24 Feb 2013

What is Owner Financing?

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Since the implosion of the real estate bubble, the bank’s lending standards have significantly tightened.  

Here is what it took to get a mortgage in 2012:

what it takes to get a mortgage infographic

Benefits to the Buyer:  Working directly with an individual rather than a bureaucracy will allow quicker negotiations and flexibility in terms.  The main requirements for owner financing is a 10-20% down payment and proof of income.  These types of deals can be agreed upon and executed in a manner of days as opposed to months with a bank.

Detriments to the Buyer:  While it’s easier to get approved for an owner financed home, the interest rate will typically be higher than traditional mortgages.  However, if the monthly payments are still affordable, owner financing could be the difference between owning a home and not owing a home.

Benefits to the Seller:  If the seller has little or no equity, then selling a home while keeping the existing financing in place and creating a new note to wrap the existing one may be the only way to sell their house and relieve themselves of the monthly payments.  Many folks with no equity who can’t afford their home mortgages anymore or can’t afford to pay the closing costs to sell wind up in foreclosure, so this type of situation, while risky, is still a better alternative than foreclosure.

Detriments to the Seller:  The seller is receiving installment payments rather than the entire lump sum.  Of course, this has tax advantages, so it’s not always a bad thing.  If the seller is leaving the existing financing in place, then there’s a risk the buyer may default and the seller will be responsible for the payments again.  If unable to pay, then the sellers’ credit will be affected.

Owner Financing Example

Suppose the owner of a house with a 6% interest rate has very little equity in their home, can’t afford to pay closing costs (estimated $15k) but needs to sell fast.  Now suppose there is a home owner with $20k to put down on a house, decent credit, but is a business owner rather than a W2 employee.  Here’s how an owner financing transaction can help both the buyer and the seller.

  • Property Value: $200,000
  • Sales Price:  $210,000
  • Down Payment:  $20,000 (includes $10,000 for owner finance fee paid to seller – not applied to sales price)
  • Note Value: $200,000
  • Interest Rate: 8%
  • Balloon: 7 year

Because the seller is providing financing, the seller can set the sales price a little over real property value ($210k vs 200k).  This wouldn’t be the case with a bank loan.  Also, the seller can charge for closing costs  (5%) and not apply to the price of the home.  This means that this distressed seller can sell their home for note value of $200,000, recieve $20k up front, and make a 2% interest spread each month as cash flow.   The buyer, who can afford this down payment and monthly interest payment, is able to own a home that they otherwise would not have been able to acquire.

Once the terms are agreed upon, the signing of the documents will take place in front of a notary and the paperwork will then be filed at the courthouse.

Lion Pride Capital | Owner Financing:  Lion Pride Capital Partners has a national network of buyers and sellers who are seeking to purchase or sell distressed properties with owner financing.  We have an established team in place that knows how to buy and sell and close a house quickly using owner financing.

If you are interested in buying or selling a house with owner financing, Lion Pride Capital can help.  Contact us today at (512) 296-2299


About the Author

Robert Guild has been the financial expert and the controller for both public and private companies for decades. Robert is now the co-founder of Lion Pride Capital Partners. At Lion Pride Capital Partners, we’re a team of investors. If you wanted to describe us in a couple of words, it would be: Expertise, Experience, Funds, and Network. We have experienced cash buyers and a construction manager who has been building and remodeling homes for over 20 years. We have a Realtor/Investor who finds us properties and markets our finished properties for sale. We also have a top mortgage banker with an extensive real estate portfolio and has been investing in real estate for over 20 years. I also have real estate investment mentors who are the most successful investors in Central Texas. We also have access to investor friends around the country so that together we can provide pretty much any solution to any problem in real estate for about any seller in about any situation. Regardless of your situation, we can help! Contact us today.

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