Owner Financing good or bad?
It would seem a bit counter intuitive for someone to allow a buyer to pay over time for their property. After all, wouldn’t it be better to get all the money in one go thereby requiring the buyer to get financing from a bank? Well, sometimes it’s more lucrative for the seller if they can make it work to offer financing. As always TAKE ADVICE when it comes to anything to do with finance and assets. This is a huge undertaking for anyone to make and without the proper fiscal and legal mechanisms in place could be a risk that you would not want to take. There are obviously good reasons to offer owner financing as detailed below.
1. Better Selling Price
In a buyer’s market, it can take a while for a property to sell, and once a home has been on the market for longer than 60 days, real estate agents often encourage the seller to drop the price. To attract more interest, they make sure that all the marketing materials, including the For Sale sign, clearly show that the price has been reduced. However, instead of cutting the price, it might be more advantageous for the homeowner to offer a prospective buyer financing.
When offering financing, the homeowner gains more power to negotiate because he is providing a valuable service and making life easier for the buyer. Many buyers will be happy to pay the full price because they don’t have to deal with a bank, which can be a tiresome process. Additionally, while a homeowner will charge interest, the cost of financing can be less than the cost of a traditional mortgage, especially when you take into account all the fees involved.
2. Larger Buyer Pool
With a large percentage of North American buyers being ineligible for traditional financing, a homeowner can increase the buyer pool significantly. While not all of those people would make good financing prospects, there are still plenty of people who could easily cover the payments of such a loan. In other words, the property becomes more saleable, and the homeowner has access to more prospective buyers just by adding “Owner Will Finance” or “Easy Terms” to their marketing materials.
Sometimes a prospective buyer would be a great risk but for certain reasons such as moving to a new area, new job or bad debts that have been now cleared they have fallen into a tight spot.
3. Faster Closing of the Sale
Whenever a traditional lender is involved in the sale of a property, it’s not uncommon for the closing period to be as long as four weeks and sometimes more. However, if the homeowner is offering financing, then the closing period drops substantially as it can take as little as two weeks. There is less paperwork involved, and the due diligence isn’t as rigorous. Note, though, that such a transaction should always be conducted using a lawyer and a proper contract.
4. Profiting from Properties That Are Difficult to Finance
There are plenty of properties that lenders are wary of providing financing for, including land, low value properties, mixed use properties, and more. However, a smart investor can make a substantial profit because these types of properties are often sold at a greatly reduced price. He can then offer prospective buyers financing, meaning the property can be sold at close to full value.
5. Increased Earning Potential
The reason banks offer loans is to make a profit, and they do so by charging interest and other fees. So, a homeowner offering financing can earn a similar profit. Typically if a bank approves you as a buyer then the interest rate offered is low based on your credit history as a low risk for credit. If you are offering owner financing you can mostly charge a higher rate of interest than bank would offer.
If you are selling your property for $300,000 at an interest rate of 5% per annum and the loan period is 25 years, the monthly payment will be $1,932.90
The total amount the buyer will pay over the life of the loan is $579,871, netting you a total profit of $279,871.
It might seem like a long time to wait to make a profit, but if you think about how much you could earn by putting the money in a savings account, you might find that it’s a better deal. For example, you can only expect to earn about 2.0% per year from a savings account. Now, let’s say you sold the property for the same $300,000, and put that money in a savings account. If you didn’t touch it for 25 years, you’d have a total of $492,191. In other words, you’d be more than $87,680 poorer.
Of course, you can always put the money in a mutual fund or some other investment. However, there’s a lot more risk attached, and there’s a chance you won’t earn anything. Even if you choose a fund with a great track record, you’re unlikely to earn more than 8% per year, but with much greater risk. After all, if you offer financing and the buyer defaults, you can always recover your property, whereas with a mutual fund, you’d lose everything.
Seller Financing for Real Estate: What To Do and What Not To Do
You’ve got a great property with plenty of amenities. It's situated in one of the best parts of town, and the school district has won every award in the region. Despite all of this however, the house just isn't selling, and you’re about to reach the end of your rope. In this position, you might consider seller financing for your real estate woes, but it's always important to look before you leap.
Do Check Your Buyer’s Credit
If you’re going to offer seller financing for real estate, you’d be remiss not to thoroughly investigate the backgrounds of potential buyers. Since you will be allowing someone else to live in your home while paying you for that privilege, you don’t have a mortgage company to handle the legal snafus that often occur. Make sure to run background and credit checks to make sure a buyer isn't hiding something.
Don’t Back Down on Stipulations
The best thing to do when you’re considering seller financing for your real estate property is to consult with a lawyer before the transaction takes place. Find out the standards of the industry, the widely-accepted clauses for your contract and other information that will help you protect yourself. Once yourlawyer has advised you, don’t back down because you feel sorry for the buyer or because you’re desperate to sell. Believe me, there are plenty of great candidates out there who would be grateful for seller financing.
Do Hire Representation
In addition to your lawyer (who hopefully specializes in real estate), you also need a real estate agent to cover all of your bases. When you offer seller financing, you put yourself at greater risk than if you were to sell your real estate property the old-fashioned way. For this reason, a Real Estate Agent can help you make important decisions and can advise you through every step of the process.
Don’t Lower the Interest Rate
The interest rate you offer for seller financing is like your life jacket on rough seas. It protects you in the event of default, and also helps you come out ahead. Even if your buyer has six kids and lives on one income, you shouldn’t lower the interest rate below the rate mechanism you have in place (prime plus 2 etc.). If he or she couldn’t get approved from a standard mortgage company, don’t agree.
Do Request References
Both personal and professional references can be invaluable when you consider seller financing. It gives you an opportunity to learn about the buyer through alternate channels, and also to verify his or her veracity. Real estate transactions are a notoriously high-risk investment, and this is one of the major reasons. When sellers don’t do their homework, or properly investigate their buyers, they set themselves up for a financial fall.
Don’t Limit Your Options
You don’t have to offer seller financing if you aren't comfortable with the potential consequences. Even though the real estate market may be less than favorable for sellers, you can still sell a well-built property for close to the asking price. You should likewise not offer seller financing if you depend on the sale of the home to buy your next one; a down payment won't be sufficient to cover your costs of moving.
It’s a Competitive Market
The real estate market can be saturated with inventory at times (while at other times, the opposite is true), which means that it can be difficult to sell a home. Your real estate options may seem limited at this point, and seller financing can be a life-saver. If this is something that you might be interested in, consult with a Realtor® and a lawyer to learn more.
Don’t Go It Alone
If you’re considering offering financing, it’s important to consult a professional qualified in seller-financing to make sure all the documents are in order. At some stage in the future, you might want to convert this contract into cash, which you can do by transferring your note, deed of trust, contract, or mortgage to an investor. However, to make sure you are getting the most for it, you should consult an investor who specializes in notes to find out what they consider to be good terms and how the contract should be structured.