Owner finance is an old financing method that fell out of common usage for many years, at least here in Grand Junction, CO. However, now that banks have tightened credit score requirements, so many people have lost a house to a foreclosure in the past few years or for other reasons, cannot get a mortgage loan; we are seeing some resurgence of this type of financing where the seller essentially become the buyer’s bank.
For starters, no one should engage in owner financing without the services of an attorney; buyer’s side and seller’s side too.
As the seller, you may have a somewhat larger share of the market potentially interested in your house since you are offering a financing option most of your competition can not offer. As such, you can:
· Set a price and not feel that you have to cave in on that price; as long as your listed price is based on ‘fair market value’ determned by other similar homes that have sold in your area.
· Expect a large enough down payment that the buyer is truly committed to the purchase. Banks like the number 20% and so should you.
· Require the buyer to provide a credit report and you may want to see other financial documentation to give you a warm, secure feeling about their ability to make the monthly payments, to you.
· Determine an interest rate for the loan based on the buyer’s creditworthiness and expected ability to make payments. It is not uncommon for the rate to be 1-2% higher than banks are charging for the loans they advertise; or higher if the down payment is lower. This is a negotiable term of the contract.
If a Realtor is working for you, the buyer or both of you, they will have access to standard contracts and other Colorado real estate documents. According to Sharon Dixon, a vice president at Fidelity National Title Company in Grand Junction, there are Deed of Trust and Promissory note documents that can be accessed at the Division of Real Estate site on the Internet.
A few other terms that need be addressed in the purchase contract include:
· Amortization rate – as the seller, do you want to be receiving these monthly payments for 5, 10, 15 years? I would not suggest any more than 15 years. Or do you want to let the buyer have fairly low monthly payments with a lump sum ‘balloon’ payment due at say 5 or 7 or 10 years?
· Property tax and hazard insurance escrow accounts are required by banks, so you should require them too. This way part of the buyer’s monthly payment will go into a reserve account to pay taxes and insurance on time. That is good financial management and good for your peace of mind. If the taxes are not paid, the county could foreclose on the property.
· As the bank, another thing you should require the buyer to provide is a lender’s title insurance policy. This assures you there are no outstanding liens or judgments that may make claim to the property you are selling.
· Closing the sale in Colorado typically takes place at a title company. They will review documents and prepare closing documents. However this does not preclude you having an attorney review the closing and all other documents that are part of the contract.
If all the i’s are dotted and t’s are crossed for a properly written and executed contract, you should be safe to sell to this buyer. If later, you decide to sell this contract to an investor who buys private mortgages, you should be able to sell it and receive your ‘cash out’ without having to discount the price.
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