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 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.

How to get Real Estate Loan

There are many types of real estate loans to consider. The most common real estate loan is the traditional bank loan. A bank loan is getter harder to get and many banks are leaving real estate lending. Other options include owner financing, private party loans, hard money loans, online lenders, and peer to peer lenders.

Bank Loans

Banks loans are the traditional loan for land and home purchases. They are still the main type of home and real estate loan but are less common for buying land. Banks are hesitant make land loans after the huge losses suffered during the Great Recession.

Bank loans usually have a lower interest rate than owner financing or hard money loans but have higher closing costs. If you can get approved the bank loan is still an excellent option to buy homes or other real estate.

Owner Financing

Owner financing is the best of the real estate loans. In this arrangement the buyer pays a down payment and then makes payments to the seller. The seller acts as the bank. The advantages to sellers are the interest earned and the deferral of income for tax purposes.

There are also advantages to buyers. Although the interest rate may be higher than a bank there are minimal closing costs. (The interest rate is negotiated between buyer and seller.) There are usually no credit checks, helping buyers with lower credit scores.

Like a standard bank loan, owner financing is set up using standard legal documents which protect the seller in the event of a default.

Private Party Loans

A private party loan is money borrowed from an acquaintance or family member. There are two types of private party real estate loans. The first is a personal loan without collateral.

The second uses the land as collateral, similar to a bank loan or owner financing. The loan will be structured similar to a bank loan, or owner financing, allowing the lender (your friend or family member) to foreclose if a default occurs.

In either case you are looking for an acquaintance or family member willing to make you a loan.

Hard Money Loans

Hard money loans should only be used in extreme circumstances. This type of real estate loan is known for high interest, high closing costs and short terms. Realtors, title companies or others involved in the real estate industry may know of people or companies willing to make a hard money loan. You can also search online. I would recommend against a hard money loan. The costs are extremely high, and the terms strict.

If the seller is willing owner financing is the best option. Many sellers understand that cash buyers are rare and seller financing may be the only way to sell at a reasonable price. Owner financing is negotiated in the purchase contract, and setup by the title company.

Online Lenders

There are online lenders which are similar to banks. There are more all the time. Quicken Loans is one example and is a large home lender. Unfortunately, they only do home loans.

Peer to Peer Lending

A new option is peer to peer lenders. This is a newer concept, that pools money from investors and lends it out to qualified applicants. Each company is different and has different qualifications. Again these Lenders are concentrating on home loans. Lending Tree is an example of this type of loan. Other are found by searching online.

Owner Financing. 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.

Category: Loan

Owner Financing: the best real estate loan

Owner Financing: The Best Real Estate Loan