Payment Amount Concerns with Owner Financing

Sellers want the payment to be as large as possible, buyers want the payment to be affordable. Payment amount is the financing condition where the sellers desire for security and protection are most likely to gurantee failure.

The seller feels like a large payment will get the note paid more quickly and build the buyers equity faster. This gives the seller confidence that if they had to foreclose they could get their money back. It also means the loan will be paid off quickly and they won’t have to worry about it. Finally, if the seller is having some financial problems or moving to a larger house they may need the larger payment themselves. Especially if they had expected to use the equity tied up in the seller financed note as the down payment on their new place.

Buyers are not always realistic about their finances. When purchasing a home with conventional financing the lender looks at their income and expenses and tells the buyers how much house they can afford. In the seller financed situation this doesn’t happen. New buyers especially will not realize all the hidden costs of home ownership. In their eagerness to get a home of their own they will agree to larger payments than they should.

It is relitively easy for the seller trying to make the loan safer to put the buyer into a postion where failure is inevitable. Maybe they had to borrow to come up with the larger down payment the seller “needed” to feel safe. Maybe the payment the seller “needed” to make his own payments is a little to large. Then something happens. The water heater has to be replaced, the buyer didn’t get as much overtime as he expected, etc. Suddenly they start slipping behind.

Once they are behind the late fees kick in and life gets difficult. There is no room in their budget which would allow them to recover and things go downhill from there. Soon the seller has an ugly foreclosure problem.

What’s sad is there may have been no reason why things had to end that way. I know one investor/seller who encourages buyers to call him if/when they get into trouble. If their “story” is reasonable he will allow them to skip a payment or make a partial payment so they can catch up with their finances. Very few will even consider something like this. Almost no sellers would actually think about this when they are structuring the financing documents and make an effort to keep the down payment and payments affordable for the buyer.