Home Selling in Palm Coast>Question Details

Bondo, Home Seller in Palm Coast, FL

What are the advantages and disadvantages of offering owner financing?

Asked by Bondo, Palm Coast, FL Wed Mar 23, 2011

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The advantage is that you can negotiate favorable terms or pricing. The disadvantage is that you are typically dealing with a less credit-worthy buyer, and there's a risk that you may have to foreclose and that when you do, the property will get trashed by the formerly-friendly "buyer." And if you sell the note, it will be at a significant discount.

Hope that helps,
1 vote Thank Flag Link Wed Mar 23, 2011

Please check out my blog "10 Advantages to Using Owner Financing". Some disadvantages are:

Time is Money – For most sellers waiting to get paid is the biggest drawback since they would prefer to receive the full purchase price in cash at closing. Using a balloon payment to shorten the term of repayment can often reduce the severity of this time delay. Using temporary seller financing techniques can also help optimize a subsequent sale of the payments to a note investor.

Honey, Did You See That Check? – It will take time every month to keep track of the payments. An amortization schedule helps to accurately calculate the interest, principal, and remaining balance due. There are also annual 1098 mortgage interest statements to prepare. Many sellers decide to leave all this to a professional and make use of an outside servicer.

Here Comes Guido – When payments don’t arrive on time sellers will quickly find they have been cast in the role of bill collector. They also have to worry about if the buyer maintains the property, lets the property insurance lapse, fails to keeps the real estate taxes current, or violates any other terms of the financing arrangement.

No TARP for You! – There is the risk a seller will need to initiate foreclosure proceedings if the buyer fails to make payments (or follow any other terms of the note). Along with time and money, in today’s market foreclosure comes with the risk a property might be worth less than the outstanding balance due. There is no government TARP lender bailout plan for the individual seller!

Who’s On First? – When a property is sold with owner financing and the seller still owes money, both the buyer and seller need to be concerned about timely repayment of the underlying lien.

Of course all this can be avoided if you sell your note for cash.
Web Reference: http://www.tkfunding.com
0 votes Thank Flag Link Wed Mar 23, 2011

I had a seller do just that last year because his condo was in litigation and could not be financed. We worked with our Title and Escrow officer to set up the deed and promissory note. The seller was able to negotiate their price and make interest each month. Should the seller decide, there are secondary investors who may be interested in purchasing the note. The note, terms would need to be desirable to do so. Also, if you were to sell it in the secondary market, the investor/buyer of that note would want a discount.

You would either higher a servicing agency or you would be your own servicer of that note. Collecting payments, verify that property taxes, and home owners insurance are paid, and if applicable, HOA dues.

If the Buyer defaults then you would have to go through the course of foreclosing.

Work with an attorney or experienced Broker if you are considering this. The buyer should have a good amount of equity invested (teeth in the game).
Web Reference: http://terrivellios.com
0 votes Thank Flag Link Wed Mar 23, 2011
Bondo, First of all, if you are going to offer owner financing, you need to have a real estate attorney set up the paperwork involved with that. There are both advantages and disadvantages in offering owner financing.

Advantages are: Over a period of time, you can make more money off of the sale of your property than with a traditional sale; It might make it easier to sell the property if your are offering terms which are competitive with the local lenders (Financing does sell homes. Back in the 80's recession, we had assumable VA and FHA loans that were selling properties that would otherwise not sell. Some involved qualifying the buyer and others did not.)

Disadvantages are: The buyer could default. The property could be in worse condition than when you sold it.; You don't get your money upfront; You are bound by the agreement for the time period provided - Things might change in your financial situation. Ther are less options for liquidating assets.

I am not an accountant, so I am not sure of the tax consequences as well. It would be prudent for you to consult with a real estate attorney as well as a tax consultant before you decide to do this.

Great question.
0 votes Thank Flag Link Wed Mar 23, 2011
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