Sellers, you be the Bank!
The fastest, and typically the most profitable way to sell a property, especially when the property is owned free and clear, is through Owner Financing, also known as Seller Financing
An Owner Financing sale involves the seller carrying the loan for the property they are selling like a bank would. If the seller owns the property free and clear, the loan can be created with a simple note. If the seller already has a loan on the property, the loan payments can be assigned, using a mortgage payment assignment sale, or a new loan can be created using a wrap-around mortgage sale.
Owner Financing Sale Example
- Current Appraised Property Value: $200,000
- Existing loan(s) payoff: $0 – owned FREE AND CLEAR
- Sales price: $200,000 (Avoid higher closing costs from traditional listing and bank involvement)
- New Loan: $20,000 down from buyer, $180,000 seller carry, Interest Rate: To Be Negotiated
In this example, the property is sold at a premium price by creating a loan that is made by the seller and given to the buyer. Because the property is sold with financing, it will generally sell FASTER and at a PREMIUM PRICE.
The exact terms, including the interest rate and monthly payment are negotiated with the buyer. In general, properties sold with financing will demand premium interest rates (2-6%) above what lending institutions offer (to those that can get loans). Most or all of the down payment will go towards fees and closing costs.
Real Property Hero can manage this entire process for you by contracting to buy your property from you, creating the loan and all necessary paperwork, and then assigning the contract to a buyer that would like to buy a property with owner financing.
Owner Financing Sale Advantages and Disadvantages
The advantage to selling a property through owner financing is that it will typically sell much FASTER and even at a premium sales price because it comes with financing. Also, because the interest rate is at a premium, you DO get a nice return on your money. Additionally, because you have a first lien on the property, it is a secured investment.
The disadvantage to selling a property with owner financing is that you don’t get all of your money at the sale – instead you get it in the form of monthly payments, but consider the tax savings when not getting the whole lump sum at once.
If you want to place a time limit on the loan you are making, you CAN put a balloon term in the note, making the loan expire after 3, 4, or 5 years (or any amount of time you desire) at which point the buyer will be required to refinance and you will receive all of your money.
For many sellers this is ideal – fast sale and excellent return on their money. For others, they would prefer to sell FAST and at a PREMIUM PRICE and get ALL OF THE MONEY up front. Unfortunately, no such options exist, so you have to choose between the tradeoffs of selling using the various options listed in on this website. For people that own properties free-and-clear the best options are generally owner financing, fast cash, or traditional listings, with each having different advantages and disadvantages.
Common Questions about an Owner Financing Sale
Question: How long does this process take?
Answer: Normally 2-10 weeks, but it could be less than a week! Most of this time is used showing the property to a list of buyers that have already been found that are looking for properties, like yours, offered for sale with financing.
As with any sale, you can negotiate the closing date with the buyer.
Question: What are the odds of success?
Answer: Good! Of course many factors affect the odds of success – most notably, would anyone want this property with the payment?
It has always been true that offering a property with financing, as is done with owner financing, allows a property owner to sell a property FASTER than any other method of selling a property.
Question: What if the buyer stops making the payments?
Answer: If payments are missed, you have the right to foreclose on the property and get it back. In most cases it would be preferable, however, to call the buyer (or let the loan serving company do this) and try to resolve the situation, by telling the buyer to deed the property back using a deed-in-lieu, so that a foreclosure on them (and the destruction of their credit) is not necessary.
In all cases if there is trouble with the buyer, call Real Property Hero, and we will be happy to help resolve the problem and/or get the property back so that we can quickly buy and sell it again.
Question: What if the buyer trashes the property?
Answer: The advantage of SELLING a property through owner financing is that the buyers are actually buying the property and not renting. In most cases buyers have a pride in property ownership and care more for the property than renters.
Additionally, these buyers are bringing their hard earned money to closing when they buy. So unlike renters who are just putting down a small deposit, the buyers have much more skin in the game, in the form of their down payment. They may even make substantial improvements to the property after they buy it as is the case with many homeowners.
Finally, if you threaten to foreclose on a buyer, you can also often negotiate the terms under which the buyer will return the property to you, in exchange for you treating them more fairly in a foreclosure proceeding. For example, you can offer to allow them to stay in the property for an extra so many days in exchange for them cleaning and make-readying the property for a new buyer and deeding the property back to you so that you don’t have to foreclose.
Regardless of the condition of the property, it can always be offered to a new buyer as-is.
Question: What about 1098 Interest statement and other documents that need to be issued each year?
Answer: You can generate these yourself, or a loan servicing company can generate these for you.
Real Property Hero, can help you find a good loan servicing company.
Question: What kind of end buyer will buy the property?
Answer: Possibly a person with less than perfect credit, but with an income sufficient to make the monthly payments, and enough up front cash necessary to pay most of the fees, and closing costs associated with the Mortgage Payment Assignment Program. Possibly a self-employed person that can’t get a conventional loan in the current lending environment. In some cases a buyer with excellent credit and income that simply can’t get a loan because of current underwriting standards, or simply does not want to put down the very high down payment required in the current lending environment.