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What is owner financing and when/why to use it? (a plain English overview)

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So you want to sell your house and you’re interested in owner financing. If so you’re probably wondering what owner financing is and exactly what it’s all about. That’s what we’ll be talking about in this article. We’ll detail what it is, the different kinds of owner financing structures, typical terms, why you might use it as a seller or buyer and give guidance on why you might use owner financing to sell your house.

What is owner financing

Owner financing is a method of financing a property in which you, as the owner of the property acts essentially as the bank. In other words, you the seller hold and service the buyer’s loan.

Instead of the buyer paying the bank, they instead pay you principal and interest. The buyer makes monthly payments that are based on the terms of the loan, the interest rate, and other terms that you agreed upon.

What are the different types of owner financing

Owner financing may also be known as seller financing, a land contract, etc. The two most common structures are as follows:

  • Note and mortgage – think of a note and mortgage as what a bank mortgage would look like. It’s just with you, as the seller financing the loan instead of a bank. The property is securitized by the loan. The buyer takes title with a deed, and the sale is recorded. This is important because it makes it just like a traditional loan, with the full responsibility of the property and payment of things like taxes, etc. on the buyer, not you.
  • Land contract – in a land contract you as the seller keep the title in your name. The buyer pays the mortgage payments to you until the loan period Is paid off or satisfied in full.

Typical owner financing terms

The financing terms will depend on what you as the seller and the buyer agree on. You and the buyer will need to agree on the terms as part of the negotiating process.

One thing to note is that owner financing is generally short-term. At the least, it is shorter-term than a traditional 15 or 30 year mortgage.

Most sellers will not carry the loan for 30 years like a traditional bank. In this sense, the seller generally acts as a short-term lender. They typically carry the loan from anywhere from 5 to 10 years, give or take depending on the seller.

These loans typically have a balloon payment where the buyer has to pay the entire balance of the loan on the agreed upon maturity date.

Why would you use owner financing?

Why would you as a seller use owner financing?

You might be wondering if owner financing is right for you. Below are some reasons why you might want to use it to sell your house.

  • When you can’t sell your house to a traditional buyer.
  • When your house doesn’t qualify for traditional lending because of its condition, the number of repairs needed, or other factors. In other words, you can sell your house in as-is condition without selling it for cash. Selling for cash greatly reduces your buyer pool so this helps find a buyer for your house.
  • When you have a buyer that doesn’t qualify for traditional lending. This might be because the buyer has a 1099 job, is self-employed or just can’t qualify due to employment status or other financial reasons.
  • When you don’t want to pay capital gains on the entire amount of profit in one given year.
  • When you want a steady source of income. Selling your property through owner financing is a great way to create a source of income every single month. It offers a passive return that is oftentimes more profitable than investing in the stock market.
  • When you need to sell your house, or when you are having trouble selling traditionally. Selling your house through owner financing may make it easier to sell your house as it allows those who can’t get a traditional mortgage to buy it. This is especially true when selling to investors or those who can’t qualify for a traditional loan. In other words, you expand your buyer pool.
  • Owner financing is also suitable for those wanting to close their house quicker than a traditional sale. There is no bank involvement or application process or approval. This expedites the closing process.

Why would a buyer use owner financing?

Some reasons why a buyer might look to use owner financing include the following:

  • When they can’t qualify for traditional lending. This is mostly because they are self-employed, have a 1099 position, haven’t worked at their employer for enough time, etc.
  • Investors also commonly use this method because it is less expensive than very costly private sources of funding. Many investors who can’t qualify for traditional lending because they are self-employed. Investors are also the type of buyer that is willing to buy your house as a cash sale in as-is condition. As such, they would not be able to use traditional lending anyways. Owner financing makes it possible for them to buy your house without very expensive hard money or other private loans if they don’t have cash in the bank.
 

Should I use owner financing to sell my house

The answer to this question depends on you as the seller, your specific situation, and your goals for the sale and your personal finances.

Below are some scenarios where it makes sense to use owner financing to sell your house.

If you want to sell your house fast without making any repairs (sell it as-is)

You might need to sell for cash because the condition of the house means it won’t qualify for traditional lending. If you are selling your house for cash the reality is that most buyers won’t be able to pay cash. Even investors (or many of them) wouldn’t be able to pay cash so they would end up using very expensive hard money lenders. This is definitely a deterrent unless your property is priced extremely low. This allows them to justify expensive private money payments.

Offering owner financing helps make it possible for buyers to buy your house without having to pay all cash or use expensive hard money or other private lenders.

If you are looking to sell your house and they will buy it then seller financing is a win-win for both sides.

If you want to sell your house without incurring a large capital gains hit all at once

Owner financing could be a good strategy if you can’t afford or don’t want to get hit with capital gains tax all at one time. Owner financing spaces out the tax hit you receive from the property over multiple years.

Setting the terms or the duration of the loan over several years allows you to space out the income you receive over several years. If the loan duration is long enough the lump sum at the end will be smaller and have a lower impact on your capital gains hit.

In the end there is no getting around capital gains, but using seller/owner financing allows you to space it out.

If you want to get a steady source of income every month and don’t want to actively invest in real estate or in notes

This is a good solution for those who could benefit from monthly income from the sale vs. a large lump sum. This might be those who are retiring or investors (or investor minded individuals) looking for a source of income every single month.

Because the house is collateralized you also have recourse to foreclose and take the house back if the buyer does not fulfill their end of the deal. This means you not only get a steady income but it is also secured.

We buy owner financed houses

Our company, Sesa Properties, buys owner-financed houses in Cleveland and throughout Ohio. We are a professional house buying company. If you are interested in selling your house via owner financing please contact at 216 8778430 or contact us online to find out more.

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