Owner Financing for Sellers
Owner financing can be an attractive option for sellers for several reasons. In addition to having a transaction that generally closes quicker than one involving conventional mortgage financing, the seller may find that there is an increased pool of buyers willing and able to meet their price. There also may be an upside to the transaction with increased revenue through interest paid over the life of the loan, or by selling the note on the secondary market.
Several scenarios may prompt a seller to consider owner financing:
- The seller has sufficient equity in the property or owns it outright and is looking for a source of income from the real estate
- The seller is under pressure to pay back liens, or avoid short cannot wait the length of a conventional real estate transaction. If there is a sizable amount owed, the sellers existing lender will have to agree to the transaction.
- The seller wants to stop being a landlord but still wants income from the property.
It’s important for any seller considering owner financing to understand compliance with the Safe Act and the Dodd-Frank Act. Partnering with an experienced real estate attorney and a residential mortgage loan originator (RMLO) resolves much of the risk of not executing the right disclosures and contract provisions.
A reliable RMLO will prepare the loan documents in compliance with all legal requirements, and an attorney or experienced realtor can prepare the contract of sale. The loan package should include the price, terms, interest rate, and payback schedule. There should also be a contingency in the event the property has to be sold.
Owner financed mortgages vary in terms. Some may be amortized for 30 years but feature a balloon payment at the end of a shorter term. The idea here is that at the end of the period the buyers financial situation will have improved sufficiently to refinance or make the final payment.
Other types of arrangements might be a land contract, an assumable mortgage, or a lease option.
- A land contract gives “equitable title” to the buyer, a form of shared ownership. When the final payment is made, the buyer gets title and deed.
- A lease option works like a rental, except the seller guarantees for a fee to sell the property to the buyer at an agreed upon price within a finite period of time, and credit some or all of the rent payments to the purchase.
- An assumable mortgage allows the buyer to take over the seller’s existing mortgage, pending lender approval.
Sellers assume risk in an owner financed mortgage, so the following safety measures should be in place
- The seller should require a detailed application, and perform credit check and background check on the buyer, the same as a regular bank would do. The results should be reviewed with their attorney and RMLO, who can advise them of potential red flags
- Verify that the documents are properly recorded after closing.
It’s a good idea to engage the services of a loan servicing company. They will prepare monthly statements and invoices, ensure that taxes and insurance are paid, and follow through on collection activity in the event of a default.