If you’re a homeowner in Utah, chances are you’ve come across the term owner financing before. But what is owner financing? How can it benefit you? And more importantly, is it right for you?
Bob Shepard was close to 61 when he decided to sell his home in South Jordan. Nearing retirement, Bob heard about owner financing from a friend who was a real estate attorney. “At first, it seemed appropriate,” he explained. “Now that the kids were gone, we wanted to downsize. And a little extra monthly income seemed perfect at the time.”
It seemed perfect—at least for the first six months. Then the payments fell behind. Not just one payment or two. But over three consecutive payments in a row.
Luckily, Bob had secured his owner financing loan with a promissory note allowing him the legal right to foreclose on delinquent payments. But how could he have avoided the situation in the first place? First, we’ll have to define what owner financing is.
Owner (or seller) financing is a property sale in which an owner extends credit to a home buyer to purchase their property instead of selling through a realtor. The loan is typically secured through a promissory note allowing the original owner both the legal right to foreclose should the buyer default on their payments, or even sell the note to another investor. Monthly mortgage payments are still made, except to the original owner (who may choose to secure the payments with their lender in a junior, or wraparound, mortgage)—at additional interest of anywhere from two percent or more. Not only does the owner profit with a wrap mortgage, but home buyers with bad credit are given an opportunity where traditional lenders might fail them.
Ideally, owner financing should be a win-win situation. Sellers (often retirees or pre-retirees) view it as an investment; particularly if they own multiple properties. And buyers with bad (or even good) credit don’t have to go through a lengthy period of pre-approval or even rejection. But there are some disadvantages to both.
Disadvantages To Owner Financing
For one, owner financing puts you in the same dilemma as a bank with one large difference—you’re depending on that monthly payment. While the buyer may have legitimate reasons for their delinquency, they’ve signed a legally binding note. Foreclosure is a lengthy process; one which can take several months or more to complete. And to make matters worse, even if you’re lucky enough to convince your lender of a wrap around mortgage, the burden of paying back any missed installments will typically be your responsibility.
Another common disadvantage we’ve heard about owner financing loans is property damage. A seller is taking it on good faith that a buyer will maintain a home sufficiently. But it’s also not uncommon to hear stories of buyers making renovations to a home that actually lower property values; in some cases, outright vandalism. And should you foreclose for any reason, repairing the damages will once again be your responsibility.
The Bottom Line
Owner financing can seem like an actual investment if you’re looking to sell your home. And in many cases, it is. But you need to know what to prepare for—and more specifically, whom.
Don’t always assume that a buyer will be trust worthy. Credit checks may not be enough. Look into their background first. Do they have a longstanding job history? Reference checks? A criminal record? A history of previous judgement liens?
Some of the above may not necessarily entail a risk. They may have legitimate reasons for gaps in their work history—a lengthy illness, for example. But remember. With owner financing, you need to think just like a lender would.
Simply one who can show a better understanding of circumstances.