How To Owner Finance Your Home

You’ve seen the real estate ads in the classifieds section of the newspaper: “Owner Financing Available” or “Owner Will Carry”. An owner financed real estate transaction enables the buyer of the property to make payments directly to the seller.

This allows the buyer to purchase the real estate without having to apply for a mortgage from a bank or financial institution. The seller also has the option of selling the loan to an investor for cash.

Of course, there are lots of variables that work into a price offer including type of property, location, age of house, equity, is the buyer making the monthly payments, etc. These are just some of the things an investor likes to see. Investors buy all sorts of real estate notes and deeds of trust. Every house is different, every loan is different and every deal is different. Use the above list to make the loan more attractive to an investor.

ADVANTAGES OF OWNER FINANCING THE SALE

Sell Your Property For Your Desired Asking Price
A buyer may be perfectly happy to pay market value (and maybe more) for a house that requires a smaller down payment and that a bank won\’t help them finance.

Charge a Higher Interest Rate Than a Bank Would Give
By charging a higher interest rate than a bank (say 7.5 – 8.5%) you are, in effect, increasing the overall sales price of the property, and making the note more attractive for an investor.

Faster Sell
You can sell a home with owner financing a lot quicker than with bank financing and there can be tax advantages in spreading the buyer’s payments out over time (talk with an accountant about that).

Great Monthly Cash Flow Investment
Many owners simply like the idea that they can receive a monthly income and a high interest rate from a property even after they have sold it – and no longer have to worry about repairing leaky roofs or replacing dead water heaters.

Sell The Note To An Investor
A seller who owner financed the deal also has the option of selling that note to an investor for cash either right after closing or after waiting a number of months or years (give me a call or email and I can get you more information about selling your note).

DISADVANTAGES OF OWNER FINANCING THE SALE

Cash At Sale = Small Down Payment
Seller receives only a small or even no down payment.

Buyer Won’t Pay
The seller takes the risk that the buyer will not make payments and will have to be foreclosed on. (Forte Properties uses a loan sevicing company to act as an intermediary when selling Owner Financed homes in Austin Texas.)

Due-On-Sale Clause
If I owner finance my house won’t I activate the Due-On-Sale Clause in my mortgage and if I’m only getting a small down payment and monthly installments how will I pay the bank loan back?

The Due-on-Sale Clause is a provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home. It is probably the most talked about, feared and misunderstood topic in real estate.

You can also do a simultaneous closing, where a few days after the close of the house with the buyer you receive a check for the note from an investor.

If you’re going to owner finance your home and you know you want to sell the note this is a great way of doing it because the investor is there for the whole process and you don\’t have to start over again 6 months later with another appraisal, inspection, credit check, etc.

REAL ESTATE PROFESSIONALS – Providing owner financing could mean the difference in having your client sell their house quickly or having it sit on the market for months, years or not selling it at all.

Asking a seller to offer owner financing to buy their home can be a tricky proposition. Sellers often reject the suggestion of owner financing because nobody has explained the benefits or proposed owner financing as a way to sell the home. Most sellers’ knowledge is limited to traditional bank mortgages.

Selling a house or other Austin, TX real estate with owner financing may be unfamiliar territory for many, but anyone who plans to sell property against the current background of tough lending conditions may want to brush up on the basics.

Understanding the concept of owner financing is easy: the seller assumes the role of a bank and finances the buyer’s purchase.

The decision to provide owner financing, however, can be much more difficult; although providing owner financing could mean the difference in being able to sell a house, it could also mean a great amount of risk for the seller if the buyer eventually defaults on the loan.

As the U.S. struggles with a sluggish real estate market, owner financing presents a way for buyers and sellers to close deals that might not be possible with conventional financing.

There are some deals that just simply cannot get done (with conventional lending) because the credit markets are too tough for a particular buyer to qualify or because the type of transaction is perceived to be too risky.
There could also be a situation in which a buyer may not have sufficient capital for a down payment. Partial owner financing, in that case, can help fill in the gaps in closing a deal.

In addition, the benefits of owner financing can appeal to sellers who are trying to unload property. Closing a deal on a house, for example, may take considerably less time with owner financing than with conventional financing. While a conventional lender will scrutinize the collateral property to determine the level of risk, a seller who is already familiar with their property can form his or her own risk assessment relatively quickly.

