What is Owner Financing?

If you don’t know about owner financing (aka seller financing), there is probably a reason. But it’s not because people don’t do it. Instead it might be because banks, mortgage companies, and other lenders don’t make money when the seller provides the loan instead of them. I’m not saying banks are bad. But the facts are clear. Businesses don’t promote things that reduce their income. When a seller or owner finances the deal, it reduces the loans these companies are able provide. So while experienced real estate pros use owner financing all the time, it’s not common for everyone. Or is it?

Have you ever purchased a car or other item from a family member who let you make payments directly to them? Many of us have. Especially when we were young. That’s an example of the owner financing! But somehow we became convinced this wasn’t the proper way to finance a purchase. I’m here to tell you that we were misled.

Seller or owner financing is used instead of getting a mortgage from a bank. And it’s regularly used by real estate investors today. It is also how many common real estate transactions were done decades ago. Although it’s still actively used today, most banks and lending “experts” will say it’s uncommon. Those bankers simply don’t know what they don’t know.

What are the benefits and risks?

There are benefits and risks with almost every decision we make. It’s no different when you decide how to pay for a new home or piece of land. And we don’t believe one option is always better than another. Owner financing has several benefits for both the seller and the buyer. Let’s explore them.

Closing timeline

The most obvious benefit for most people is that closing is much quicker. You won’t have to wait for an appraisal. And you can’t be delayed by the loan underwriter, because one doesn’t exist. Typically the only time involved for closing on this type of a loan is waiting for the title search work to be completed.

Cash impacts

Buyers often benefit from a lower monthly payment on these types of loans. Although they do have to put more money down, there is often no credit check required. Monthly cash flow is a benefit for the seller. They don’t get the full cash from the sale, but they do earn some interest or financing fees on the loan they’re providing.

If you find a bank that does land loans, construction loans, or investment mortgage loans, you find they also require a high down payment and lower dept to income ratios. In addition to that, rental property investors find that banks require them to have liquid assets of at least 6 and up to 12 months of the mortgage, insurance, and other expenses. New investors often don’t have this kind of cash, so it’s hard for them to get into the investment market. Seasoned investors may have the cash, but they may want to use it for other investments.

Another opportunity for sellers who offer financing… You often have the option of selling the loan in the future if you find you need the cash quickly. In that case, you’d turn to a “note seller”.

Qualifying for seller financing

If you can’t get a bank loan, then you’re not able to buy – right? That depends. Sellers are often more flexible than a bank. As mentioned above, seller financing often doesn’t require credit checks because of the large down payment. At Property Masters, we offer Lease Purchases – with no credit checks – on most of our properties. Learn more here.

Larger buyer pool

As a owner of a property, the pool of potential buyers naturally increases when you offer financing options. As a buyer, you need to know that you have more buyers competing with you.

Interest savings

An often overlooked benefit is the money you save in reduced interest. While it’s true that the interest rate is higher on owner financed deals, there also fewer closing costs. Zillow has a list of fees you can expect at closing for a typical mortgage, which generally add up to nearly 10% of the amount being financed. Most of these don’t exist with owner financed purchases. And since most people roll those costs into their loan, buyers end up paying a lot of additional interest with traditional mortgages. And seller financed options rarely have early payoff penalties.

Is owner financing the best option?

That depends. Sometimes it is. But not always.

Property Masters uses a variety of options when buying and selling our own property. The one we choose depends largely on the type of property we’re buying. When we’re buying land, we usually pay cash and we occasionally ask the seller to finance it. Other factors we consider include how we plan to use the property, how much improvements will cost, how much cash we have on hand, current interest rates, and the property’s depreciation schedule to name a few.

Bottom line: Explore all of your options, weigh the pros and cons of each, and be sure 6to keep seller financing as one of the several tools in your financial toolbox. It’s a great way to buy properties that you otherwise wouldn’t be able to buy.