Welcome to Owner-Financing.com
Owner financing is a great tool, which, when used properly, offers benefits to both buyer and seller. Like all tools it can also cause damage to buyers and sellers. The purpose of this website is to provide an introduction to the risks and rewards of seller financing plus some ideas for creative ways to make it successful for both parties.
When home sales slow down seller financing as a sales tool always becomes more popular. Problems occur when desperate sellers, driven by the need to sell immediately, get talked into providing owner financing without really understanding the risks or the process. They frequently bypasses some of the steps in the normal home sales process, especially those which protect the seller. When problems arise, and they ALWAYS do, naive sellers don’t know what to do and may not have the paperwork needed to protect their position.
I know people who can hardly wait for the downturn to really take hold because they know the boom in owner financing will create opportunities for them to profit. You do NOT want to find yourself unprepared for dealing with them! If you educate yourself about owner financing before you negotiate the deal and create the documents, you will be in a position of strength. Use the links at the left to inform yourself about owner financing, but keep in mind whole books are written about seller financing and lawyers sometimes make a career out of specializing in this area. When real money is on the table, professional advice should always be obtained.
Seller financing doesn’t have to be a win/loose situation. Your hourly pay rate for taking the time to educate yourself about owner financing ahead of time will be very high.
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First let me make sure I understand the situation. You are the seller and own your house free and clear, so there is no existing mortgage to worry about. You plan to sell with owner financing and the buyers are the parents of the wife of the young couple with two children who will actually be living in the house.
Second let me point out your mortgage doesn’t need quotes around it. A mortgage is a contract between buyer and seller. Your owner financed agreement is just as “real” and subject to the same legal processes as a mortgage from any other lender. Lenders use standard forms because they deal with millions of mortgages. If the language changed from house to house (Except for amount, interest rate, term, etc.) they could not automate their processing systems. That’s why they all make the payment due on the first of the month. Their computer systems could never handle the load if the due date was different for each mortgage.
Third, your “deal” is with the people who sign the contract (mortgage & Note). The family living there has nothing to do with it from a legal standpoint. You would foreclose against the parents. The kids and family are simply tenants and their rights would be defined by landlord tenant law. You could not move against them because their rental agreement would be with the property owners, not you
The beauty of owner financing is you can set whatever terms you and the buyer agree on. That means you can do whatever it takes to make the arrangements work for both sides. For example, in your case, you could make the initial payments small so the buyers would have money for materials to do the repairs. You would also want language that let you recover those amounts if the repairs were not completed in a timely manner with the work done to acceptable standards.
The curse of owner financing is you can set whatever terms you and the buyer agree on. All those pages and pages of terms (which no one reads or understands) which are part of a commercial mortgage, are there because some buyer found a way to cheat the lender. A seller like yourself will not be able to imagine all the ways transactions like this can get messed up. You need to have a lawyer with significant experience on the dark side (recent foreclosure defense and prosecution) draft the actual documents according to the terms you and the buyers agree to.
That said, this could be a really good way to sell your house, you just have to make sure you set it up right. Eviction and foreclosure is controlled by local law and custom. In New Mexico, where I did my deals, you foreclose first and then, once you own the house again, you do the eviction. Since this can take months, some people I know will offer to refund some or all of the buyers down payment if they move out in a week or two and leave the house in the condition it was in at purchase (fixed in your case
).
Length of term will be a balance between your needs and the buyers. Buyers are usually worried about the payment amount. You are probably worried about getting paid and would like it paid off as quickly as possible. However, with what investments are returning these days, a longer term note might provide you with interest income that would be helpful.
As I have mentioned before, I don’t like balloon payments. They cause to much trouble if circumstances change. A better solution to my mind is graduated payments. Make the payments the first year low while they do fixup and then increase them by some amount at regular intervals. Perhaps they increase by $200/mo. after the first years repairs are done and then $50/mo each year after that until paid. A good financial calculator will let you play around with the numbers to find something you both can live with. It should be fairly easy to create a payment schedule that the buyers can afford, which pays off reasonably quickly and which avoids the need for a balloon payment.
I realize all this is complicated and I have only touched the surface. However, it seems to me that finding a way to sell a house that needs work and generating extra interest income in the process is worth some effort.
Good luck.
I have an owner of a home that is valued at 280,000 and is interested in owner financing to me at 5% interest, 0 down over 30 yrs.
He paid $100,000 down and borrowed the rest from the bank. She makes monthly payments on the balance 180,000.
My question is, must she pay off her loan completely before she deals with me on owner financing?
I am reasonably certain that if you read her loan documents you will find language which says if the property is sold the entire outstanding balance becomes immediately due and payable.
I am reasonably certain that under current economic conditions there are many homes being sold this way. It is not illegal, but the bank certainly has the right to enforce the contract. Your risk of having the note called by the bank depends on the bank, the local market, the cleverness of your paperwork, your relationship with the seller, and other factors. An experienced local real estate attorney might be able to put some guesstimates on the probability, but will make no guarantees.
Calvin ball seems like the best description of the situation.
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