Owner Financed Deals make a comeback

by Terry Brown

With 1 year CD rates below 1% (.65% as of today), sellers are figuring out that receiving a large check from closing and having no where to invest it may not be a wise thing.

Currently, bank real estate interest rates are hovering around 4%, owner financed loans of 5% without points or origination fees are a great deal for both seller AND buyer.  

Sellers without much financial experience are learning all about balloon payments, pre-payment penalties, interest only mortgages and even doing first & second mortgage combos with a balloon on the second so they can have some cash in the near future, yet still have long term retirement income.   

Buyers like the fact that they don't have to qualify via their credit scores or worry about maxing out their income-to-debt ratio.    Yes, both entities are winning.

However, sellers must be careful - sometime requesting upwards to 15-25% down payment instead of the 5-7% down payment that many banks require.    They also need to remember that this is a business transaction, and treat it as such.   Don't get too "friendly" with your mortgagee - you want to keep the transaction professional and not allow your borrower to learn too much about you.   The last thing a seller wants is to get the property back - unless perhaps it is a land deal, whereas not much damage can be done to the property.   They also need to go through a closing company as they will understand how to properly file all of the closing documents, including an owner-financed lien.

The main thing they want to remember is to not get themselves into the "second" position, such as doing an owner financed deal on a piece of land and the buyer goes out and gets a mortgage to build a house, but then asks the seller if they will allow the bank to take the first position instead of a second.    Why?   If the buyer defaults on the building loan, the seller would be responsible for the bank loan.    Rule:   NEVER give up the first lien position on an owner financed deal.

Buyers want to make sure that a closing company is used as well, as they don't want to make all of their payments and find out that the seller sold their property to someone else, because the documents of their sale was never filed.     An established title/closing company can solve all of your fears.

For now, there are more sellers than they are buyers.    If you learn that a seller has a sizable equity in their property, you may want to ask for an owner-financed deal, even if it isn't indicated - worse that could happen would be that you would be told "no"...     Offer a "balloon" payment option of 3 to 5 years, you may see sellers may bite.   Again, if the seller doesn't have anywhere to park their cash, they may enjoy earning 5% or more on it for a few years...

Final thing to remember, sellers DON'T want to go to closing with money - so your down payment MUST cover the commission of the sale and their closing costs - otherwise they will not have much motivation to do the deal.    Get past these things and you could avoid alot of bank fees that are just profit to the banks.

TB