Hi. I’m Chip Waller. I’m often asked about what is owner financing. Owner financing is whenever someone wishes to sell their real estate, and they’re going to act as the bank and hold the mortgage or note and provide financing for the purchaser so the purchaser does not have to go to a lending institution to borrow the money.
This is advantageous to the purchaser because they don’t have to have the closing costs that banks charge or go through the underwriting requirements. As far as the seller is concerned, they get a higher rate of interest than what they would on their investments. The difference as far as getting cash, of course, is that it’s not liquid and that is a downside to owner financing for the seller.
What goes into the owner financing is is how much of a down payment will you receive before you agree to hold the note in mortgage. This is usually a percentage. A rule of thumb is to ask at least 20 percent down as a down payment in cash, and then agree to possibly hold the other 80 percent. The more down payment you receive, the more secure you are.
In dealing with owner financing you want to really be satisfied that if you take back the real estate that you’re financing, it will to be worth what is owed to you. With this recent economic crash, as far as the real-estate market is concerned, no one could anticipate that the value of property would go down by as much as 50 or 60 percent. So the rule of thumb of 20 or 30 percent was not a very good rule if you financed property back in 2005 and 2006.
Another thing that you look at in owner financing is the interest rate. Usually at this time you’re looking anywhere around six, seven, eight percent. Even though borrowers say, “Well, I can go to the bank and get it for four or five,” if you go to the bank and get it for four or five you’ll have a lot more closing costs and a lot bigger hassle.
Then you also need to address how long you’re going to hold the note and mortgage, and that you can keep the payments small, Let’s say you agree to finance it for three years, then you can spread the payments out as if they were going to pay for 30 years, and at the end of three years they have what they call a balloon payment, and they must come up with all of the money, or if you agree to finance it, say, for 15 years, 10 years or 20 years, you can have a level payment called an amortized payment or amortization, and then you get an amortization schedule that goes along with your financing.
The other thing before agreeing to owner financing is that you need to understand what it’s going to take if the buyer fails to make the payments. You have to go through the mortgage foreclosure process, which takes time, which is probably six to nine months at a minimum. The cost is anywhere from $2,500.00 to $5,000.00 and up, depending on whether or not it is commercial property and if it’s contested.
So if you have any questions about owner financing, give me a call at 847-2288 and I’ll be glad to talk to you. Thank you.