How does owner financing work? (loan, payment schedule, interest rate, real estate)

[Agnes]

Friends mentioned they have used owner financing several times over the course of their real estate buying/selling. You simply go to the title company and the closing is arranged between private parties versus with a financial institution. They said for a buyer, it can be good because you don't have to pay points/fees/bank mumbo jumbo, and you can negotiate for a percentage lower than the bank would offer. I have heard that for the seller, it can mean a quicker sale and possibly for a higher price. They also said the sellers who are willing to do this are usually ones who have paid off their mortgages. Obviously the buyer would have to prove creditworthiness.

I've heard this is rare but do-able. It's the first time I've heard of it.

Has anyone seen this or worked this?

[Delaneyland]

I've done it twice and actually is much simpler than one would think. First house I bought from a church, they were looking for monthly income and I was young with no credit history. A simple contract was drawn with a five year balloon, easy schmeasy as long as you've got trustworthy lawyers to do the paperwork. Certainly there are fewer complications than you'd have with a bank but keep in mind most of the rules are in place to protect your and the banks investment. Also keep in mind many title companies are owned by banks so don't count on dodging fees...you can and should get a closing cost estimate from the title company you use so you know up front what you're paying for.

[UseJeff]

It's not complicated at all, and most title companies should be able to help you with this as well. The more common type of owner financing is a "seller carryback"... this is where you get a 1st mortgage financing, then they hold a 2nd mortgage for you. There could be no payments, or there could be payments. There could be no interest, or you could defer the interest. It's really up to the seller and buyer what they want to do.

The other option, is like you stated... a full on mortgage loan from the seller. however, this isn't common at all for a couple reasons. First, they would need to own the house free and clear, otherwise you'd need a loan to get the money to pay off their loan. Second, even if they are free and clear, doing a mortgage for you doesn't give them any money at all, other than payments. Sure, in time they will get their money, either upon a refinance, sale, or you just pay it off. They of course could set up a baloon payment, to shorten the term of the loan. There's just such a risk involved with giving someone a mortgage, even though they can foreclose just like a bank. They could take that huge chunk of money, and just put it in an online bank account making 5.5% compounding, vs. 6-7% non compounding... If you can find it, then it could be quite beneficial... I just don't think these days it's very common to find owner financing with the way the market is now...

[Journey to Missouri]

But, you want to be really careful. Where we live, I would never do owner financing because of the fact that the only reason most, not all, want owner financing is because they are unable to get financing through a known and reputable financial institution and then we asked ourselves that if they can't get a regular loan like we did then why would we want to loan to them, knowing that they were bad risks. It is something to think about.

[NYtoVT]

We are currently offering a home for sale with owner financing. The financing options are really endless. The term. interest rate, balloon date, eventual total price all can be negotiated. Owner financing provides for an open-ended discussion with potential buyer. Typically, people who mare relocating and only one spouse has a job with the other looking. Owner financing can be structured to give the other spouse a chance to find a job.
Our property is free and clear and that does give uis the option to far more flexible with the terms. The one thing that I would NEVER do is take a second position in the lien chain.

[marysally]

I did an owner finance about 10 years ago on a rental house that I owned free and clear. I charged about 1% higher (8.5%) than the going rate at the time so I was getting more than I could get without risk and knew that I could foreclose and resell if necessary. I also required the buyer to provide proof of insurance and had payments set up through my bank so they kept track of collections and sent me a statement for tax purposes at the end of each year. The house was in need of some repairs but the buyer was buying as rental so there was no haggling over price. The buyer had excellent credit and stable employment so no concerns there. Buyer paid it off a few years ago when interest rates dipped so low that didn't make sense to continue paying 8.5%. I agree with NYtoVT - never take second position in lien chain.

[sunsprit]

I've bought and sold properties on "owner financing".

It's a simple matter to negotiate the term, rate, down payment, etc. With a simple sales contract and a standard loan form, all we've had to do was contact a title company for the required documents and then file with the county recorder.

A title company does it's work at your request; it's not where the terms or fees are generated for a transaction. They're simply the clearinghouse. I usually use a "special warranty deed" instead of a "general warranty deed", as it's less expensive for title insurance and I generally have purchased with a "general" so if I haven't encumbered the property in any way, it's a clean title to transfer.

I've also sold on a "contract to deed" sale where a title company wasn't needed at all. I took a modest down payment from the buyer and they agree to a sales contract with monthly payments. The difference here is that I still own the property until they've completed the payment schedule, when the title is then transferred. If they don't complete the payments (and some haven't), then I (regretfully) have to evict my buyer and terminate their sales contract. The risk to the buyer is that they've never owned the property, so I am able to evict and foreclose with a minimum of hassles and legal action. Of course, the buyer then loses all of their financial interest in the property at that point.

Given that we're typically dealing with folks who have less than ideal credit or a good financial situation, I structure the deal to be more favorable to me than it would be if I'd just invested the money somewhere else. I wouldn't do a "no down payment" deal, ever. If the buyer doesn't have enough interest and equity at risk from the first day, then they don't have much to lose if they later walk away from the deal ... and I miss out on other opportunities, plus have the expenses involved. Also, folks with no money at risk tend to damage properties one way or another, leaving me with the costs to remediate.

I have bought properties specifically to "sell" to a known buyer who could not do the deal themselves at the time. One situation was a family farm where a family member was offerred the place (at a far below market price) by the grandparents wanting to retire to town, but the kids didn't have the money to do a deal with their current incomes and didn't qualify for "first time farmer" federal grant loans. So, I bought the place for them, and they started making payments to me after their modest downpayment on a "contract to deed" sale. If they blew it, I owned the place well back of market. If they could re-fi on their own within 5 years (the "balloon" time frame), they had their farm, I had a good return on my money, and we were all satisfied. They had two good crop years and a heck of a lot of motivation to make the place work ..... and they later got a favorable farm loan based upon the equity they'd established and a "proven" two year track record of farming. Paid me off at a reasonable profit and bought the place, now titled in their name.

[thepizzaguy]

I'm not so sure that getting a mortgage on a free and clear house is a good thing for the seller, unless it's an assumable loan he is getting for the new buyer. The main issue here is if the buyer defaults. How are you going to get him out of the house should the default continue on for sometime and start causing you loses? For that you should find out what options your have and any obligations. If you can just change the locks and toss his stuff out on the curb after x amount of time, then that's convenient.

[TimtheGuy]

Originally Posted by thepizzaguy

I'm not so sure that getting a mortgage on a free and clear house is a good thing for the seller, unless it's an assumable loan he is getting for the new buyer. The main issue here is if the buyer defaults. How are you going to get him out of the house should the default continue on for sometime and start causing you loses? For that you should find out what options your have and any obligations. If you can just change the locks and toss his stuff out on the curb after x amount of time, then that's convenient.

...ahhh can you point out more about the...ahhh...stuff???

[Linda Pratt]

I prefer to sell a home under "lease with option to purchase". The difference? The deed remains in the sellers name, not the buyer. So if the buyer defaults, it is a matter of eviction instead of foreclosure.

Rule of thumb in real estate investing (yes, I know it's contradictory); When selling, keep the dead in your name. When buying; get the deed in your name!