Owner financing, also referred to as seller financing, is a method of financing a property in which the owner of the property holds the buyer’s loan. Owner financing can also be called seller financing, seller carryback financing or seller carryback (because the owner “carries back,” or holds, the financing). It works like bank financing, but the buyer repays the seller by making monthly payments over an agreed-upon period with a specified interest rate and terms. Seller financing is commonly used by investors to buy or sell properties, but it can be used by anyone. Check out these 4 tips for selling your house with owner financing in Washington DC, PG County, Montgomery County.
Tip #1: Check Buyer Qualifications
You will not have to wait long for an offer if you are willing to provide owner financing; however, you do have to take into consideration WHY they aren’t using a traditional bank to obtain the financing. You must conduct all due diligence on your potential buyers to protect yourself and your investment. Make sure you require your potential buyer to fill out a loan application and investigate all the information provided, such as current employment and references. Also, conduct a background check and run a credit report. Do everything a traditional bank would do.
Tip #2: Make it Legal
When you find your buyer, make sure you draw up a legal contract with all your agreed upon terms. Make sure you include loan term, down payment, interest rate, payment schedule and what happens if they default. You will also need a promissory note to be recorded in the county records of the property. This is how you prove that you are the mortgagee and you can foreclose if they default. It is extremely important that all of the words and phrases are legal, and that you do not forget an important part of the contract. A small mistake in the beginning might cost you a lot in the long run.
Tip #3: Owner Perks
The whole owner financing process seems to be in favor of the buyer, who may not be able to obtain traditional financing through a regular bank, so why would an owner support this option? You will collect interest on the loan! Often times, you will make more money off the property selling it through owner financing than if you took the lump sum purchase price. You may be able to collect even more interest if you allow for a longer loan period. Also, if you change your mind after a while and do not want to continue to hold the loan, there are investors standing by ready to take over your note. Keep in mind, this will fully depend on the creditworthiness of the buyer and whether they have been making on-time payments or not.
Tip #4: Collect like a Pro
A very important part of financing your own sale is the bookkeeping or “servicing” of your own loan. You need to keep track of all of the payments and when they were made, the real estate tax, insurance, any homeowners association fees, and anything else to do with the note. Hiring a 3rd party to take care of the loan servicing will save you a lot of time and possible errors in the future. You may also be able to accept multiple forms of payment this way to make it easier for your buyer to make the payments on time with a less likely chance of default. Having a professional note servicer will take a lot of liabilities off your hands and provide you with more free time to focus on what you enjoy.
Owner financing offers major advantages to both buyers and sellers. But before you enter an owner-financed agreement, weigh the risks and consult a real estate attorney to ensure you understand the consequences, terms, and responsibilities of the agreement. This method of financing is definitely not right for everyone, but it can be a useful tool when buying or selling real estate.