Owner Financing – A Win-Win Situation For Both Parties

With the current economical scenario, the road to raising finance is surely a bumpy one. Not to mention the U-turns and diversions. This has made it difficult for both home owners, to sell their property, and real estate agents, to buy properties. This problem has been neatly addressed by ‘owner financing’.
Owner Financing – A brief a look
This is for the sake of newbies who are contemplating to venture into the real estate market.
Owner financing is when a seller provides financing for a buyer. This surely does sound like the ‘have your cake and eat it too’ for the buyer eh? Before we go into benefits, let’s look at an example to clear up the cloud of confusion.
Mary Daisy Dinkle wants to sell her house for $100,000. Since the economical situation was bad, she had to wait for a long time before a buyer, Max Horovitz, approached her. The buyer is not financially stable enough to buy a house though he is able to amply support himself on a day to day living. Mary doesn’t want to lose the buyer. Also Max is very interested in buying up the house. Here is a deal they come up with:
Initially Max will make a down payment of $5000. Additionally, he will give Mary a financial instrument (such as an IOU certificate) of the remaining amount. There will be an annual interest rate of 8%. Max will pay in monthly installments for the interest, the duration of which will be five years. After the end of this period, Max will have to pay Mary a complete amount for the house- $95,000.
This is the simplest form of Owner financing. By now you should be quite clear with the concept.
Benefits of Owner financing for the buyer
Since the owner desperately wants to sell their property, possibly to meet their immediate needs, they will be a little lenient with the buyer’s qualification. If commercial lending were a mountain, owner financing would be a hill. That is just how easy it is to acquire.
• Flexible financing options: The buyer and seller can mutually decide on a payment option. This of course would never be the case with traditional loans. Here are some options;
o Interest only
o Less-than-interest
o Fixed-rate amortization
o Balloon payment
• Flexible down payment: Referring to our example, if Mary asked for a bigger down payment amount than what Max could afford, they could work out a way where Max paid some percentage of the down payment at the start and periodically paid more than the interest rate to cater for the remaining down payment amount.
• Closing costs are cut down: The buyer saves up on costs such as loan/discount points and administration fees that are usually involved with commercial lenders.
• Quicker Procedure: unlike having to wait for the long procedures set by institutional lenders, owner financing is quite simple and straight forward.
Owner financing benefits for seller
• Healthy Price: Because the seller gives the buyer the benefit of owner financing, the buyer can ask for a high price even in poor market conditions.
• Beat taxes: Since the property is being sold in installments, the seller might have to pay a less amount in tax than selling the house using other methods.
• Extra Income: The buyer usually pays interest on a monthly basis. This increases the seller’s monthly income.
• Better Interest Rate: In majority of the cases, owner financing requires a higher interest rate. This makes financing even more lucrative for the buyer.
• Quicker Sale: Properties that just don’t move off the listing have shown a good reaction to owner financing. It attracts a larger pool of buyers.
Owner financing is a win-win situation for both parties – now do you agree?