Have you ever been involved in buying or selling a property / business ? If the answer is yes then the probability of knowing about the fin term “owner financing” is very high for you.
Anyway we will discuss very indepthly about “owner financing” in this blog post. Here is the brief introduction on what exactly is “owner financing” in easy to understand terms.
When it comes to buying or selling a property, a bank or mortgage lender is generally engaged in the transaction. We all know about this method as it is the traditional method that has been followed since long back.
Apart from this traditional transaction method, there is one another method which may sound unconventional but many people are following it. This choice might be advantageous for both buyers and sellers and is coined as ““owner financing”.
As per this alternate method the seller is able to take on the role of the lender, which offers a novel approach to ease the sale of property or other real estate transactions.
What exactly is Owner Financing?
Owner financing, also known as seller financing, is a simple technique where the seller himself finances the transaction amount required to buy a real estate property to the buyer. In this approach the buyer need not worry about getting finance from a bank or other financial institution. Owner of the property himself plays the role of lender and finances the buyer to buy it. Main benefit of obtaining a loan from the seller eases the transaction for the buyer. In many cases buyers and sellers prefer this “Owner Financing” method apart from going for traditional bank loans.
Under this arrangement, the buyer is solely responsible for making payments to the seller directly over a period of time, typically in monthly installments, until the agreed-upon amount is completed and settled. There is no involvement of third parties in such real estate settlements. Negotiations take place between the buyer and the seller about the agreement, which include the interest rate, loan time period, and the corresponding payment plan.
For the transaction to complete without any issue, a legal instrument, such as a promissory note, is drafted in order to formalize the arrangement. This document outlines the provisions that have been collectively agreed upon. In the majority of instances, the seller will keep a lien on the property until the buyer has paid the full amount of the purchase price.
How does “Owner financing” Differ from conventional forms of financing?
In simple terms “If the Loan for buying a property is provided by the Owner, it is called “Owner Financing” and if the Loan for buying a real estate property is provided by Banks or financial Institutions it is called traditional or conventional financing.
Traditional Financing :
In a normal real estate transaction, the buyer obtains a mortgage loan from a bank or lender. If you are not sure about a mortgage loan, then here is the answer for you. Mortgage loans are the most common type of loans given by banks after confirming the buyer’s creditworthiness, income, and assets. Banks only provide loans if and only the buyer fulfills certain regulations set by them like credit score and income. Until the loan is returned in full, the buyer is responsible for making regular payments to the bank, which include both the principal and the interest.
Owner Financing:
In this type of financing, the seller takes on the role of the lender / bank and provides a loan to the buyer. In these types of Financing, involvement of a bank or mortgage business is absent. So the buyer need not not worry about showing documents related to Credit Score, Assets and income.
In this approach there are less obstacles to overcome for buyers. Especially for the buyers who might have been having trouble qualifying for conventional loans.
There will be an agreement between seller and buyer regarding the loan payment and interest rate. As per the agreement Buyer pays the interest amount and Monthly installment , till the loan tenure completes or the loan amount is settled.
Scenarios Where Owner Financing is Used
There are many circumstances in which owner financing can be helpful. Below we have clearly explained bout the scenarios where buyers and sellers can get benefit from this “Owner Financing” approach.
a) As a buyer if you are facing any issue in getting Traditional Financing.
Buyers who may have difficulty in getting approval for a traditional mortgage can get the maximum benefit with this “Owner Financing” method. There are many factors responsible for not getting conventional loan such as bad credit, self-employment, or an insufficient credit history. Buyers who perfectly fits in to the above mentioned categories will go for “owner financing”.
Sellers that are ready to provide financing might pave the way for purchasers who are in this situation.
b) Real Estate Properties that are not Easy to Sell
Generally this unconventional method of Financing comes into play in case of properties that are tough to sell. So the Owner of property comes with a unique tactic of financing the buyers. Through this approach Seller has the probability of attracting more potential buyers.
Owner Financing concept is used in a situation where selling the property via traditional financing is difficult.
c) If the Seller is looking for a regular Stream of Income:
Sellers who do not require the total amount of the sale immediately may opt to receive recurring monthly payments instead of the full sale price. This has the potential to generate a consistent revenue stream. More importantly he would get good profits through the interest.
d) In case if you want to avoid transaction fees
When dealing with situations that involve rapid transactions, owner financing frequently removes the long approval processes that are necessary by banks.
Another advantages is to avoid the fees and complications that are associated with banks. Buyers and sellers can save decent money on loan fees, appraisal costs, and other standard financing expenses.
It is important to take into consideration owner financing as a realistic alternative, regardless of whether you are a buyer searching for a means to become a homeowner or a seller looking for new ways to attract different customers.