Pitfalls of owner financing.

Real Estate Broker/Owner with (831) 626-4000 CA #01772851 HI #RB-21268

An investor client just sold a piece of vacant property to a couple who want to build on it. Since he is in first position, and intends to stay that way, I think he is doing well with that sale. He has some income every month, and the property will only increase in value if a home is built on it. I was his broker for the transaction.

However, this client handled an earlier sale of a 4-plex himself. It was owner financing, with the seller in first position. Not too long afterwards, the seller had to take it through foreclosure for non-payment.

What did he get back? A gutted 4-plex on which no repairs had been done. There were no tenants because it was not habitable. He had to put quite a bit of money into the building just to get it into a condition where he could rent it out. That included appliances that had been taken out.

This was a very expensive lesson for him. Maybe if he had used a REALTOR(R), he would have been guided through some pitfalls.

Some homeowners or commercial property owners, I understand, are considering owner financing as well. There are so many things to consider before agreeing to such a transaction:

1. Who makes sure the property taxes are paid.

2. Who makes sure there is enough insurance on the building.

3. Will the property be owner occupied or become a rental? If commercial, who will be the tenant, running the operation?

4. Repairs, keeping it in sound condition, inside and out.

5. Why does the buyer not get a loan? What is his financial background?

6. Stay in recorded first position.



Posted by

Hella Mitschke Rothwell, Broker/Owner/REALTOR 


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Hella Mitschke Rothwell (R)

Real Estate Broker/Owner/Realtor®
Licensed in California #01772851 & Hawaii #RB-21268

Tel. 808-226-1095 or 831-626-4000 

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Disclaimer: Hella Rothwell does not guarantee nor is in any way responsible for the accuracy of the information provided herein, and provides said information without warranties of any kind, either expressed or implied.


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M. Lynn Delatte
Developers Realty - Broadview Heights, OH
People don't always think about the issues that can come up with owner financing. That is one situation where I would point out that a good real estate attorney might be a good investment, especially if the client did not have much experience.
Oct 20, 2012 08:58 AM #1
Hella Mitschke Rothwell
(831) 626-4000 - Honolulu, HI
Hawaii & California Real Estate Broker

Lynn: Absolutely, and an accountant as well because there are pros and cons about the income and tax consequenses.

Oct 20, 2012 11:02 AM #2
Tom Arstingstall, General Contractor, Dry Rot, Water Damage Sacramento, El Dorado County - (916) 765-5366
Dry Rot and Water Damage www.tromlerconstruction.com Mobile - 916-765-5366 - Placerville, CA
General Contractor, Dry Rot and Water Damage

Great information Hella. It would be easy to get caught up in the owner financing availabel and miss some important facts.

Oct 20, 2012 05:48 PM #3
Marte Cliff
Marte Cliff Copywriting - Priest River, ID
your real estate writer

Even with all the safeguards, it can go wrong - just as it can with bank financing. 

When I first got into real estate in the mid-80's seller financing was the norm. Interest rates were at 14-16%, banks wanted 20% down on conventional financing, and most of the houses for in our little town wouldn't qualify for FHA or VA. There were plenty of reasons why buyers weren't getting bank financing.

Oct 21, 2012 09:53 AM #4
Joe Petrowsky
Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709 - Manchester, CT
Your Mortgage Consultant for Life

I have been taking back mortgages for many years. Usually they are interm, until credit or income changes. Over 90% of the time they have worked out very well. Owner financing is not for a novice, as you point out very well.

Oct 21, 2012 10:04 PM #5
Hella Mitschke Rothwell
(831) 626-4000 - Honolulu, HI
Hawaii & California Real Estate Broker

Tom: Interesting times, indeed.

Marte: I remember those times in the early to mid-80's when interest rates were so high. In Hawaii where I lived at the time, "Agreements of Sale" were almost the norm. That usually gave you about 5 years to get your own financing.

Joe: Absolutely, you really need to check out the buyers. In today's market with people losing their home, their job, and their credit, you really take a chance.


Oct 22, 2012 05:14 AM #6
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Hella Mitschke Rothwell

Hawaii & California Real Estate Broker
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