Owner Financing: The Best Real Estate Loan
Owner Financing, also known as seller financing, is a real estate transaction where the seller is also the lender. Owner financed land can be any real property, although it is more common with land than houses or commercial property.
How To Setup Owner Financing
Seller financing is set up when the offer to buy land is negotiated. This is negotiated between buyer and seller with the help of any realtors. All terms are negotiable, including interest rate, payment amount, length of loan, and amount financed.
The interest rate is usually higher than the current bank interest rate. This is appropriate as there are no loan fees, which can be over 2% of the loan amount. Also, it is more difficult for the seller to sell the loan than it is for a bank to sell a loan.
Payments can be made directly to the seller or a payment collection company can be used. If the payments are made directly, the buyer and seller will calculate interest paid, current balance, and payoff themselves. The interest paid will need to be calculated annually for tax purposes.
If you don’t want to do this a payment or escrow collection company can be used. They will make these calculations and send an annual interest statement for tax purposes. They charge a setup and monthly fee for this service.
Documents Used
A transaction on owner financed land is similar to a bank loan without the fees. The same documents are used to transfer the property and secure the loan. The Lender is just the seller instead of a bank. A warranty deed is used to transfer the property to the buyer. The warranty deeds has warranties that the buyer owns the property free and clear.
A Trust Deed and Trust Deed Note is used to secure the loan to the seller. The Trust Deed is recorded with the Warranty Deed and includes the loan amount. The Trust Deed Note is not recorded but includes the loan terms such as interest rate, payment date and amount.
The Trust Deed can be foreclosed in the event of default. This is often a 3-4 month process and does not require a court hearing. The process varies from state to state.
Advantages To Buyer
The advantages to the buyer in this type of transaction include lower or no loan fees and financing without credit checks, appraisals or debt ratio requirements. The transaction is usually closed much quicker because of no approvals.
Advantages To Seller
The main advantage to the seller is the opportunity to earn interest which can be large depending on the amount, interest rate and length of the loan. It is also easier to sell your land, as it is difficult to get bank loans on land and few buyers have cash to buy real estate without financing.
The seller is also protected in the event of default as they can foreclose the property similar to a bank foreclosure. It is important to get a down payment that is large enough to cover foreclosure costs, any damage to the property and serve as incentive for the buyer to keep making the payments.
In the event of foreclosure the seller keeps all payments received from buyer.
Summary
Owner financing can be an excellent option for both buyer and seller. It offers the buyer an opportunity to buy land they otherwise couldn’t afford, and allows sellers to sell land in a market where cash sales are rare. And to earn interest in addition to the money earned from the sale of the real estate.
The seller is also protected as they can foreclose in the event of default, while the buyer becomes the owner at time of sale.