What is 'Owner Financing'
Owner financing is when a property seller finances the purchase directly with the person or entity seeking to buy it. This type of transaction can be advantageous for both the seller and the buyer since it eliminates the costs of a bank intermediary. However, owner financing can create much greater risk and responsibilities for the owner. Owner financing can also be referred to as “creative financing” or “seller financing.”
BREAKING DOWN 'Owner Financing'
Owner financing is one way to structure the purchase of a real estate property. This type of financing can offer advantages for both the buyer and the seller. If owner financing is an option in the transaction it is typically disclosed in the advertising of the property.
Owner financing is often most common in a buyer’s market. It may be utilized to help the owner find a buyer more quickly and to increase the transaction time for a sale. However, it requires the seller to take on the default risk of the buyer. In order to protect the seller’s interests, the seller may require a higher down payment than a mortgage lender would. Down payments can range from 8% to 11% with a traditional mortgage lender. In an owner financed transaction, down payments can be as much as 20% or more. These transactions can offer the seller monthly cash flows that provide a better return than fixed-income investments.
Buyers typically have the greatest advantage in an owner financed transaction. The overall terms of financing are much more negotiable. In an owner financed transaction the buyer may work with a real estate agent and deal with the seller directly on negotiating the cost and payment structure. The buyer saves on points and closing costs and makes payments directly to the seller. Buyers with high levels of cash liquidity are typically more likely to participate in an owner financed transaction.
Negotiating an Owner Financed Purchase
An owner financed deal will likely be supported by a real estate agent or real estate lawyer. Some do-it-yourself transactions may be fully managed by the owner however assistance from legal counsel is generally necessary to ensure default protection for the owner. The deal is facilitated through a promissory note. The promissory note outlines the terms of the deal including the interest rate, repayment schedule and the consequences of default. To protect from default the owner also keeps the property title until all of the payments have been made.
For more on owner financings, see also: The Pros and Cons of Owner Financing and The Ins And Outs of Seller-Financed Real Estate Deals.