Owner Financing – Economic Risk Factors

As the recession in the housing market deepens, owner financing will become more popular and more risky. Deals that look good one day may not make so much sense a few months later. There is lots of material being written about what is going to happen and what it means, but in reality no one really knows. In any case, what happens to a particular owner financed deal will be unique to the property and people involved. That said, there are many factors buyers and sellers should consider as they craft a mutually beneficial deal.

What happens to owner financed deals if:

• Property values drop by 10, 20, or 30 percent? This has already happened in many parts of the country. There are lots of home owners who can’t refinance their way out of ugly ARMs because declining property values mean they owe more than the property is worth.
• Interest rates fall. This should be good for both buyers and sellers, but look at the Interest Rates page to see why it isn’t quite that simple.
• Lending requirements get stricter. For years lending standards were lowered and each time it mean a large pool of buyers who could not qualify for loans before were now candidates. However, when standards are increased, the pool of potential buyers shrinks quickly. People with credit problems which could have been ignored before are no longer able to get a loan.
• Buyers of mortgage backed securities quit buying. All those individual loans get packaged into bundles and sold. The the money from these sales is used to make more loans, which are also sold. The buyers of these loan packages have taken huge losses and no longer buy in the volume they used to. That means the lenders are not able to fund as many new loans.
• Changed buyer attitudes about debt allow more of then to “walk” guilt free. There is at least one website that for a $1,000 fee will coach people through the whole process and tell them how to stay in the house as long as possible without paying. As a seller, if your documents were not crafted carefully, you may find yourself making payments while the buyer laughs at you.
• A glut of unsold homes drops values and makes owner financing common. If you combine this with changes in buyers attitudes about debt, the potential for a buyer to “walk” from an existing deal in favor of a better one somewhere else go up. I suspect lots of sales will fall apart leaving the seller in even worse shape. This will ripple back up the chain so that even people with good jobs and credit will find themselves unable to pay their bills.