what is the best way to obtain owner financing?

Asked by Al Sowins, Corpus Christi, TX Wed Aug 15, 2007

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Sara Warner, Agent, Kirkland, WA
Fri Aug 31, 2007
Hi Al!

I'll assume the main reason you're considering owner financing is because you may not qualify for traditional financing at this time, or that the institutional financing that you do qualify for is not enough to cover a purchase with the amount you have to put down (is this correct?)

The owner financing transactions I've done were not comprised of the owner financing the entire purchase, but a part of the purchase. Partial owner-financing is the type most owners are comfortable with (if they will consider it at all). Other owners may consider 100% financing (as used to be done in the old days) but that seems to occur now mainly in rural areas or for properties that are hard to institutionally finance (mobile homes on land, for example) or if the seller personally knows the buyers.

From my experience, a seller cannot offer owner financing on a property to another buyer while maintaining their current loan. As I buyer I would be wary of any deal structured under this strategy. When you sign a note with the seller for owner financing, the note is recorded with the county. I'm not certain how you would structure this (owner financing home for you while maintaining his current loan) and be kosher with most loan underwriting guidelines. In any case, the owner financing you receive while the seller maintains a separate home loan will be in second position after that first loan the seller owes to the bank. This means that while you might be making payments to the seller, the seller may stop paying the loan to the bank, and 12 months later after no pay, the bank will repossess the home without much care for your second position owner-financing and your claim to home ownership.

That said, the seller (as far as I'm familiar) must own the home outright prior to giving you seller-financing. This does not mean that they can't owe money on the home before you approach them. What this means is that whatever amount they owe, you must pay them for (through a home loan or cash) and that after that they may turn around and provide owner-financing to you. This paying off their loan and offering you seller financing would all happen at closing, in the escrow office. The paperwork for this would all be drawn prior to closing in preparation of closing.

Note that most institutional loans you may receive will impose limits on total loan-to-value, including owner-financing. So if you have a bank that says it will give you a 70% loan, but you must come up with cash for the rest, you cannot secure owner-financing as a way to come up with that last 30%. The bank will view owner financing as another loan. So the loan you receive must stipulate that you may receive secondary financing elsewhere (owner financing or second loan).

The alternative to owner financing is purchase-lease options. I've done these for buyers as well and basically it consists of a normal lease agreement with a purchase and sale contract and purchase lease option on the end of it. With these, you can stipulate a length of time the purchase-lease option will be good for. Usually, the buyer will "buy" the purchase lease option by putting up a some of money for the exhange (say, $2k-10k for the "purchase-lease option" which is viewed as an "asset" itself. Buying the option is not always required. Some sellers will happily set up buyers in purchase lease options without any compensation for the option. Lease options will build in a price increase for every coming year (ex: 6%, meaning a 100k house will cost you 106k should you choose to enact the option-to-buy one year from when you got the option). The time length (usually 1-3 years) ends at the end of the term, and if you did not purchase the property by then, you remain a tenant without future option to buy that property
(unless the seller wishes to extend the option). Lease-purchase options often allow for a part of the monthly rent to count toward your down-payment. On a lease purchase option, often the rent you pay will be higher competitively than similarly priced rental homes. This takes into consideration the amount of your rent that counts toward down-payment, or the extension of a lease-option to you from your landlord.

With the slower market, we're seeing more purchase-lease options on the market. However, they are still rare, as most sellers are unfamiliar with them, or do not have the equity in their homes to offer a worthwhile purchase lease option. Most sellers prefer to cash out, but the search is worth the effort if your heart is set on home ownership.

My recommendation: Focus on credit repair. Both purchase-lease options and seller financing involve time limits by which you have to cash the seller out (except in certain cases). If you've found the home but not fixed/built up your credit so that you can get traditonal financing at the end of the pre-agreed on term, you'll end up losing the home.
2 votes
Deborah Madey, Agent, Brick, NJ
Wed Sep 5, 2007
Evaluate your reasons for seeking this type of fiancing as well as the reasons why a seller would want to carry financing in lieu of receiving cash from a bank at closing.