Owner financing may also be an attractive choice for investment, potentially offering high rates of return. A seller can negotiate an interest rate that the buyer will pay them that is more favorable than would be available for other sorts of investments.

Furthermore, seller financing can provide some tax benefits by spreading out a large gain over time (check with your accountant or CPA).

If the seller structures the loan as an installment sale, there can be certain tax advantages to the seller as well in terms of the timing of recognition on the capital gain. The seller would need to discuss the details with a tax advisor.
Seller financing can be used to pay for a property either in full or in part. The terms of a full loan look similar to those of a conventional loan; however, a seller has a great deal of freedom in setting the terms, such as the interest rate and the duration of the payment period.

For instance, a seller might wish to provide owner financing as a short-term arrangement of five years, after which the borrower is expected to refinance the loan, presumably with conventional financing.

While sellers can be more flexible than banks in considering prospective buyers, they should nevertheless think like a bank when reviewing potential buyers. Examining documents and reports such as tax paperwork, proof of employment and credit history is prudent in determining a buyer’s ability to pay off the loan.

A seller who provides owner financing will need to get the mortgage recorded in accordance with the specific execution and acknowledgement requirements of the State of Texas. Sellers should also work with a title insurance company to perform a title search and purchase title insurance to secure the right priority for the mortgage.

A title insurance company can also serve as a good resource for understanding how much it will cost to record the mortgage. In Texas, the cost to record a mortgage or deed of trust is minimal, consisting of a basic administrative fee added to an amount that varies according to the number of pages.
Generally, the overall cost to seller finance will depend on how many documents are involved and how sophisticated those documents need to be. The size of the property and the intensity of due diligence procedures factor into these costs.

If it’s a simple scenario, such as a small little residential deal, it might be under a thousand bucks. If you provide seller financing for a sophisticated apartment building or strip center it can be multiple thousands of dollars. If you’re in the Austin, TX area, Forte Properties is your #1 choice for owner financed home transactions.

Documentation is perhaps the least of a seller’s worries. For most sellers, the initial decision to provide owner financing can be the most significant hurdle they encounter.

Documentation-that’s not a big deal. It’s done all the time, there are a lot of good lawyers that do it. It’s deciding to do it, and deciding on how to manage the risks inherent in providing owner financing when you’re a casual seller-that’s the biggest difficulty. Again, if you are interested in owner financing whether you are a home buyer or seller, Forte Properties in Austin, TX can help you every step of the way.

In most cases, sellers prefer to have cash instead of a promise by the buyer to pay them later. In addition, sellers who consider owner financing need to understand the risk that the buyer might not pay you in whole or in part, or might have financial distress situation arise down the road, where after a year or two the payment stream to you is disrupted by their financial distress.
Because sellers do not have the same resources as conventional lenders, financing a buyer can be even more intimidating. While banks can absorb the risk of nonpayment by spreading it across their entire loan portfolios, an individual seller isn’t typically able to do that. Furthermore, it’s more difficult for a seller to choose the best loan terms in accordance with the perceived risk/return.

There’s no science to that because you’re not a conventional lender. Because of the serious risks involved with seller financing, sellers should do their homework ahead of time and decide whether it is an option within their level of risk tolerance. Preferably, a seller should make this decision early in the process of selling a property, well before any offer is on the table.
You need to decide that up front so that you can package your materials in contemplation of what you’re willing to do relative to seller financing.
Lawyers who are familiar with financing and financial documents can be critical resources in the time preceding and immediately after making the decision to offer owner financing. A lawyer can help a seller understand the ramifications of owner financing and design the appropriate paperwork.

Sellers just need to be prepared for what happens if the deal goes south. Sellers can then adjust the language and terms in their loan documents accordingly, such as setting a higher interest rate that’s reflective of the higher risk, or requiring personal guarantees and other forms of credit enhancements.

As the popularity of owner financing has increased, the Texas Association of Realtors has witnessed an increase in the use of its promulgated “Seller Financing Addendum”. If you are considering a Austin, TX purchase involving owner financing (either as a buyer or seller), you should consult Forte Properties. They have a team of real estate professionals in various facets of the real estate market and are very familiar with the Seller Financing Addendum and all other documents required when buying or selling homes with owner financing.

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