What’s Owner Financing and how does it work?

Recently I had an agent call me to propose owner financing on one of my listings.  I presented the “offer” to my client and the first thing she asked was “What’s owner financing and how does it work?”  I quickly realized that many people might not know what it is and how it work , so here it is in a nutshell.

Owner financing is an alternative to traditional financing where someone takes out a mortgage from the bank to finance the home.  In this case, a buyer may not be able to qualify for a loan because of their credit score or debt-to-income ratio, among other things.  When a buyer and seller agree to owner finance, they agree to have the buyer pay them (instead of the bank) every month.  Of course each case is slightly different depending on the terms of the contract, but the buyer would not only be responsible for the monthly payment to the seller, but they would also be responsible for paying the taxes and insurance.

Owner financing could potentially be profitable for someone that owns their home completely (i.e., doesn’t have a mortgage).  For example, on a home that’s listed for $125,000.  The seller could require $25,000 down and “finance” $100,000 at an interest rate of 8%.  The seller could potentially earn an extra $8,000 per year in interest. (NOTE: this is just an example…there are regulations that govern interest rates in these kinds of deal.  Be sure to do your research).

With that said, one would also have to consider the risks.  What if the buyer defaults by not paying the mortgage or the taxes? What if they don’t keep the home in good shape?  These are all things to think about.

If you decide to owner finance your property, be sure to do your homework! It would also be a good idea to hire an attorney to draft the contract.  That way, in the event that the buyer does default, the contract would be so air tight that you could quickly foreclose and get your home back.

NOTE: This is just a brief part of owner financing. There’s lots more information about wraparound mortgages and other “creative” financing technques.

IRS Information: http://www.irs.gov/publications/p523/ar02.html#en_US_2010_publink1000200795

State of Texas information: http://www.sml.state.tx.us/