How does owner financing work? http://www.reimaverick.com/how-does-owner-financing-work/
Owner financing is becoming increasing popular in today’s economy due to how difficult obtaining a conventional mortgage has become. In order to qualify for most conventional mortgages, a person must have a certain credit score, must have employment for a certain number of years, and must be able to put 20% down on the property.
Also, they must hope that the bank comes up with the same appraisal value of the property that everyone else in the equation does, or the loan will fall apart. The fact is, there are so many things that need to go right in order to obtain a loan that many people are turning to an alternative: owner financing. After all, in a free and competitive society, isn’t the ability to create new avenues in order to solve problems the backbone of capitalism? With that in mind, let’s answer the question ‘how does owner financing work?’
How Does Owner Financing Work | Conventional Mortgage
Before we discuss owner financing, let’s first explain how a conventional mortgage works. Then we can explain the differences between a conventional mortgage and owner financing.
In a conventional mortgage, a seller agrees to sell a house to a buyer for a price. When the sale is complete, the new buyer obtains a ‘deed’ to the house. The buyer goes to a bank to obtain a loan for the purchase, using the house as collateral should the buyer ever default on the loan, and the seller is then paid in full at the time of the transaction. This loan is known as a mortgage. The buyer will obtain the deed to the house when the sale occurs along with the mortgage and will typically pay both principal and interest on the mortgage for the next 15-30 years.
How Does Owner Financing Work | What is Owner Financing
In a typical owner financing transaction, a seller agrees to sell a house to a buyer for a price. So what is owner financing? Instead of the buyer seeking financing from a bank, the seller would agree to and create an owner financing contract to sell the house for a price and agree to installment payments in lieu of a full price payoff. So how does owner financing look? Here’s an example:
Sales Price: 5,000
Down Payment: ,000 (includes ,000 for closing costs)
Note Value: 0,000
Interest Rate: 8%
Balloon: 5 year
Once the terms are agreed upon, the signing of the documents will take place in front of a notary and the paperwork will then be filed at the courthouse. In many instances (though not required — but highly recommended), owner financing deals will be closed at a Title Company.
How Does Owner Financing Work |Benefits
The benefits of this type of transaction is ease and convenience. First, there are only 2 parties involved- the buyer and the seller. There are no banks, appraisers, insurance companies, underwriters, etc… that turn the mortgage part into a nightmare. Instead, you have two parties that can make offers and renegotiate quickly and efficiently until they both agree. Then they can both close quickly. A typical owner financing transaction can be completed, start to finish, in a matter of days. The seller benefits because installments loans at 8% pay better than putting the money in a bank account and is safer than putting it in the stock market. The buyer benefits because they’re obtaining a home they otherwise could not have purchased through conventional methods.
How Does Owner Financing Work | Wrap Around Mortgages
Suppose you are in a situation where you owe 0,000 on a house that is only worth 0,000. If you were to sell with the assistance of a Realtor and wait for a conventional mortgage to be approved, you would typically wait 6 months (6 more months of expenses) and pay 7.5%, or over ,000 to sell your house. If you are selling because you can’t afford to continue making payments and have no money in the bank, then this process doesn’t work well. This scenario is too common in today’s economy and is a reason for the record amount of foreclosures. What if you could sell your house fast without having to come out of pocket? How does owner financing work in this scenario?
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Hi, this is Frank Chen with REIClub.com, the only site you need as a real estate investor. Today I’ve got quick video on the pros and cons of owner financing/seller owner financing…
Definition:
Owner financing is a loan where the seller in a transaction offers the buyer a loan rather than the buyer obtaining one from a bank. It is also called seller financing.
Usually the buyer will make some sort of down payment to the seller, and then make installment payments (usually on a monthly basis) over a specified time, at an agreed-upon interest rate, until the loan is fully repaid or until a new loan in put into place to retire the seller loan.
Seller financing is an alternative worth considering when:
– The buyer has no cash for a down payment sufficient to qualify for conventional financing
– The buyer is simply unqualified for conventional financing
– The property is one that conventional lenders will not finance
– The property has simply been on the market too long with little buyer activity
Owner Financing PROS
– Terms of deal are flexible and negotiable
– Higher sales price – the seller may be in a position to command full list price or higher
– Tax breaks – reporting only the income received in each calendar year
– Monthly income – payments from a buyer increase the seller’s monthly cash flow
– Favorable Returns – Higher interest rate – owner financing can carry a higher rate of interest compared to other investment types
– Shorter listing term – Offering owner financing moves a hard-to-sell property
– Attract a larger number of interested buyers
– gives buyer time to repair credit to get conventional loan
– Eliminate repair costs – the property could be sold ‘as is,” eliminating the need for costly repairs that conventional lenders would require
– Substantial savings in closing costs
– Sell the contract and cash out – note buying
Owner Finance CONS
– Have to be familiar with current loan terms
– Buyer may still default on loan at end of term
– Property may need repairs if buyer defaults or back-outs
– No full equity payment upfront
– Headaches of being a lender
– Verifications – providing tax reports, verifying that property taxes have been paid, owner has maintained property insurance
– Possible foreclosure
– Evictions
In conclusion, if you are a seller considering using this strategy, you should make sure that you can afford to wait for the equity and are comfortable collecting only monthly cash flow for the period of the note. You need to also be very thorough with your background checks (are there any law suits, liens, etc.). Also, be sure you consult with a real estate attorney because there are financing, disclosure and repayment-term requirements that need to be met, and do vary per state. Remember, in most cases, the seller is assuming the risk so take the time and do your research.
Again, this is Frank Chen with REIClub.com. Please take the time to leave your comments for this video below and please subscribe to our YouTube channel so you’ll be automatically notified when we upload more quick video tips for you. Take care and good investing.
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