Posts Tagged ‘Debt To Income Ratio’

How To Owner Finance Your Home

You’ve probably seen the real estate ads in the classifieds section of the newspaper:

“Owner Financing Available” or “Owner Will Carry” or “Owner Will Finance”

This is often seen as a sign of a motivated seller.  It can also be seen as someone who understand the value of equity and how to properly access all his/her equity.  See, when an owner finances a home, he/she can usually demand higher price for the home that if it asks for an all cash purchase.

Time Value of Money aside, this is an intrinsic understanding of someone who finances things.

An owner financed real estate transaction enables the buyer of the property to make payments directly to the seller instead of a financial institution.

This allows the buyer to purchase the real estate without having to apply for a mortgage from a bank or financial institution who perhaps has more stringent qualification requirements such as debt to income ratio or even a set credit score.

The seller of a home with owner financing can decide what credit rating he/she will accept if any.  A well versed seller will also know that in order to obtain a highly rated seller financed note that can be sold for the most cash in the future. such note needs to have some important attributes.

When creating a note with its future sale in mind, a seller needs to understand that there are lots of variables that work into a price offer including type of property, location, age of house, equity, is the buyer making the monthly payments, etc.

Most note investors buy these seller financed notes for the purpose of collecting the payments, not foreclosing.  Because of this very reason they look at the tangible positives of the note.

Understanding these factors will assist the seller in creating the best possible note that can provide the best return while being held and would demand the highest value when sold should the need arise.

ADVANTAGES OF OWNER FINANCING THE SALE

1. Sell Your Property For Your Desired Asking Price. A buyer may be perfectly happy to pay market value (and maybe more) for a house that requires a smaller down payment and that a bank won’t help them finance.
2. Charge a Higher Interest Rate Than the Bank’s going rate.  By charging a higher interest rate than a bank (say 7.5 – 8.5%) you are, in effect, increasing the overall sales price of the property, and making the note more attractive for an investor.
3. Faster Sell. You can sell a home with owner financing a lot quicker than with bank financing and there can be tax advantages in spreading the buyer’s payments out over time (talk with an accountant about that).
4. Great Monthly Cash Flow Investment. Many owners simply like the idea that they can receive a monthly income and a high interest rate from a property even after they have sold it – and no longer have to worry about repairing leaky roofs or replacing dead water heaters.
5. Sell The Note To An Investor. A seller who owner financed the deal also has the option of selling that note to an investor for cash either right after closing or after waiting a number of months or years (Call 800-346-0136 or complete this online form to get more information about selling your note).

DISADVANTAGES OF OWNER FINANCING THE SALE

1. Cash At Sale = Small Down Payment.  Depending on your needs this can be an advantage.  Usually the Seller receives only a small or even no down payment when seller financing.  This can be by design due to the tax implications of the sale.  A shrewd seller will know that a good note is created taking a sizeable down payment, usually 10%.
2. Buyer Stop Making the payments. The seller takes the risk that the buyer will not make payments and will have to be foreclosed on.   This can often be prevent by a well created note that includes placing the deed in escrow in case of delinquency.  See your attorney for details.
3. Due-On-Sale Clause on the first lien.  The first lien holder can enact the due on sale clause if it determines that title has been transfer, which is the case of an owner financed transaction.

As you can see there are things you must know before deciding to owner finance a home.  What is important to remember is that the sale of a home is a serious matter and as such selling it via owner financing can result in a great investment if one takes the time to do the proper research and take the proper precautions.  Lets suppose that you want to sell the home that you own free and clear for 100,000 all cash.  The cash that you get at closing is subject to capital gains tax unless you use the proceeds to buy another primary home.  What is left after taxes you take it and put it in the bank at 4% or in mutual funds at 6-12%, if you don’t know what you are doing, your investment can evaporate before you know it.  If by contrast you sell the same home for $100,000, take 10% down or $10,000 and finance the $90,000 at 10% for 20 years, you stand to get a better return secured by a piece of real estate that you are familiar with.  You will initially only pay on the $10,000 down payment and the interest payments for your first year.  That can be more appealing to you, specially in this economy.