Sellers for the most part will automatically reject the notion of owner financing because no one has explained that option to them as a way to sell their home.
As a seller, owner financing can be a valuable and lucrative tool to use in making a big profit on your home, providing of course that it is understood and done properly.
Traditionally, a buyer gets a loan from a third party lender (i.e. a bank, credit union etc.) in order to finance the purchase of a property. Owner financing (A.K.A. seller financing, owner carry-back, seller take-back) however, is an agreement in which the seller of a property agrees to provide (all or part of) the financing to the buyer for the purchase of that property in the form of a loan. The terms of which can be negotiated by both parties, but will usually include a balloon payment due from the borrower after a given period of time.
When to Use it
Any time you want to! At any given time there are many buyers out there who are ready and willing to buy, but are unable to do so. They have money in the bank for their down payment, but their credit score is not good enough to qualify for conventional financing. Offering seller financing is a good way to make money with your asset, especially in times when houses aren’t selling quickly.
Types of Seller Financing
- Agreement for Deed: (or Land Contract or Contract for Deed). In an agreement for deed, the buyer only gets equitable title, and is permitted to take possession of the property. Legal title will only be conveyed when the loan is paid in full (hence, agreement for deed).
- Trust Deed or Deed of Trust: A trust deed is a written document used to secure a loan on real estate. Three parties are involved in the transaction: the trustor (the buyer/borrower), the beneficiary (the seller/lender), and a neutral third party called the trustee. The borrower transfers bare legal title of the property to the trustee to be held as security for the lender pending fulfillment of payment.
- Lease Option or Lease Purchase: Simply put, it’s a lease with an option to buy. This means that you are going to sign a lease agreement to lease the property, and you are going to sign an option agreement to sell the property (to be executed at the buyer’s option) at a particular time in the future, under specific terms and conditions spelled out in the agreement. A Lease Purchase is basically the same thing but the buyer has to purchase the property instead of it being an option. Both are considered Rent-to-Own programs. Typically, part of each rental payment is set aside for the purpose of accumulating funds toward the down payment and closing costs, or it can be applied towards the purchase price.
Whole or Partial Financing
Sellers can finance the entire balance – or any part thereof – this may or may not include an underlying loan. If there is no underlying loan in place the seller can finance the entire amount, or the buyer can get a loan from a lending institution for part of the purchase amount while the rest is carried by the seller.
If there is an underlying loan in place, the new loan can either be assumed or “wrapped” around the existing one (or the existing loan can also be paid off with a new loan from an institutional lender). This new loan is then referred to as the “Wrap Mortgage”, while the old loan is referred to as the “Wrapped Mortgage”. For example, a seller has an existing loan in the amount of $60,000.00. They decide to sell their home to a buyer using owner finance. They agree on a purchase price of $100,000.00, with the buyer putting $10,000.00 down and borrowing $90,000.00 on a new mortgage from the seller. This new mortgage will “wrap” the existing $60,000.00 mortgage (hence its’ name, wrap mortgage). Payments on the new loan will be due from the buyer to the seller each month. The seller will remain the party responsible for making the payments on the original “wrapped” loan.
Benefits to the Seller
The biggest benefit to the seller is that he can demand a higher sales price and stricter terms. Buyers are generally agreeable to paying a slightly higher purchase price and/or interest rate in exchange for seller financing. The length of the loan is usually less lengthy as well, giving the seller a relatively quick return on investment.
Some other benefits include:
- Tax breaks
- Set higher interest rates
- Provides monthly income
- Shorter marketing time
- You will earn more money in the long run because you are willing to get paid in installments. If you have never looked at an amortization schedule, we encourage you do so. You’ll be amazed – remember that in this case you are the bank!
Benefits to the Buyer
For the buyer, the biggest benefit is simply being able to buy a house during a period when they would normally not be able to. The reason for this is that a seller looking to owner finance will usually have different, and hopefully less stringent qualifying criteria than a traditional lending institution.
Some other benefits are:
- Lower closing cost. Buyers can avoid having to pay origination fees or loan doc fees
- Faster move-in time. Financial institutions will have a longer qualifying and underwriting process than an individual seller
- Flexible financing term. Staying within the guidelines of Chapter 5 of the Texas Property Code, the S.A.F.E. Act and Dodd-Frank, buyer and seller are only limited by their imagination.