Pros and Cons of Owner Financing As Seller

Definition:

Owner financing is a loan where the seller in a transaction offers the buyer a loan rather than the buyer obtaining one from a bank. It is also called seller financing.

Usually the buyer will make some sort of down payment to the seller, and then make installment payments (usually on a monthly basis) over a specified time, at an agreed-upon interest rate, until the loan is fully repaid or until a new loan in put into place to retire the seller loan.

Seller financing is an alternative worth considering when:

  • The buyer has no cash for a down payment sufficient to qualify for conventional financing
  • The buyer is simply unqualified for conventional financing
  • The property is one that conventional lenders will not finance
  • The property has simply been on the market too long with little buyer activity

Owner Financing PROS

  • Terms of deal are flexible and negotiable
  • Higher sales price – the seller may be in a position to command full list price or higher
  • Tax breaks – reporting only the income received in each calendar year
  • Monthly income – payments from a buyer increase the seller's monthly cash flow
  • Favorable Returns – Higher interest rate – owner financing can carry a higher rate of interest compared to other investment types
  • Shorter listing term – Offering owner financing moves a hard-to-sell property
  • Attract a larger number of interested buyers
  • gives buyer time to repair credit to get conventional loan
  • Eliminate repair costs – the property could be sold ‘as is,” eliminating the need for costly repairs that conventional lenders would require
  • Substantial savings in closing costs
  • Sell the contract and cash out – note buying

Owner Finance CONS

  • Have to be familiar with current loan terms
  • Buyer may still default on loan at end of term
  • Property may need repairs if buyer defaults or back-outs
  • No full equity payment upfront
  • Headaches of being a lender
  • Verifications – providing tax reports, verifying that property taxes have been paid, owner has maintained property insurance
  • Possible foreclosure
  • Evictions

In conclusion, if you are a seller considering using this strategy, you should make sure that you can afford to wait for the equity and are comfortable collecting only monthly cash flow for the period of the note. You need to also be very thorough with your background checks (are there any law suits, liens, etc.). Also, be sure you consult with a real estate attorney because there are financing, disclosure and repayment-term requirements that need to be met, and do vary per state. Remember, in most cases, the seller is assuming the risk so take the time and do your research.

Again, this is Frank Chen with REIClub.com. Please take the time to leave your comments for this video below and please subscribe to our YouTube channel so you'll be automatically notified when we upload more quick video tips for you. Take care and good investing.

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