Should You Choose Owner Financing?

Photo by SHOP SLO® on Unsplash

Selling a home requires a lot of decision-making. One of those decisions concerns financing, and there are numerous options available to both sellers and buyers. Real estate negotiations can be confusing, but there are some unconventional ways to finance a deal, and owner financing, for some buyers and sellers, can be the answer.

In today's world, it can be an option for buyers who are short on cash for a down payment, or for those who would like to trade some "sweat equity" for a reduced price on a home.

For sellers, taking back a note on their property provides guaranteed income for the duration of the note. In case of default on the part of the buyer, the property reverts to the owner.

Owner financing is not without risk, to either seller or buyer. Although the concept sounds simple, it can actually be complicated. But being open to carrying a note personally can speed a sale in difficult times. In a down market, it might be the only way to promote a sale. Typically, a commercial lender would not want to be a party to a transaction partially funded by the owner, but there are private lenders who routinely consider financing property on which the current owner takes back a second mortgage. In such transactions, however, owner financing is more risky.

Seller Reasons to Consider Owner Financing

In slow or deflated markets, owner financing represents a way to sell property at market value, or even at a higher than normal price. Buyers who cannot qualify for a traditional loan are sometimes willing to pay a premium in order to buy with a lower down payment. 

Property owners who don't need cash proceeds to buy another home, view the potential of stable monthly income for the term of the loan as a distinct advantage. It eliminates most worries about ongoing maintenance and repairs. In practical terms, the seller no longer "owns" the property, but retains the right to reclaim it in case of default. Money earned is retained, and the property could be resold, theoretically at a higher price.

If a home needs repairs that the seller is unwilling or unable to complete, some buyers would be willing to exchange needed work for a discounted sales price, resulting in real value for both parties.

Buyer Incentives

For a buyer short on cash, starting a new job, or moving to a new area, securing a traditional mortgage can be difficult. A lease-purchase option, possibly in tandem with a commitment for owner financing can be a viable path to a secure financial future. 

Frequently, the option for owner financing is more available for a lot or for undeveloped land. If you're interested in buying land on which to build a home, look for owner-financed deals offering a short-term loan with a balloon payment for the balance at some time in the future.

Owner financing can be beneficial to both parties, but it is important that understand legal requirements and ramifications.