How to Fend Off Owner Financing Thrown Off the Track?
Even a thoroughly laid-out plan can go wrong in numerous ways. When it comes to money and finances, mistakes, unpredictable circumstances, and failure to engage them could hit you where it hurts the most, your pocket.
Are you ready for the owner-financing deal of your life?
We at @RealEstateAgent.com will shed light on the many facets, twists, and turns owner financing may imply. So, next time you wish to finance your house for the first time or invest in real estate, you can spot potential risks and dangers at first sight!
I give you cash, you give me the property deed, and no banks will be involved.
Since you have made it so far, you must know that there is a home-buying alternative called owner or seller financing. First and foremost, owner financing works in a buyer’s market when home sellers find buyers with difficulty. To facilitate the transaction, they offer buyers the tempting option of seller financing.
Essentially, the property owner finances the purchase and gives the buyer the estate on credit. The purchaser will have to repay this credit through a down payment, monthly fees, and the final balloon payment. Still, how do buyers and investors get hooked so quickly?
Which are the aspects that win parties over in an owner financing scenario?
The concept revolves around an excellent idea of eliminating the bank as an intermediary. If you think about it, this results in a series of outstanding advantages. Buyers won’t get bogged down by bad credit scores or low income. Thus, they won’t have to deal with strenuous mortgage loan applications and lengthy approvals at any lending institution.
Secondly, sellers open to owner financing can also close faster. This overall flexibility and efficiency describe the entire process. Therefore, owners and buyers can establish their own “parameters” in a carefully crafted seller-financing contract.
Is owner financing all too good to be true?
Like in a candy shop, everybody is mesmerized by the abundance of sweets. No one considers the drawbacks and risks the sugar rush can induce.
Both parties face financial risks.
A buyer’s default can trigger a whirlwind of (catastrophic) consequences. Put yourself in the seller’s shoes! Suppose they are willing to do business owner financing-wise! Without a lending institution or government agency (see government home loans) to cover the buyer financially, they’ll become dependent on your promise to repay the loan.
On the other hand, borrowers will face the same burdens and responsibilities. Suppose the buyer can’t finance the house in time because their financial resources have dried up. Then, they can lose the money already invested in the owner-financing project. Then, let’s take a buyer backing out of the deal and leaving a mess behind. In that case, the seller will also have to pour substantial money into the house’s renovation.
What is the solution?
Buyers must carefully budget potential expenses for the long run. However, don’t be too optimistic with your finances, and prepare for the worst-case scenario. Expect higher interest rates on your loan (than a bank would demand) and hefty monthly payments for at least five years.
Then, remember you’ll also have property taxes to pay! You might get lucky, though, and escape the initial down payment (which is entirely up to the seller.)
To top it all, you must be prepared to settle (the balloon payment) the final lump sum, in the absence of which you won’t get the property title!
Secure a stable income and refinancing options!
In other words, you must be 100 percent sure of your monthly revenues to sponsor the loan repayment. We advise you to look for refinancing solutions, such as a conventional or government mortgage loan application. They serve as a safety blanket to have at hand when the day of the balloon payment comes. It would be a shame not to finalize the deal after all your financial efforts.
Sellers can double-check the buyers’ income.
On the other hand, sellers can fend off irresponsible financial speculation by working with a so-called mortgage loan originator (mortgage bankers and brokers.) They can double-check the borrower’s financial situation and ensure they can repay the loan on the owner-financed property.
However, the contract will protect the sellers’ interests. They get to keep the property title during the contract period.
Explore the property you’re about to buy for mortgages and liens!
This will be a slightly extended reasoning, so bear with us! You can’t come by owner-financed real estate that effortlessly. Sometimes it takes a genuine investigation to uncover these treasures.
We recommend you hire a top-tier local real estate agent and verify multiple listing services online! Or you can explore your neighborhood for empty and deserted properties. Their legit owner might want nothing to do with them and is willing to sign an owner-financed agreement with you.
Public records will reveal important information on the property!
You can check the homeowner in your county’s public records. Also, we suggest you investigate whether there is a mortgage on the property! Why would it be best for you to stay away from such houses? Because of a “minor thing” called the due-on-sale clause attached to the owner-bank loan agreement.
Suppose you, the buyer, diligently pay your monthly debt to the seller. And as the final day comes, you’re prepared to have the property deed. However, the bank suddenly intervenes and might commence a foreclosure process.
The reason behind this is simple. The owner didn’t pay their original mortgage off from your payments. And now the bank has a legit claim (the due-on-sale clause) for immediate compensation. You can bypass such inconveniences if you buy a house with no mortgage. Or, if you regularly check if the owner pays off their part of the mortgage!
Ensure your own piece of mind by hiring a real estate attorney!
So what happens now that you have tracked down the owner, and they are open to seller financing? Parties involved must spend face-to-face time and come to terms to reach a win-win settlement. The seller must inform themselves about every single detail to dodge future misunderstandings.
For this purpose, they have to disclose the initial purchase price. Then, settle the down payment, how much the buyer is supposed to pay, and for how long (the amortization period.) Property taxes should also be included as part of the big picture.
In a word, there are many things at stake. We strongly recommend that both parties work with experienced real estate attorneys when writing and signing the owner-financing contract. Contracts are legally enforceable.
An owner-financing deal is a proper adventure with the potential of countless advantages for both parties. However, many traps can make your life financially miserable. Information is crucial!
Buyers must gather as many details and facts as possible about the property. Where is it located? Who owns it? Why do they want to sell it? What’s the price they’re asking for it? Are there any mortgages or liens on it? If owner financing applies, what will be the down payment? What will owners charge as a monthly fee, and for how many years?
To ease your journey, we advise you to hire professionals, such as realtors and attorneys, but no banks are necessary! These specialists have been long in the business and will oversee the entire operation’s legitimacy!