and seller agree upon an interest rate, monthly payment amount and schedule, and other details of the loan, and the buyer gives the seller a promissory note agreeing to these terms. The promissory note is generally entered in the public records, thus protecting both parties.

It doesn't matter if the property has an existing mortgage on it, although the homeowner's lender might accelerate the loan upon sale due to an alienation or due on sale clause. Generally, the seller retains title to the home until the buyer has repaid the loan in full so this should not be a major issue.

Sellers and buyers are free to negotiate the terms of owner financing, subject to state-specific usury laws and other local regulations; some state laws, for example, prohibit balloon payments.

Many sellers expect the buyer to provide some sort of down payment on the property. Just like any mortgage lender, they assume that buyers who have some equity in a home are less likely to default on the payments and let it go into foreclosure.

Owner-Financing Benefits for Sellers

A variety of advantages for sellers arise in owner-financing situations as well:

  • Higher sales price. Because the seller is offering the financing, he may be able to command full list price or higher.

  • Tax breaks. The seller might pay less in taxes on an installment sale, reporting only the income received in each calendar year.

  • Monthly income. Payments from a buyer increase the seller's monthly cash flow, resulting in spendable income.

  • Higher interest rate. The owner-financed loan can carry a higher rate of interest than a seller might receive in a money market account or other low-risk types of investments.

  • Quicker sale. Offering owner financing is one way to stand out from the sea of inventory, attracting a different set of buyers and moving an otherwise hard-to-sell property.

If you are needing to cash out of your loan, then owner financing may not be for you. As advantageous as it can be, owner financing is a complex process. Neither buyer nor seller should rely just on their respective real estate agents but instead should engage real estate lawyers to help them negotiate the transaction, ensuring that their agreement conforms to all state laws, covers every contingency, and protects both parties equally.

In our next blog we will discuss the different types of owner financing instruments and the advantages to the buyer. If you would like to discuss your situation, give us a call at 252-257-4822 or visit our web-site at .

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