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5 Reasons Why Owner Financing Can Be Attractive To Buyers
Creative financing in real estate typically refers to any type of financing methods that excludes the typical mortgage from a lender. And if you are a serious investor or business person, you should only be practicing those that are legal.
One of the most advocated methods of creative financing is owner financing. And this funding avenue is available to both investors and homeowners.
Also known as seller financing, owner financing presents a savvy way for property buyers to access capital for the acquisition of property.
Such a transaction means that the deal is not a all-cash deal at closing.
The buyer does not pay for the house completely like with a loan from the bank. The owner (seller) in turn, accepts payments directly from the buyer in an owner-carry sale either on a later date or in the form of installments.
The details of the payments can sometimes be very flexible and will be agreed upon by both parties.
One example of owner financing is a seller still having an outstanding balance on the mortgage. With the sale agreed upon, the buyer pays the seller a sum in cash, and instead of obtaining his own mortgage, the buyer assumes the existing mortgage by making payments towards it.
There will inevitably be pros and cons though.
Another example is in unencumbered property whereby the owner has fully paid off the home loan on the house. The buyer then purchases the house by making installment payments to the seller without any involvement from a lender.
The are various ways owner financing can be structured between buyer and seller. And it certainly presents a variety of advantages to the buyer.
Here are some of them.
1) Easy financing qualification
Without the involvement of a financial institution like a bank or licensed private lender in conventional financing, there will be no need for the buyer’s credit record to be scrutinized by the rules of the book.
Often times, when home buyers apply for home loans, they get their applications declined because of adverse credit. But the bank never offers them any explanation of what happened during the loan assessment process.
When you “lender” is the seller, there is every chance that your credit report won’t even be requested. And if it is demanded, you can explain away problems by providing reasons and excuses… preferably backed up by evidence.
You seldom get to respond to a bank if they find a borrower having undesirable credit. They usually just drop the prospect and move on without ever looking back.
Moreover, even if a borrower obtains a loan approval from a bank with an attractive loan quantum despite a low credit score, there is a very high possibility that the borrower would be subject to high interest rates due to what the bank deems as additional risks.
Property buyer dealing with owner financing often obtain fixed rate loans comparable to the market.
And it is seldom adjustable or calculated on a reducing rate as the math is just too complicated to keep track.
If you are a real estate investor who is on a journey to acquire as many rental properties as possible, then it truly makes sense to use owner financing as much as possible as go to traditional sources like banks only when necessary.
This is because there is only so much a lender will lend you. So it better to leave it till you really need it.
2) Lower costs
Seller financing helps a buyer to save on a TON of costs items.
First time home buyers often don’t know what they are getting into when purchasing their first property.
This is one reason why they seldom even consider owner financing as the pain of paying for all those excessive closing costs expense items is not felt.
However, if you have dealt with a few real estate transactions before, you should know that there are so many services that you have to pay for… it seems like a never-ending disadvantage.
The costs of a loan alone can send your head into a tailspin. And that’s just getting started.
With the projected costs savings, you can offer the seller a higher cash payment upfront to sweeten the deal.
3) Quick closing
As such a deal will effectively eliminate a lot of major stages in a typical property transaction, it can take as little as a few days to close the whole deal.
If you find this hard to comprehend, look at it this way.
There will be no need for lenders to assess your mortgage application.
There will be no need for them to spend a few days going back and forth with email regarding additional income documents or other paperwork.
No need for appraisals and surveyors to estimate a value of the property.
There will also be much less legal work required.
If all terms are quickly agreed upon by both buyer and seller, an experienced investor can even close the deal on the same day!
It’s not right to say that owner financing is less risky to the buyer.
But the truth is that in such transactions, the fear that a seller has over non-payment would be much more intense than the fear a buyer has for being unable to pay.
If for example, a seller does a deal with someone else who is funded by a traditional mortgage. The seller’s role is basically done after closing.
He fully redeems his outstanding mortgage and banks in the remaining of the sale proceeds.
By taking on an owner financed deal, a seller will now have to ensure monthly payments are made. On top of that, if the mortgage on for the house is till running, a buyer who fails to pay promptly means that the bank would look up the previous owner for it.
His credit might be adversely affected!
Of course, the seller can seek legal recourse. But is the potential risk of taking on all these worth it?
The buyer on the other hand will not have to worry about the consequences of his credit being tarnished for defaults as his has no loan from the bank.
A buyer can legitimately protect his own credit by stating in the terms of contract that recourse action is limited to the secured collateral. Or just use a company for the transaction in place of himself.
5) Potential bargain deal
When a property owner accepts to get involved in an owner financing deal, it’s a sign that all is not well somewhere somehow.
Because if it is a great property with good demand, he should be able to easily find buyers… often with pre-approved mortgage loans on hand.
Assuming all things being equal, I’m 100% certain that an owner would choose an all-cash deal over any form of creative financing.
So if you do run into a seller willing to entertain such a deal, make no mistake that you are doing him a favor in some way.
Maybe he has tried to sell it unsuccessfully for some time, maybe he urgently needs some cash for some some reason, maybe he wants nothing to do with the particular property anymore, maybe maybe maybe.
In such circumstance, there is a good chance that as time goes by, the seller will be more and more receptive to selling you the house outright at a discount.
You end up paying less to settle the outstanding balance.
That would be a nice day to pop the champagne.