Owner Financing in Real Estate Purchases

Many real estate purchases fail because of problems with financing. Owner financing can often alleviate these problems by offering an alternative way of providing financing for the purchase. From both a buyer and seller's point of view, owner financing can help insure the success of your next real estate sale or purchase.

In owner financing, the seller acts as the lender. Generally the buyer pays a down payment, and then the seller carries a note for the rest of the principal that the buyer owes on the purchase. As with a finance company, the buyer makes payments in installments, pays an agreed upon amount of interest on the principal, and may be liable for late fees. Check online resources such as Bankrate.com http://www.bankrate.com/brm/ for current interest rates. A real estate contract signed by both the seller and buyer stipulates in writing all of the terms of the transaction.

From a seller's point of view, owner financing offers these advantages:

Makes a piece of real estate easier to sell - In terms of properties, such as bare land, where a finance company will not lend on it, owner financing may be the only way to sell it. This gives the seller the option of selling to buyer, such as someone who is self-employed, that a finance company might turn down for a loan.

Can give you a monthly income - The buyer's payment can give you an income for the term of the mortgage. This can be ideal for taxes because you don't have to declare the entire selling price within a particular year. Also, owner financing usually means getting a balloon payment at the end of the mortgage.

Brings you more money on the whole - You are getting interest in addition to the principal. Depending on the interest rate and term of the note, this can add up to be a significant amount of money.

From a buyer's perspective, these advantages can make it easier to purchase the real estate because the seller is willing to work with the buyer. This is especially true of first-time buyers, who might have the down payment and a good job, but lack the credit history a finance company requires for a loan.

In addition, you don't have the fees, restrictions, and guidelines associated with traditional financing. Also, the seller and buyer can negotiate to set up terms that work for both seller and buyer. This includes the down payment and monthly payments. Online mortgage calculators can be helpful in this process. See, e.g., http://www.interest.com. One of the main advantages of owner financing is that, you as the buyer, can often arrange with seller to divide the down payment into two payments and set monthly payments that better suit your budget.

For a seller, the main disadvantages to owner financings are:

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You have to wait for your money - When a real estate purchase is financed through an institutional lender, the seller generally receives his or her money at the close of escrow. When you carry the note, you have to wait for the term of mortgage to receive all the money from the sale.

You incur a higher risk - Because you don't receive all the money at the time of purchase, you take on the risk that the buyer could default on the terms of the purchase agreement. There is legal recourse if this occurs to protect the seller. For example, you can foreclose on the property because your note will be secured by a lien on the property.

As a buyer, these disadvantages can affect you with respects to the terms you can negotiate with the seller. Ways the seller can offset their risk include asking for a larger down payment. The reasoning is, the more money you put down on real estate, the less likely you will default on the purchase. Also, if your credit is less than perfect, the seller can ask for a higher interest rate or higher monthly payments.

Overall, owner financing offers an alternative to real estate purchases that can work for both sellers and buyers.

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