Profile picture for zephyr1973

What exactly is "owner financing"?

Can someone explain how exactly this works? I see it in sales ads and recently, someone mentioned it here.
  • May 01 2008 - US
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Answers (11)

the owner carries the debt...

  • May 01 2008
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Profile picture for Peter J Rogers

But before you consder it make sure you have a lawyer who REALLY understands real estate law. It can be a minefield for the uninitiated.

  • May 01 2008
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Since loans are rarely assumable anymore, it means that the current owner offers the property free and clear and offers you a loan. The owner may have a higher opinion of the property than a bank and thus may give you a bigger loan on it.

 

You get on the title and the current owner (seller) has a lien on it, just as a bank would. If you stop making payments, he will foreclose on you, just as a bank would.

 

Peter

  • May 01 2008
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Ditto on the real estate attorney!

 

Also, you will want to purchase title insurance to protect you from any future claims on the property that were not picked up in the title search.

 

Don't forget a property boundary survey and physical marking (stakes) of all corners so you know exactly what you are getting.  The survey will also determine whether any portions of the property are in a floodplain, restricted by easements or subject to any rights-of-way.  Encroachments on the property from adjacent properties...or vice versa will also be identified and you can ask the seller to resolve them so you don't inherit them.

 

Be sure to have a professional home inspection to check on possible structural issues, and a wood destroying insect inspection if you are in an area where termites, wood boring bees, etc. are a problem.  Ask the seller to provide a one-year home warranty...or buy one yourself, rather than be without one, especially if the structures are older.

 

And, check to see if your state is similar to North Carolina, in that it provides for liens to be filed against a property for which contract or repair work has been completed...but has not been paid for.  In NC, such liens (called mechanic's liens) can be filed within 120 days of the unpaid work.  Thus, it is possible for a mechanic's lien to be filed against the property subsequent to the deed being searched and/or after closing, thus, becoming a liability on the owner of the property at the time the lien is filed.  To prevent this, get a statement from the seller certifying that there no unpaid bills for such work and waiving the buyer of responsibility in the event there should be.

 

Hopefully, a good real estate attorney and experienced real estate agent can help you cover all the bases.

  • May 02 2008
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Profile picture for lucydjacobs

If you have a buyer who is requesting owner financing, beware. It sometimes means they can't get a real loan and can't afford to pay you, either. What they really wish to do is live in a home that is an upgrade over a typical rental, so they will pretend they will buy when few of these deals ever go through in the end.

 

Whatever you do, make sure YOU - as a seller - pay the mortgage company each month and don't leave it to the owner-financed buyers to do it. Otherwise, they could live free for six months and ruin your credit rating, then leave for the next victim.

 

Now, with that said, a deal that worked out is one in our family that involved an estate. The estate found a buyer, but until he paid off his home loan he wanted owner financing temporarily. He was good for his word. Made payments every month (no worries since the land and home were free and clear) and as soon as his home was paid for he got another loan on his home and purchased the resort-type home from the estate.

 

But yes, a lawyer was used!

  • May 03 2008
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Profile picture for zephyr1973
Oh, I'm not planning to do this, but I just keep seeing it and wondered if this was a new phenomenon in this market as I had not ever seen it before. Thank you for the information, though! I'm trying to learn as much as I can for the next time we sell/buy!
  • May 03 2008
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Profile picture for Peter J Rogers

Owner financing has probably been around longer than banks have been writing mortgages.

  • May 03 2008
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Profile picture for lucydjacobs

Owner- financing was a big deal in the 1970s- mid 1980s when interest rates were 15 percent. This led to those "No Money Down" info-mercials telling buyers ways to use other people's money to invest in real estate. 

 

Sellers could get top dollar for a home back then if they sold. Their problem for sellers is  that buyers couldn't get loans and meet the (then) 20-percent downpayments required. FHA loans would later allow first-time buyers to get into homes with low downpayments, but with "great" interest rates of a discounted 10 and 12 percent! Most sellers in those years were of WWII generation and had lived in their homes for 10 or 30 years, They ahad equity that allowed them to be able to finance, or owned their homes outright.  They could finance the buyer, charge him 12 percent, then get 10 or more percent on CDs. That was also way back when - the era gone by when banks played fair and honest. Not like now, when they charge 23 percent on credit cards and give negligible interest on CDs and charge fees like mad.

 

Sellers had the leeway to do this since they didn't play the equity game back then. Back then, it was called a "second mortgage." To get one meant you had to jump through hoops, pay more than 15 percent interest, and people assumed you were near bankruptcy to ask for one - not that you were buying a Lexus or two and putting granite in the kitchen and travertine in the bath.

  • May 05 2008
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Profile picture for lucydjacobs

On other thing: These homes we Boomers bought in 1970s to 1980s were the NOT updated and we paid  9 percent or higher interest rates.

 

We steamed off avocado wallpaper and that metallic foil stuff. We pulled out gold shag carpet, replaced orange Formica that had burn marks with white or beige tile, which was the quartz/Corian of its era. Marble was granite of its time, and cost a fortune, not to mention wasn't practical for families with grape-juice spilling kids.

 

In the 2000 era, buyers are too snooty to paint a wall, replace a countertop or steam off those wallpaper borders of white geese with blue bows on their necks that we Boomers put up in the mauve-and-blue 1980s to early 90s.

 

The reason buyers younger than us Boomers didn't get in the market pre-bubble is that they were L-A-Z-Y and were taste snobs. In walked "flippers" to fill the void in the late 1900s who were willing to do the work on a house, then sell it at top dollar to perfection-seeking lazy buyers.

  • May 05 2008
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Profile picture for lucydjacobs

Meant that as a warning. Keep an eye on the bubble bust in your particular market and don't wait too long. If you're waiting for Granite McMansion to drop, it may never drop to point a buyer hopes. In the meantime, immigrants who aren't lazy will have snapped up the homes in the family neighborhoods, steamed off the wallpaper, be set for long-time ownership and will build equity.

 

That's what happened in S.Cal. The real-estate market dipped after the LA riots in the 1990s. Articles said everyone was leaving the state for good to move to Nevada and elsewhere. While that happened to some extent for retirees, those in LA waiting for the bottom waited too late. Jobs were created anyhow. People moved into Calif. as fast as retirees moved out. Amnesty had kicked in and new citizens began buying homes like mad.

 

Prices went back up before expected. Not saying that will happen since this is a national crisis rather than local blip. But just as sellers shouldn't get stuck on a "sell" number, neither should buyers who want a certain neighborhood or type of home get stuck on "buy" numbers.

  • May 05 2008
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If you have a buyer who is requesting owner financing, beware. It sometimes means they can't get a real loan and can't afford to pay you, either. What they really wish to do is live in a home that is an upgrade over a typical rental, so they will pretend they will buy when few of these deals ever go through in the end.

 

most of those buyers are one that were foreclosed on, have judgments and/or have heard that private seller financing can not hurt their credit if they default or if the market goes down further they can just walk away without legal recourse.

 

Also too many read the scam ads on craigslist about no money down, no credit  owner financing and actually believe it works that way in real life. Had one pair of klowns that thought they could buy up houses like that and then resell them as rent to own and pocket the profit.  Everyone has an angle and watch too many houseflipping shows on tv.

  • May 07 2008
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