Have you listed your home on the market, and it just sat there for months without a seriously interested buyer? That even with hundreds of marketing strategies online you’ve implemented, the closest you still got to a buyer was someone who merely wanted to test the waters? Believe it or not, we greatly understand how frustrating that can be and often even discouraging. But we’re here to give one more addition to your strategies.
If you haven’t explored what owner-financing is, you’d want to continue reading on. This is one of the best approaches for sellers who need to sell their houses ASAP. Yes, there are also disadvantages; and at the end of the day, it still depends on your situation and needs. So here is a briefer on what owner financing is all about so you can start weighing whether this is for you or not.
What is Owner Financing?
As per popular belief, there are two (2) types of homebuyers: those who pay in cash and those who pay through a mortgage. However, sellers often overlook a 3rd type of homebuyer — buyers who can’t afford to pay either in cash or through a mortgage. We still call them homebuyers because there is a 3rd payment option they can avail of, which is the seller financing option. As the name suggests, the seller financing option is only accessible to homebuyers if you, the seller, will offer it.
In seller financing, the seller (you) basically acts as the lender. This means that you’ll allow the buyer to pay in installments but with a corresponding interest fee — much like what is practised in a lending institution. The difference between you and a mortgage lender is just that your terms aren’t entirely regulated by any law, and your buyer doesn’t have to pay mortgage insurance. However, you do need a licensed mortgage loan originator to underwrite and create the loan contract for your property.
There are different ways of carrying out owner financing:
- Lease Option
If you’re familiar with the rent-to-own structure, this is it. Your buyer leases the property until an agreed-upon date. Once the lease expires, they will have an option to either buy your house or forfeit it. If they proceed with buying, the total amount they paid for the lease can be subtracted from the property’s total price. This is an excellent option for homebuyers who aren’t sure of their situation yet, even after their lease period.
- Mortgage Notes
In a note and mortgage structure, a mortgage lender secures the agreement between you and your homebuyer. The title will be transferred to your buyer already; however, if the loan defaults (your buyer fails to pay you directly for some time), the lender can enforce their right to foreclose the house and evict your buyer.
- Contract for Deed
In a contract for deed, the buyer pays in installments, but your name stays on the title until your buyer repays you in full.
- Balloon Payment
This is often implemented by developers who are pre-selling. In a balloon payment, the buyer pays half of the total price in installments, while the other half is paid in lump sump after an agreed-upon time.
For example, if the house is $264,000 and the balloon scheme follows a 50/50 arrangement in 5 years, this means that your buyer will have to pay $2,200 monthly for 60 months and $132,000 in cash during the 61st month.
Advantages of Owner Financing
Owner financing can benefit both seller and buyer. From a seller’s perspective, some of the major advantages include:
- Lower capital gains tax
- Passive income
- You can get the property back should the loan default or the buyer decides to forfeit
- Attract more potential buyers because of lower loan costs
Risks of Owner Financing
On the contrary, some of the downsides to engaging in owner financing include:
- There are still rules to follow as it’s already regulated (though not as strict as banks and other established lenders)
- Buyer may potentially forfeit even years after occupying your home
- Buyer may not repay the loan as agreed, requiring you to take some tedious and lengthy legal actions
- You’ll have to spend on taxes and other legal fees
When Is Owner Financing a Good Option?
Although the risks of owner financing may sound scary, there are ways to mitigate these risks. One is by doing a comprehensive background check on your buyer. This includes checking credit histories, income, evaluating debt-to-income ratio, and many more — basically the kind of background check that banks/mortgage lenders also do.
The second way is to ask for help from a real estate lawyer. Lawyers are more adept at contracts and making sure your buyer wouldn’t be able to find an easy exit strategy once they purchase your home. The bottom line is owner financing can be a viable option anytime as long as you execute it right the first time.
If you think owner financing is already too complicated for you and you’ve exhausted all other options, you can also talk to us directly at Spire. We’re homebuyers in Georgia who buy houses for cash in Suwanee through a very simple process. You won’t have to wait long for us to buy your house completely. Contact us at (678) 318-1801, or you can leave your info on the form below, and we’ll contact you as soon as possible.