What does "owner will finance" mean? (rent to own, contract for deed, etc) (apartment, lease)
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We have been working with a husband-wife LLC who is considering buying a house of our liking as opposed to picking their own house like they usually do, and then working a deal with us to sell it.
They said that after 1 year if we paid on time and everything was going well, they would consider financing us themselves. I assume this is the same as when people put on their listings "owner will consider financing." What does that mean??
It means exactly like it sounds. Thge sellar owns the property, and will act as a bank. They usually want a short term contract. Say you buy my house for $100k. I can set the interest, it may be above or below going rates, depending on the situation.
You save money by not having to qualify, or go through of any of the costly deals you would if you used a bank..
The benefit to the seller is, they make the money instead of the bank...
I would give a loan amoritized over thirty years, but due in five... or three, or whatever both agree on.. I, as an owner would prefer to carry the financing, it's great money. So both sides come out ahead...
The seller makes all the interest, the buyer saves a lot of red tape and expense...
I would only do this if you can afford and qualify for a home the regular/normal way, and you choose to pursue this deal only because it's actually a better purchase. I doubt that it is.
Sellers who do the type of deal you are contemplating do not expect you to eventually buy the home. In fact, they often hope you won't succeed. Then you lose your deposit, the excess (over market) rent you will probably be paying, and you're worse off than if you have just rented a small home or apartment and kept saving while you work on improving your credit score.
Get a good Realtor to help and advise you, and talk to a lender to see if you qualify to buy a home. If not, don't buy anything. We are in this economic mess because of people trying to buy homes they couldn't afford. Guard your downside and don't get yourself into something that you don't fully understand.
I've purchased "owner contracts" or "contract for deeds". Actually the house we just bought was written up as a contract for deed for x amount down and payments of x amount over x months with x interest or cash in the amount of x. We are getting a much better price for cash and are going that route but if we hadn't been able to do the cash sale we have the payment options. All it cost us over the house price was a few hundred dollars closing and it's recorded. Depending on what you are looking at and the value of the property it can be a good or a bad deal.
OH I wanted to add, often the houses you find that the seller is advertising as a contract for deed is a property that is likely not going to be financed by any bank due to a number of issues from repairs to not having a standard foundation comparable to the rest of the neighborhood.
Please do not confuse seller financing with "lease to own" as they are completely diffferent animals..
I would have to say out of all the post's, Donn2390 hits on it the best with a few exceptions. I have done many owner financed deals and they can work out for both sides; here's how...
For the buyer; the buyer is able to obtain financing and purchase a home where he/she would not have otherwise been able to do so through traditional financing. (can't get a loan) Someone else in here mentioned don't do this unless you could otherwise get a loan at a bank??? why?) Anyways, by doing so the new buyer has the tax advantages of owning as well as being able to build equity and having future knowledge of what their house payments going to be.(no rent increases like a lease can have as the deal has already been done) All of these referenced items cannot be had when one rents; not to mention the pride of ownership and cost lost when improving property when you lease like landscaping etc...
For the seller; this is a no brainer if someone can pay cash for a home, or already owns it out right. The seller can make lots of $ doing these deals because they are dealing with folks who don't have any other options (can't get a loan, but still want to buy).
The seller will often charge full retail for the home as the buyer has no bargaining power here. A home that would normally sell for 300K would now be 325K; the seller will also make money on interest, charging anywhere from 7.5 to 9% interest depending on down payment and length of terms. The terms are usually something like this ( 30 year am loan with a 3-5 year call, prepay on anything under two years, which is dropped after that) The seller now no longer has any liabilities associated with owning and is now the bank. Taxes, insurance, HOA dues, maintenance issues and management fees if using a prorperty manager are a thing of the past as the new homeowners pay all of that.
You ask about the risk?.. There is no risk when the seller demands the buyer actually has some skin in the game; (meaning a healthy down payment) novel idea, I know. As long as he gets 15-20% down his equity position is his security. The new buyer doesn't make the note, he simply forecloses and does it again. One can easily see that the profits under this scenario would become obscene.
There's an expectaion that within 3-4 years the buyer will have worked out what ever issues were keeping him from obatianing traditional financing to begin with and go to a bank to then obtain the financing needed to pay off the seller.
For the seller; this is a no brainer if someone can pay cash for a home, or already owns it out right. The seller can make lots of $ doing these deals because they are dealing with folks who don't have any other options (can't get a loan, but still want to buy).
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Question...how does the seller ensure that they will get the value of the loan if (for instance) the house burns down or something? If that happened and the buyer didn't pay up, the seller would be out in the cold. I would suppose they write into the contract that the buyer has to carry insurance? How can the seller make sure the buyer stays current on insurance payments?
That's exactly right...This is no different than when people borrow money from the bank to buy their house. The bank requires people to have insurance in force at all times. If the house burns, you collect the proceeds as you are the lien holder; thats the way the deed is drawn up.
How do you make sure it's in force? Same as the bank, you require it before closing; if the buyer trys to cancell the policy you get notified by the insurance company. There's a clause in the deed that states the home will be insured at all times, if it isn't or they refuse you by a policy and foreclose. An even easier way to control this is to make them carry an escrow acct like many banks do now; this way you have the money up front to make sure taxes and insurance are paid.
Again; most people who have 30-40K invested will want to make sure that the property is insured anyways as they have something to lose as well.
NEVER, NEVER, NEVER buy a house on a contract for deed! I've bought and sold close to 100 houses and I would never do this. There is a very good reason for this, you are not buying anything. What happens if the seller gets in trouble with the IRS (an agency not known for its "customer friendly" attitude) and the IRS puts a lien on the house?
Ask your attorney how many hours, and how much $$$ he estimates it will take for him to clear up that little problem.
golfgod
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