Reasons a seller will do this include: He/she needs to in order to sell the property because it is not moving on the market or it is difficult to obtain traditional financing. Or, because the seller personally knows and trusts the buyer. Or, because the seller views this as an investment. A seller looking for investment return will srutinize your credit and qualfiications, perhaps more so than a bank.

Buyers may seek this because they look for a deal when purchasing a property that a seller has not moved and strike a deal. Or, the property may be one that is difficult to obtain financing. Or, the buyer may have diffficutly obtaining financing.

Understand an owner's motives for their willlingness to carry paper and make sure it works for you. If you are looking for prospective owners to carry paper, look in the direction that best suits your need. i.e. If you are willing to undertake a challenging property, start looking at those and inquiring if those sellers would consider financing.
1 vote
Perry Hender…, Agent, Austin, TX
Wed Sep 5, 2007
1. Work with a realtor who understands Owner Financing.
2. Ask for it.
3. I have 10 properties here in Austin waiting for you to ask for it. BTW- they are fairly priced and cash flow too.
1 vote
Jim Walker, Agent, Carmichael, CA
Thu Aug 16, 2007
The Three C's

If a seller and the buyers are being advised by licensed real estate professionals, they will be advised to be as careful as an institution would be in evaluating the collateral, capacity and character of the borrower. The advantage to an ethical seller finance is that the seller knows the collateral already.

You will still have to have acceptable credit and the ability to repay. Terms or rate should be as good or slightly better than you would get from an institution, but not ridiculously better.

When sellers are naive and unrepresented, they may be convinced to make an imprudent seller financing transaction, Inducing a seller or a buyer into a seller finance transaction that is not fair to both parties is unethical and in some cases illegal. There are many unethical investment seminars which teach people techniques to prey on unsophisticated, naive sellers
Similarly there are a few sellers who set traps for naive buyers.
1 vote
Bridgette Ko…, , Florida
Thu Aug 16, 2007
Bottom line answer: VERY CAREFULLY. Jim hit the major pitfalls with his last paragraph. I see too much of this is the rural areas that I serve. Do not proceed without a REALTOR or an attorney to represent your interests! Best of luck and happy hunting!
0 votes
The Hagley G…, Agent, Pleasanton, CA
Wed Aug 15, 2007
First of all, find a good Realtor to represent you in this request. It is becoming more of a buyers market, and we're going to see more and more seller financing. You are more likely to get the seller to carry a second as opposed to the full loan, but bottem line, you never know until you ask.
Web Reference:  http://www.cindihagley.com
0 votes
Marie Tils,…, , Tri Cities, WA
Wed Aug 15, 2007
Depending on the reason you want owner financing. If you have poor credit and no money then working with someone who is willing to do a lease to own might be a good option for you. If you have poor credit and money then there are loan programs out there for you. The best option would be talking to a Realtor who has some of these connections and will help you make them
Web Reference:  http://www.mtils.com
0 votes
Bruce Lynn, Agent, Coppell, TX
Wed Aug 15, 2007
#1. Have your realtor search MLS for owner financed properties.
#2. Visit investor group meetings and network for owner financed properties.
#3. Target older neighborhoods where owners may own the home outright.
One issue in Texas is that it is tough to do owner financing if you don't own the property outright. There is a "contract for deed" idea, but most attorney's advise against using this form of financing to owners due to changes in the law about 2 years ago.
What is your goal with owner financing?
Web Reference:  http://www.teamlynn.com
0 votes
Pam Winterba…, Agent, Danville, VA
Wed Aug 15, 2007
Are you asking the seller to carry the entire loan on the property? If so you would ask.

Some factors involved would be the seller carry back is dependant upon the sellers needs for the money to move on, their equity position in the property and perhaps the buyers investment (cash down) in the property.

I am not sure if you are asking the seller to carry a first loan or a second loan? Would you be putting cash down and how long would you expect the seller to carry.
Web Reference:  http://pamwinterbauer.com
0 votes
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