What is Owner Financing, Seller Financing, OR
Seller Carry-Back Financing?
Owner financing is a
technique for selling a house. It is
an arrangement whereby the seller agrees to "carry" the financing
of the house for the entire purchase if the seller owns the house
free & clear.
If the seller does NOT own the house free & clear, then the seller
may need to set up a wrap around note.
In any event, the buyer and seller mutually agree on the terms set
forth in a note. Afterwards, a formal agreement including price,
loan amount, interest rate, etc. needs to be signed by both the
buyer and seller.
As well, a title company should set up an escrow account and a
real estate atttorney should complete all of the paperwork.
Owner financing also helps a potential buyer OVERCOME
the single most important obstacle to buying a house. This
obstacle is NOT HAVING ENOUGH CASH FOR THE DOWN
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Advantages for the SELLER:
The ability to sell your
property (house) AT
OR ABOVE your
price. In comparison, other sellers choose to discount their selling price.
The ability to sell your property QUICKLY while other sellers are
waiting for an offer.
The ability to avoid extensive price negotiations. The reason being
because your buyer is WILLING to accept your asking price in exchange
for the opportunity to receive owner financing.
The ability to create a cash flow after the sale of your property.
The interest rate established in the promissory note can be higher than
other investment opportunities such as a money market account.
You can sell your property "as is" which would eliminate needed repair costs
required by conventional lenders. As well, you save money with the reduction
in closing costs.
The ability to ensure the safety of your note.
Increases the number of potential buyers and creates a shorter listing
period (a.k.a., D.O.M. / days on the market).
Makes the house more desirable (the down payment for example).
Your house can be financed when conventional lenders will not
You become the bank (finance part of the purchase price with no
assistance needed from the bank).
An appraiser is LEGITIMATELY allowed to appraise property at approxi-
mately 5% higher than fair market value if owner financing is involved.
Allows you to set the terms of the note such as the interest rate and
Allows for the tax advantage of receiving payments over time instead of
receiving one total amount at the time of sale. In other words, you the seller
are creating an installment sale whereas you only report the income received
in each calendar year.
The ability to sell your note to a note buyer more quickly compared to
selling your property the "traditional" way.
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Disadvantages for the SELLER:
If the buyer's credit report or employment record can not be obtained, then
foreclosure could become more realistic in the event the buyer stops making
payments. As a result, you the seller would incur the costs of initiating the foreclosure
There is a due diligence process for checking the creditworthiness of a buyer.
Interest income on a mortgage loan and payments received from an owner
financed home sale are taxable.
If the buyer makes a small down payment, in an attempt by the seller to make
the transaction more attractive, then possible abandonment could result. The reason
being is because of the minimal investment from the buyer (a.k.a., "skin in the game").
You would need to pay off the existing mortgage balance before you could
owner finance the entire purchase price of your house.
***A word to the wise: obtain a full credit check on the borrower, require hazard insur-
ance on the property, and include a due-on-sale clause. Also, it would be a good idea to
consult with a Real Estate lawyer and obtain competent legal advice. The reason is because
there are financing, disclosure, and repayment-term requirements that need to be met.
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Advantages for the BUYER:
Ability to AVOID the hassle from a financial institution because of self-
employment, lack of sufficient time on the job, or a low credit score.
Ability to obtain financing assistance from the seller if you can not afford
the down payment as in conventional financing.
The ability to accept the seller's terms, such as asking price, without
further negotiation. Those buyers who can NOT qualify for a conventional
loan will more than likely accept such terms.
An affordable payment plan can be arranged with the seller who is willing
to discuss options. Since the seller is in a position to sell the house, flexibility with
the note terms is almost guaranteed.
The seller does not elect to receive one cash payment (as in a traditional
mortgage) for the price of their house.
Owner financing is NOT a
desperation strategy to sell a house. Without owner
financing, you are simply another seller competing with others with NO REAL
COMPETITIVE ADVANTAGE IN THE MARKETPLACE.
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