Owner Finance.. What to know
Owner finance known as rent to own also perceptive as individuals being the bank under certain criteria filled in the contracts.
“When part or all of the purchase price, less the buyer’s down payment, is carried by financed by the seller, the seller is providing owner financing. It doesn’t matter if the property has an existing loan, except to the extent that the existing lender might accelerate the loan upon sale due to an alienation clause. Instead of going to the bank, the buyer gives a financing instrument to the seller as evidence of the loan and makes payments to the seller”
Most purchase-money transactions are negotiable. Sellers and buyers are free to negotiate the terms of the owner financing, subject to usury laws and other state-specific regulations. Again, you might want to seek legal advice.
While there is no standard down payment required, many sellers want a sufficient down payment to protect their equity. Down payments can vary from very little to 30 percent down or more. Sellers feel their equity is safeguarded by the buyer’s down payment because buyers are less likely to go into foreclosure if they’ve invested a lot of money upfront.
Types of owner finance include
- Land Contracts.Land contracts do not pass legal title to the buyer, but give the buyer equitable title. The buyer makes payments to the seller for a certain period. Upon final payment or a refinance, the buyer receives the deed.
- Promissory Notes and Mortgages.Sellers can carry the mortgage for the entire balance of the purchase price (less the down payment), which may include an underlying loan. This type of financing is called an “all-inclusive mortgage” or “all-inclusive trust deed” (AITD). The seller receives an override of interest on the underlying loan. A seller may also carry a junior mortgage, in which case, the buyer would take title subject to the existing loan or obtain a new first mortgage. The buyer receives a deed and gives the seller a second mortgage for the balance of the purchase price, less the down payment and first mortgage amount.
Lease Purchase Agreements.Selling on a lease purchase agreement means the seller is giving the buyer equitable title and leasing the property to the buyer. Upon fulfillment of the lease purchase agreement, the buyer receives title and typically obtains a loan to pay the seller, after receiving credit for all or part of the rental payments toward the purchase price.
Owner Financing Benefits to Home Sellers
- Higher Sales Price.Because the seller is offering owner financing, the seller may be in a position to command full list price or higher.
- Tax Breaks.The seller might pay less in taxes on an installment sale, reporting only the income received in each calendar year.
- Monthly Income.Payments from a buyer increase the seller’s monthly cash flow, resulting in spendable income.
- Higher Interest Rate.Owner financing can carry a higher rate of interest than a seller might receive in a money market account or other low-risk types of investments.
Shorter Listing Term.Owner financing attracts a different set of buyers. If a property is not selling under conventional methods, offering owner financing is one way to stand out from the sea of inventory and move a hard-to-sell property that otherwise might not sell.